Employing every available means to protect consumers from deceptive and misleading practices, the FTC recently announced the revitalized use of its statutory Penalty Offense Authority. More than 700 businesses – top consumer products companies, leading retailers and retail platforms, major ad agencies, and other names you know – are recipients of the latest Notice of Penalty Offenses aimed at curbing illegal practices in the use of endorsements and testimonials. They’re now on notice that the misleading use of endorsements could lead to major financial penalties. Here’s what you and your clients need to know about this significant development.
Some background first. Under Section 45(m)(1)(B) of the FTC Act, the FTC may notify companies that certain acts or practices have been found in administrative decisions, other than consent orders, to be deceptive or unfair. Companies that receive a Notice of Penalty Offenses now have “actual knowledge” that those practices violate the law. If the company engages in that conduct in the future, the statute allows the FTC to sue the company, seeking civil penalties. The FTC recently sent a Notice of Penalty Offenses to for-profit educational institutions listing deceptive employment and earnings claims that can invoke financial remedies. The latest announcement: a Notice of Penalty Offenses Concerning Endorsements.
Endorsements and testimonials are a mainstay in advertising and it’s hardly a new phenomenon. Why are endorsements so popular with advertisers? Marketing experts say it’s because the “Don’t just take it from us. See what others are saying about our product” message resonates with the buying public. But reach back to the very first volume of F.T.C. Decisions and you’ll find FTC challenges to misleading endorsements.
Truthful endorsements can help buyers make sound choices in the marketplace, but their deceptive use injures both consumers and honest businesses that have to complete against corner cutters and falsifiers. The Notice of Penalty Offenses Concerning Endorsements lists the following endorsement-related acts or practices that have been found to violate Section 5 of the FTC Act:
- claiming – directly or by implication – that a third party has endorsed a product or its performance when that’s not the case (this includes fake reviews);
- misrepresenting that an endorsement reflects the experience, views, or opinions of users or purported users;
- misrepresenting an endorser as an actual, current, or recent user of a product;
- continuing to advertise an endorsement unless the advertiser has good reason to believe the endorser continues to subscribe to the views presented in the endorsement;
- using testimonials to make unsubstantiated or otherwise deceptive performance claims – even if the testimonial is genuine;
- failing to disclose a connection between an endorser and seller of a product if that connection might materially affect the weight or credibility of the endorsement or review and if consumers wouldn’t reasonably expect that connection; and
- misrepresenting – explicitly or implicitly – that the experience of an endorser represents the typical or ordinary experience of users of the product.
The announcement offers three key takeaways.
There’s nothing new about requiring endorsements to be truthful and substantiated. Despite the announcement regarding the renewed use of the FTC’s penalty authority, the list of penalty offenses shouldn’t come as a surprise to advertisers. The list simply reinforces established FTC law that those practices are – and for decades have been – violations of Section 5.
The Notice of Penalty Offenses ups the impact for recipients that violate the law. Let’s be clear: Although the FTC sent the Notice to more than 700 companies, the fact that a company received a Notice was not based on a review of its advertising and in no way suggests that the company has violated the law. Rather, it’s a reminder of the established law regarding the use of endorsements and testimonials and puts those businesses on notice that deceptive practices in the future could result in penalties of up to $43,792 per violation. Companies shouldn’t need an incentive to honor well-settled consumer protection principles, but just in case, the Notice of Penalty Offenses establishes that law violations could prove costly.
The Notice offers compliance insights for all companies that use endorsements. If your company didn’t receive a Notice of Penalty Offenses, your reaction shouldn’t be “Whew!” Savvy advertisers – that includes national retailers and other businesses – should take it as an opportunity to reconsider the internal checks they have in place to ensure that endorsements in their ads comply with the law. Reading the litigated cases the FTC cited in the Notice of Penalty Offenses offers a relevant refresher.
Looking for additional compliance resources? Visit the FTC Business Center’s Endorsements, Influencers, and Reviews portal.