FTC – Notice of Penalty Offenses and Penalty Offense Authority
FTC Penalty Offenses Team Lead
Partner & Yale Graduate
FTC Penalty Offenses Team
Contact NickThe Federal Trade Commission (FTC) is the federal agency responsible for enforcing consumer protections and taking action against anti-competitive market activity. It has several investigative and enforcement tools at its disposal, and it has been active in using these tools to pursue civil and criminal cases in recent years.
One tool that the FTC has began using heavily is the Notice of Penalty Offenses. Previously, the FTC relied on Section 13(b) of the Federal Trade Commission Act (FTC Act) to pursue civil fines based on its authority to seek a “permanent injunction.” But the U.S. Supreme Court held that Section 13(b) authorizes injunctive relief only—not monetary relief. This significantly hamstrung the FTC’s enforcement efforts, and it quickly went in search of another solution.
It found the solution it wanted in Section 5 of the FTC Act. Under the Penalty Offense Authority provision of Section 5, the FTC can pursue civil penalties (including monetary fines) if:
- The FTC can prove that a targeted entity or individual knew its conduct violated the FTC Act’s prohibition on unfair and deceptive trade practices; and,
- The FTC has already issued a written decision finding the entity’s or individual’s conduct to be unfair or deceptive.
While proving knowledge might seem difficult (and can be difficult in some cases), the FTC can effectively sidestep this requirement by issuing a Notice of Penalty Offenses (a “Notice”). Once the FTC issues a Notice, this establishes the requisite knowledge for any entity or individual to whom it is sent. As the FTC explains:
“[A Notice of Penalty Offenses] is a document listing certain types of conduct that the Commission has determined, in one or more administrative orders (other than a consent order), to be unfair or deceptive in violation of the FTC Act. . . . That a company is sent a Notice does not indicate that the Commission has reason to believe it is breaking the law. Rather, the Commission sends these Notices to ensure that companies understand the law – and that they are deterred from breaking it.”
Of course, in many cases the FTC does send Notices of Penalty Offenses to entities suspected of breaking the law; and, often, a Notice of Penalty Offenses serves as a precursor to an FTC investigation. As a result, if your company has received a Notice of Penalty Offenses, it will be important to take appropriate responsive action promptly.
Why Have I Received a Notice of Penalty Offenses from the FTC?
The FTC can issue a Notice of Penalty Offenses in relation to any apparent or potential violation of the FTC Act. The FTC Act’s prohibition on “unfair and deceptive trade practices” is extremely broad in terms of its applicability, and the FTC can – and does – target companies of all sizes for a broad range of violations.
Recently, however, the FTC has used its Penalty Offense Authority under Section 5 to target violations in three main areas: (i) penalty offenses concerning education, (ii) penalty offenses concerning endorsements, and (iii) penalty offenses concerning money-making opportunities.
Penalty Offenses Concerning Education
The FTC sent a Notice of Penalty Offenses to several for-profit higher education institutions in late 2021. The Notice identifies the following as unfair and deceptive trade practices that can subject institutions to civil liability under Section 5 of the FTC Act:
- Misrepresenting, directly or by implication, the need or demand for individuals who have graduated from or completed courses at a specific institution.
- Misrepresenting, directly or by implication, the employment prospects of an institution’s graduates, how easily graduates will obtain employment, or employment opportunities in any field in which instruction is offered.
- Misrepresenting, directly or by implication, the number or percentage of graduates who have obtained employment or how much they may earn.
This list is not exhaustive. According to a press release from the FTC, “[c]omplaints . . . around education-related issues surged roughly 70 percent between 2018 and 2020, and the Commission is committed to rooting out practices that harm students and their families.”
Penalty Offenses Concerning Endorsements
The FTC has been paying particular attention to online endorsements and testimonials recently, placing particular emphasis on influencers (and companies working with influencers) who promote products and services on blogs, in videos, and on social media. In late 2021 it sent a Notice of Penalty Offenses to more than 700 companies, stating in an accompanying press release that it, “is blanketing industry with a clear message that, if they use endorsements to deceive consumers, the FTC will be ready to hold them responsible with every tool at its disposal.”
The FTC’s Notice identifies seven unfair and deceptive trade practices related to online endorsements and testimonials that have the potential to lead to civil enforcement action and penalties, including:
- Making false claims that a third party has endorsed a product or its performance.
