FTC notices on claim substantiation might not pass muster in the courts

Over the past couple of years, the Federal Trade Commission (FTC) has attempted to revive a long-neglected provision of the Federal Trade Commission Act (FTCA) that would in theory make civil penalties available if a company has notice of another’s past violation and engages in the same act or practice.

However, given the relevant statutory language and the single existing case interpreting it, the new practice of blanketing industry with notices is likely not as legally substantiated as FTC would have you believe—and it is certainly not based on competent and reliable judicial evidence.

In April, FTC announced it had sent around 670 companies a “Notice of Penalty Offenses Concerning Substantiation of Product Claims.” The notice asserts the truth of several broad legal propositions—particularly in the realm of health and safety advertising—that the agency believes past FTC administrative cases support.

Even if there is reason to doubt these propositions and the notice regime generally, there is still good reason to be aware of these developments. More importantly, it is important to remain aware of how aggressive the agency has become, generally, in claim substantiation cases, particularly against dietary supplement companies.

Section 5(m)(1)(B)

Enacted in 1975, Section 5(m)(1)(B) of the FTCA provides that, if FTC has found an “act or practice” to be “unfair or deceptive” in a prior administrative action and issued a “cease and desist order … with respect to such act or practice,” FTC “may commence a [later] civil action to obtain a civil penalty” against unrelated individuals or entities who have “actual knowledge” of the prior finding and who engage in the same “such act or practice.” 15 U.S.C. § 45(m)(1)(B).

Related provisions allow for civil penalties up to $50,120 for each violation, with “each day” a violation continues “be[ing] treated as a separate violation.” Id. § 45(m)(1)(C).

In “determining the amount” of a civil penalty, the court considers “the degree of culpability, any history of prior such conduct, ability to pay, effect on ability to continue to do business, and such other matters as justice may require.” Id. Finally, a particularly curious provision allows a later defendant to relitigate the relevant conclusions of the earlier administrative action. Id. § 45(m)(2). It is unclear as a practical matter exactly what that challenge would look like, particularly as to decades-old actions where the briefing may not even be available.

Following enactment in 1975, FTC used Section 5(m)(1)(B) only sparingly before pivoting to rely on a different statutory provision, almost exclusively for several decades. In 2021, however, the U.S. Supreme Court rejected FTC’s longtime interpretation of that much-used provision, cutting off the primary means the agency had been using to obtain monetary redress. AMG Cap. Mgmt. LLC v. FTC, 41 S.Ct. 1341 (2021). Since then, the agency has sought to “deploy[] new [enforcement] tools and reinvigorate[] old ones.” This notice tactic under Section 5(m)(1)(B) falls somewhere between those two poles—as an old tool that never had much vigor, this likely counts as an attempt to deploy a new one. See other notices FTC has issued.

U.S. v. Hopkins Dodge Inc.

In the only existing case reviewing Section 5(m)(1)(B), the U.S. Court of Appeals for the Eighth Circuit sided with the defendant, a car dealership. U.S. v. Hopkins Dodge Inc., 849 F.2d 311 (8th Cir. 1988). Having admitted that it advertised credit terms without disclosures required by the Truth in Lending Act, the dealership accepted injunctive relief. The dealership, however, contested the civil penalties that FTC sought.

FTC sought civil penalties on the basis of Section 5(m)(1)(B) because the agency had provided the dealership “copies of four” FTC administrative decisions and a “synopsis” of the decisions. Id. at 314. The court found only one of the four decisions actually “state[d]” a “conclusion” as to an “unfair or deceptive” act or practice, and that case was “basically a ‘bait and switch’ case” involving meat products. Id. Baiting and switching, the court held, was a “type of abusive practice” that “was never utilized by” the dealership. Thus, Section 5(m)(1)(B) civil penalties were unavailable. Id. at 315.

The new notice

FTC in its new notice lists five broad legal propositions: that it is an “unfair or deceptive act or practice” (1) “to make an objective product claim without having a reasonable basis,” (2) to make a health benefit or safety claim “without possessing and relying upon competent and reliable scientific evidence,” (3) to make a disease treatment or prevention claim without a randomized, controlled clinical study, (4) “to misrepresent the level or type of substantiation for a claim,” or (5) to make a “clinically proven” type claim without “evidence sufficient to satisfy the relevant scientific community.” See Notice of Penalty Offenses Concerning Substantiation of Product Claims.

For each broad legal proposition, the notice then cites and provides copies of several cases without any elaboration on the facts of any particular case, or even page numbers to highlight the particular findings FTC deems relevant. But the language of Section 5(m)(1)(B) and Hopkins Dodge relegate against painting Section 5(m)(1)(B) with such broad legal brushstrokes. They instead provide that in order to assess civil penalties, FTC must consider the facts of a prior “act or practice” found “unfair or deceptive,” then assess whether the later defendants engaged in the same practices, knowing they were previously deemed violative.

