INSIDER Q&A: Exploring Impact of Leadership Changes at FTC

Editor’s note: In the Q&A below with Natural Products INSIDER (INSIDER), regulatory attorney John Villafranco described the potential impact of leadership changes at the Federal Trade Commission (FTC). A few weeks after we spoke to Villafranco, the U.S. Senate confirmed all five of President Donald Trump’s nominees to serve on the commission, including antitrust lawyer Joseph J. Simons, a Republican who was sworn in on May 1, 2018 to chair the commission.

Also sworn in this week: Republican Noah Joshua Phillips and Democrats Rebecca Kelly Slaughter and Rohit Chopra. The fifth nominee, Christine Wilson, a Republican, is expected to fill the position currently held by FTC Acting Chairman Maureen Ohlhausen. Ohlhausen has been nominated to serve as a judge on the U.S. Court of Federal Claims.

INSIDER: At a high level, does the business community have a sense of what issues the FTC will prioritize under Joe Simons and the new commissioners who are awaiting to be confirmed by the Senate?

John Villafranco: The nominees’ respective backgrounds and responses to questions during the confirmation process suggests some likely policy initiatives and priorities once confirmed, including:

-- Potential return to a more flexible “reasonable basis” substantiation standard from Chairman Tim Muris’s tenure [from 2001 to 2004]. Both Simons and Wilson had important roles at the commission in the early 2000s under Muris as director of the Bureau of Competition and chief of staff to Muris, respectively. In oral testimony and written responses, both Simons and Wilson praised Muris and indicated their time at the FTC under his leadership would guide their priorities at the commission.

While multiple references to Muris’s tenure were framed primarily in terms of leadership philosophies, they may also signal a return to certain policy and enforcement positions taken by Muris. For example, under Muris’s leadership, the commission continued to apply the longstanding reasonable basis standard when evaluating whether an advertiser had sufficient substantiation to support a claim. In more recent years, particularly in the area of health claims, the commission advocated for more stringent substantiation standards that have typically only been required to approve new drugs, such as requiring two well-controlled clinical studies to support certain claims.

Muris has been an outspoken critic of this development, characterizing it as “a significant ossification of a formerly flexible standard” in a paper co-authored with Dr. Howard Beales [former FTC director of the Bureau of Consumer Protection] and [former FTC Chair] Robert Pitofsky. The piece further argues that such “an arbitrary, inflexible standard would deny important information to consumers” and raise First Amendment concerns. In a written response to a question from Sen. [Dan] Sullivan (R-Alaska), Simons noted he also “had the great privilege to learn from” Pitofsky, in addition to Muris. While he did not expressly advocate for the approach to substantiation applied during Muris’s tenure, the positive references to Muris and Pitofsky could signal a return to a more flexible substantiation standard.

-- Emphasis on guidance and communication to consumers and industry. In response to a statement from Senator [Ted] Cruz (R-Texas) in Senate confirmation hearings, Simons noted the biggest lesson he learned from Muris was the importance of clearly articulating priorities, calling it “an absolutely critical thing in terms of leading the FTC,” and emphasizing he intended to do the same upon confirmation. Similarly, in a written response to a question from Sen. Sullivan, Wilson highlighted efforts under Muris’s leadership to roll out Spanish-language consumer education materials and described her intent to “ensure that ever-increasing numbers of consumers . . . are able to obtain needed information." Chopra and Phillips also indicated their commitment to consumer education, with Chopra noting his work at the CFPB [Consumer Financial Protection Bureau] led him to conclude “traditional methods employed by federal agencies to engage and educate consumers were often ineffective."

-- Chopra as potential leader on consumer finance issues. Chopra’s background and experience with consumer finance give him an expertise rare among commissioners and could translate into significant influence on topics such as credit reporting, debt collection and Big Data. He also may engage in advertising and privacy initiatives affecting children and younger Americans, given his prior interest in this area. I do not expect him to take a leadership role when it comes to dietary supplements.

-- Continuation of Ohlhausen’s tempered approach to monetary relief. It is possible—if not likely—the confirmation of the nominees would provide greater stability to a commission that has been under 50 percent capacity with only two commissioners for over a year. This stability should lead to clearer policy objectives and perhaps more enforcement. However, given President Trump’s professed commitment to reducing regulatory burden, it is unlikely the commission will move significantly away from the more tempered approach to monetary relief that has characterized the tenure of Chair Ohlhausen.

INSIDER: As it concerns the dietary supplement industry, what issues/advertising claims does the current FTC seem to be most concerned with?