- Misrepresenting that an endorsement represents the experience, views, or opinions of a user of its products.
- Misrepresenting that an endorser is an actual user of the advertiser’s product or service.
- Continuing to advertise an endorsement unless the advertiser has “good reason to believe” that the endorser continues to hold the same views.
- Using testimonials to make unsubstantiated or otherwise deceptive performance claims.
- Failing to disclose a connection between an endorser and an advertiser if the connection “might materially affect the weight or credibility of the endorsement.”
- Misrepresenting that testimonials represent the typical or ordinary experience of the advertiser’s customers.
Penalty Offenses Concerning Money-Making Opportunities
In late 2021 the FTC also sent a Notice of Penalty Offenses to more than 1,100 businesses “that pitch money-making ventures.” The Notice contains a laundry list of unfair and deceptive trade practices, from making false or misleading representations about potential profits to falsely claiming that a money-making opportunity is available for a limited time or on a limited basis.
While these are among the FTC’s current priorities, it appears that the Commission will continue to aggressively use its Penalty Offense Authority well into the future. As a result, companies in the industries discussed above should take care to ensure FTC Act compliance even if they did not receive a Notice from the FTC, and companies in other industries should also prioritize FTC compliance so that they will be prepared to withstand scrutiny in the event that they become subjects of federal investigations.
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Dr. Nick Oberheiden
Founder
Attorney-at-Law
Lynette S. Byrd
Former DOJ Trial Attorney
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Brian J. Kuester
Former U.S. Attorney
Hon. Kevin McCarthy
55th Speaker, U.S. House of Representatives (ret.)
Government Consultant
Mike Pompeo
Of Counsel
Former U.S. Secretary of State
John W. Sellers
Former Senior DOJ Trial Attorney
Linda Julin McNamara
Federal Appeals Attorney
Nicholas B. Johnson
Former Prosecutor
Roger Bach
Former Special Agent (DOJ)
Chris J. Quick
Former Special Agent (FBI & IRS-CI)
Michael S. Koslow
Former Supervisory Special Agent (DOD-OIG)
Ray Yuen
Former Supervisory Special Agent (FBI)
FAQs: Responding to a Notice of Penalty Offenses from the FTC
The FTC’s Penalty Offense Authority is the power granted to the Commission under Section 5 of the FTC Act to impose civil fines on companies that violate the law. While the FTC has historically made little use of its Penalty Offense Authority, it began using its authority aggressively in 2021 after the U.S. Supreme Court ruled that the FTC’s power to seek a “permanent injunction” under Section 13 of the FTC Act did not authorize the imposition of monetary fines.
What Penalties Can Companies Face After Receiving a Notice of Penalty Offenses?
Under the FTC Act, the FTC can pursue civil fines on a per-violation basis. Currently, civil fines stand at $43,792 per violation. Since a “violation” can involve a single misleading marketing claim or a communication sent to a single consumer, FTC enforcement actions will often involve numerous violations and the potential for hundreds of thousands or millions of dollars in potential liability.
What Should I Do if I Have Received a Notice of Penalty Offenses from the FTC?
If you have received a Notice of Penalty Offenses from the FTC, you should consult with FTC defense counsel promptly. While receiving a Notice does not necessarily mean that your company has violated the law, it does mean that your company is on the FTC’s radar. You will want to work with FTC defense counsel to assess your company’s compliance with the FTC Act, address any compliance deficiencies, and prepare to deal with the FTC if necessary.
Do I Need to Be Concerned if Other Companies in My Industry Have Received an FTC Notice of Penalty Offenses?
If other companies in your industry have received an FTC Notice of Penalty Offenses, this is not something you should ignore. To date, the FTC has issued Notices in large swaths, and it has made clear in accompanying press releases that the companies receiving Notices are by no means the only ones at risk for enforcement action. Companies in industries facing FTC scrutiny should take proactive measures to ensure that they are not committing any violations identified in a relevant Notice of Penalty Offenses—whether or not the FTC sent them a copy.
Speak with an FTC Defense Lawyer at Oberheiden P.C.
If you have questions about responding to a Notice of Penalty Offenses or any other matter pertaining to FTC compliance, we encourage you to contact us for more information. Call 888-680-1745 or contact us online to schedule an appointment at Oberheiden P.C. today.
