The FTC Resurrects Its Penalty Offense Authority in a Big Way

October 20, 2021By Karin F.R. Moore & Riëtte van Laack

Last fall, when AMG Capital Management, LLC v. FTC was pending before the Supreme Court, former Federal Trade Commission (FTC) Commissioner Rohit Chopra (now Director of the Consumer Financial Protection Bureau) and Samuel Levine (recently appointed Director of the FTC’s Bureau of Consumer Protection) coauthored an article proposing resurrecting the FTC Act’s penalty offense authority. Rohit Chopra & Samuel A.A. Levine, The Case for Resurrecting the FTC Act’s Penalty Offense Authority, U. Pa. L. Rev. (forthcoming). If you haven’t heard of the Penalty Offense Authority found in Section 5 of the FTC Act, 15 U.S.C. § 45(m)(1)(B), you aren’t alone – it was added to the FTC Act in 1975, and it was apparently highly successful for some time, but then largely abandoned during the 1980s when the FTC’s leadership saw markets as “self-correcting” and sought to rid itself of the “national nanny” moniker.  Chopra and Levine urged:

Using this authority, the Commission can substantially increase deterrence and reduce litigation risk by noticing whole industries of Penalty Offenses, exposing violators to significant civil penalties, while helping to ensure fairness for honest firms. This would dramatically improve the FTC’s effectiveness relative to our current approach, which relies almost entirely on another authority, Section 13(b). Section 13(b) does not allow the Commission to seek penalties against wrongdoers, and it is now under threat in the Supreme Court. Chopra & Levine, supra.

Under this authority, the FTC can send companies a “Notice of Penalty Offenses,” also referred to as a “Section 205 Synopsis.”  These Notices list certain types of conduct that the FTC has determined, in prior administrative orders, violate the FTC Act.  Once a company receives the Notice, it then “knows” about the conduct the FTC prohibits and if the company subsequently engages in the prohibited conduct, it can be subject to civil penalties of up to $43,792 per violation.

As we reported here, the U.S. Supreme Court in AMG Capital Management, LLC v. FTC, No. 19-508 (Apr. 22, 2021), unanimously held that Section 13(b) of the FTC Act does not authorize the Commission to seek, or a court to award, equitable monetary relief such as restitution or disgorgement.  In response, the FTC has done what Chopra and Levine urged, and “resurrected” its Penalty Offense Authority.

The Commission’s first such Notices under the resurrection went out on October 6, 2021 to 70 for-profit educational institutions.  And in what seems to be an effort to send Notices to every entity who might arguably be covered by a prior order, the FTC sent Notices to more than 700 companies on October 13, 2021, including many consumer product, pharmaceutical, and food manufacturers, focused on the misleading use of endorsements and testimonials.  The FTC’s Penalty Offenses Concerning Endorsements website lists the cases the FTC relied on, which date between 1941 – 1984, and includes a sample Notice and letter and a list of recipients.

While the application of this authority seems fairly cut and dried, the FTC has only used this authority once in the last decade.  There may be reasons for that including the necessity of proving that the defendant committed the same conduct and did so with actual knowledge that the conduct was unfair or deceptive.  Any litigation in this area could be complex and protracted – defendants can challenge the FTC’s original determination of unfairness or deception, and the standard for actual knowledge is high (and has been recently litigated at the Supreme Court in the ERISA context in Intel Corporation Investment Policy Committee v. Sulyma, 140 S. Ct. 768 (2020)).

The FTC assures the companies – and the public – “the fact that a company is on the list is NOT an indication that it has done anything wrong,” and that the Notices are not based on a review of a company’s advertising.  FTC, List of October 2021 Recipients of the FTC’s Notice of Penalty Offenses Concerning Deceptive or Unfair Conduct around Endorsements and Testimonials (last updated Oct. 15, 2021).  However, there is no indication from the FTC about the determination of who should receive a Notice.

What does this shift to the Penalty Offense Authority portend?  The first thing is that the FTC is clearly signaling more aggressive enforcement.  This shouldn’t come as a big surprise if you have been following the FTC, its new Chairman, Lina Khan, and its actions in the past nine months.  The second more surprising thing is that the votes of the Commission to authorize sending these Notices was 5-0: the Commission is unanimous in its support of the use of these Notices.  It will be interesting to see if the votes to seek civil penalties are similarly unanimous and whether the increased enforcement crosses party lines as well.  And finally, the FTC is giving companies the warning up front.  There will not be any second chances or cease and desist orders as in the past – if you violate the law after being warned, the FTC is likely to seek civil penalties.

Categories: Enforcement