Villafranco: Commissioner Ohlhausen was designated Interim Chair on January 25, 2017 by Trump and remains in that position, although she has since been nominated to become a judge on the U.S. Court of Federal Claims. Under the Trump administration, regulatory policy reform has become a priority for federal regulatory agencies, including the FTC and Executive Orders 13771 and 13777, both signed by Trump, which mandate executive branch agencies undertake significant regulatory policy reform activities that remain underway.

Executive Order 13771 requires agencies that plan to engage in rulemaking not only consider the costs to the federal budget but also to private parties, including the regulated industry. The agencies also must engage in regulatory reform activities to offset such costs by culling outdated and unduly burdensome regulations, and easing unnecessary regulatory burdens that would be imposed by new regulations. Similarly, Executive Order 13777 directs federal agencies to each establish a Regulatory Reform Task Force, charged with responsibility for evaluating existing regulations and making recommendations concerning regulations that should be repealed, replaced or modified.

While the FTC has remained active in certain respects under Ohlhausen’s leadership, Ohlhausen has heeded the Trump administration’s direction to reduce regulatory burdens and become a vocal proponent of “regulatory humility.” She has described regulatory humility generally as her belief in the power of markets—when free of restraints and unnecessary regulations—to provide the best outcomes for consumers. This was a marked change from the policies and enforcement approaches taken under former chairs [Jon] Leibowitz and [Edith] Ramirez in the preceding eight years.

In the period since Ohlhausen was designated chair, the FTC has focused primarily on bringing enforcement actions related to fraud and has brought fewer actions involving allegedly deceptive advertising claims. Practitioners before the commission have noted the FTC’s Division of Marketing Practices—the division responsible for identifying and remediating fraud—has been markedly busier in terms of enforcement than the division focused on deceptive advertising: Division of Advertising Practices.

The Ohlhausen-led commission has also sought to ensure monetary settlements are tied to actual realistic approximations of consumer harm, resulting in much smaller monetary settlements in Ohlhausen’s first year than under Ramirez. Ohlhausen’s dissenting statement in the FTC’s action against Uber for allegedly deceptive earnings representations is instructive here. That action was brought the week before Ramirez left the agency and before Ohlhausen became acting chair. In her dissent, Ohlhausen asserted the monetary settlement of $20 million “far exceeds the best estimate of actual consumer harm” and, thus, Ohlhausen could not support it.

Ohlhausen has sought to ensure the principle of limiting monetary relief to identifiable consumer harm—an extension of her notion of regulatory humility—informs FTC enforcement actions and the scope of relief under her leadership.

INSIDER: What are you and your colleagues (fellow experts in the FTC Act and related regulations) advising your clients regarding the need for randomized controlled trials to substantiate advertising claims for their supplements, or potential exposure to FTC action for lack thereof?

Villafranco: In cases against major brands Iovate, Dannon and Nestle, the FTC sought and obtained consent judgments requiring at least two adequate and well-controlled human clinical studies to support covered claims. The requirement, which became known as the “two RCTs” (randomly controlled trials) standard, is notable because it establishes a more rigid standard than the longstanding reasonable basis standard to support advertising claims.

While the FTC had previously suggested advertisers should have “competent and reliable scientific evidence” to support advertising health-related benefits, it had never held this standard required two RCTs. As discussed previously, former Chairs Muris and Pitofsky would later refer to this as “a significant ossification of a formerly flexible standard.” I expect the FTC to return to the flexible substantiation standard. And while RCTs may constitute solid support for claims, they are not always required. And certainly not two RCTs.

INSIDER: Finally, in this current environment of uncertainty, what is the takeaway message you would like to convey to the dietary supplement industry?

Villafranco: As with any agency, the FTC has undergone significant changes in priorities and policies over the years. Those priorities and policies tend to be driven by the chair, as shown by the aggressive enforcement and policy positions taken under Chairs Leibowitz and Ramirez that resulted in monumental judgments, new policy and divisive litigation. Conversely, thus far under Chair Ohlhausen, commission enforcement has been less contentious and more tempered, with a bigger focus on fraud and a lesser focus on big monetary judgments.

Looking forward, the backgrounds of Simons and Wilson suggests a return to certain policies of the early 2000s under Chair Muris could be forthcoming, including a more flexible substantiation standard. The consumer finance background of Chopra suggests the commission may become more active in that space, particularly given the likely continued decrease in enforcement by the CFPB. Other issues that perennially generate bi-partisan support—such as consumer fraud enforcement, debt collection, telemarketing, and privacy and data security initiatives—should also continue.

John Villafranco is a partner with the law firm Kelley, Drye & Warren LLP. A member of the firm’s Executive Committee, Villafranco provides litigation and counseling services, with a focus on advertising law matters and consumer protection. Among other work, he represents clients in advertising substantiation proceedings and investigations conducted by the FTC and state attorneys general.