When the facts of cases cited in the notice are considered, it becomes particularly clear the many different types of acts and practices each legal proposition listed in the notice represents. For instance, for the proposition that advertisers must have a reasonable basis for claims, FTC cites six different cases. Two involved companies marketing fake anti-lock brake systems. Auto. Breakthrough Scis. Inc., 126 F.T.C. 229 (1998); Brake Guard Prods. Inc., 125 F.T.C. 138 (1998).

Another case involved a company engaged in practices like relying on a small pilot study for disease treatment claims when larger, better designed later studies showed null results. POM Wonderful LLC, 155 F.T.C. 1 (2013), aff’d in part, 777 F.3d 478 (D.C. Cir. 2015). A fourth involved a retailer that displayed advertising provided by the manufacturer of a purported weight loss product. Porter & Dietsch Inc., 90 F.T.C. 770 (1977), modified, 605 F.2d 294 (7th Cir. 1979), amendments to order, 95 F.T.C. 806 (1980). Yet another involved a company creating and relying on a biased survey for performance and superiority claims for microwave ovens. Litton Indus. Inc., 97 F.T.C. 1 (1981). Finally, a sixth case involved a company making cancer treatment claims for dietary supplements in reliance on studies found to be weak or irrelevant (e.g., in vitro studies, studies on ingredients other than those in the products). Daniel Chapter One, 148 F.T.C. 832 (2009), aff’d, 405 Fed. App’x 505 (D.C. Cir. 2010).

As constructed with broad legal propositions and mere case citations, it appears unlikely that FTC could prevail in assessing civil penalties based on its notice. Maybe the agency could show that a defendant, as a factual matter, engaged in the same “type of abusive practice,” such as marketing fake anti-lock brakes or creating biased surveys. However, the agency would still face the likely more difficult task of showing that mere citation of the prior case in FTC’s notice—without any factual elaboration or even pinpoint citations—provided “actual notice” that a particular practice had been deemed unfair or deceptive. Id.

If Congress intended 5(m)(1)(B) civil penalties to be premised on abstract legal propositions and entire bodies of case law, it could have written the language accordingly. But it didn’t. It required FTC to be able to show that a defendant actually knew the particulars of an “act or practice” deemed unfair or deceptive in a prior “cease and desist order.”

In 1977, a practitioner observed in a law review article that Section 5(m)(1)(B) seemed to be an “after thought,” “rife with interpretive problems that the [FTC], potential defendants, and, ultimately the courts will have to face.” David O. Bickart, Civil Penalties Under Section 5(m) of the Federal Trade Commission Act, University of Chicago Law Review, Vol. 44, No. 4, at 762, 803 (1977). He continued, “Whether it will prove a useful addition to [the FTC]’s new arsenal of enforcement power, or just another empty weapon remains to be seen.” Id.

Forty-four years later, even with what little we know from the statutory language and a single interpretive case, FTC’s new notice appears to be a tool unlikely to be fit for purpose with any amount of “reinvigorating.” Even if the agency attempts enforcement, it would, at the very least, be forced to make novel arguments to try to defend the new notice.

Trends in substantiation cases

Again, though, even if the new notice may be more bark than bite, the general trend of FTC in substantiation cases—particularly on health-related claims—remains a serious concern. In 2009, FTC’s Bureau of Consumer Protection announced efforts to “re-examin[e]” its existing standards “regarding substantiation for advertising claims,” particularly as to health-related advertising.

Since then, through both Democratic and Republican administrations, FTC has been on a tear, focusing its enforcement away from clearcut deception to attacks on scientific evidence supported by reputable experts on the other side. That shift hasn’t gone very well for the agency, which has racked up three significant losses—all in dietary supplement cases—since 2013. See United States v. Bayer Corp., No. CV 07-01(JLL), 2015 WL 5822595 (D.N.J. Sept. 24, 2015); Basic Research LLC v. FTC, 2:09-CV-0779 CW, 2014 WL 12596497, at *13 (D. Utah Nov. 25, 2014); FTC v. Garden of Life Inc., 516 F. App’x 852, 856 (11th Cir. 2013)).

But still, the losses haven’t ended the trend of FTC bringing “debate-over-science” cases. The new notice on claim substantiation is a good reminder to remain aware of the kinds of arguments the agency is making in debate-over-science cases and be sure your company is staying ahead of them.

Katie Bond, a partner in Washington, D.C., with Keller and Heckman LLP, provides regulatory counseling and litigation support to national and global brands marketing a variety of consumer products, including dietary supplements, food, and personal care products. She focuses her practice primarily on advertising and food and drug law, with an emphasis on risk analysis and a deep knowledge of regulatory regimes affecting labeling and marketing. Katie has extensive experience handling Federal Trade Commission and state investigations, in addition to assisting clients with consumer class action defense and self-regulatory challenges before the National Advertising Division.

Samuel Butler, an associate in Washington, D.C., with Keller and Heckman LLP, works with clients to analyze and manage risk related to product labeling and marketing, with a particular focus on health, nutrition, and environmental advertising in the supplement and consumer product industries. With an extensive litigation background, Samuel represents companies in federal courts nationwide, as well as before the Federal Trade Commission, the National Advertising Division, and the National Advertising Review Board. He also has significant experience in domestic and international arbitration.