With Notice of Penalty Offenses, FTC Warns Companies Against Making Unsubstantiated Marketing Claims

The U.S. Federal Trade Commission (FTC) recently sent a Notice of Penalty Offenses to 670 marketing companies warning them against making unsubstantiated claims. Substantiation is a key aspect of federal advertising compliance, and companies that make unsubstantiated claims to consumers can face civil fines of up to $50,120 as of 2023.

With its Notice, the FTC specifically targeted companies that sell over-the-counter (OTC) drugs, homeopathic products, dietary supplements, and functional foods. The FTC has published a list of the companies that received the Notice of Penalty Offenses online, though a press release announcing the FTC’s enforcement effort notes that, “[a] recipient’s inclusion on the list does not in any way suggest that it has engaged in deceptive or unfair conduct.” Clearly, however, the FTC wants people to know what it is doing; and, by publishing a list of the companies being targeted, it is sending a clear message that unsubstantiated marketing claims will not be tolerated.

Crucially, the FTC notes that while its “initial distribution” of the Notice of Penalty Offenses was limited to companies making health-related claims involving OTC drugs, supplements, and certain other products, “the notice is not limited to health claims and applies to any marketer making claims about the efficacy or performance of its products.” In other words, the FTC expects all companies to review its Notice of Penalty Offenses and ensure that they are in compliance. The FTC’s press release also refers companies to its prior Notice of Penalty Offenses regarding endorsements and testimonials, and it suggests that healthcare product marketers review the Commission’s recently-released Health Products Compliance Guide.

Understanding the Implications of Receiving an FTC Notice of Penalty Offenses

A Notice of Penalty Offenses is a regulatory document issued by the FTC. Proposed Notices of Penalty Offenses are subject to approval by the agency’s Commissioners. Once issued, a Notice of Penalty Offenses serves as a guidance document for FTC compliance, and the FTC will often send copies of the Notice to companies suspected of non-compliance.

The FTC’s authority to do so comes from Section 5(m) of the Federal Trade Commission Act (FTC Act), and is referred to as the Commission’s Penalty Offense Authority. Under the FTC’s Penalty Offense Authority, it can impose civil penalties for marketing violations if:

• A company knows that its conduct constitutes an unfair or deceptive practice in violation of the FTC Act; and,
• The FTC has previously issued written guidance identifying the conduct as unfair or deceptive.

As a practical matter, these two elements tend to go hand-in-hand. As the FTC explains, to trigger its Penalty Offense Authority:

“[T]he Commission can send companies a ‘Notice of Penalty Offenses.’ This Notice 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. Companies that receive this Notice and nevertheless engage in prohibited practices can face civil penalties of up to $50,120 per violation.”

The penalty amount is adjusted annually for inflation. By sending a company a copy of a Notice of Penalty Offenses, the FTC effectively puts the company on notice that engaging in specific conduct will lead to civil enforcement. If a company nonetheless engages in the conduct, its receipt of the Notice of Penalty Offenses will generally satisfy the knowledge element of Section 5(m).

As the FTC also explains, “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, the FTC does not select companies to receive copies of a Notice of Penalty Offenses at random. The FTC’s efforts to disseminate Notices of Penalty Offenses are targeted; and, if a company receives a copy of a Notice from the FTC, this is a strong indication that the FTC has reason to believe the company is engaging in unfair and deceptive marketing practices.

The FTC’s Notice of Penalty Offenses Concerning Substantiation of Product Claims

The FTC’s Notice of Penalty Offenses Concerning Substantiation of Product Claims identifies five specific practices that can lead to civil penalties. As stated in the Notice, “the following acts or practices used in the advertising or promotion of products are deceptive or unfair and are unlawful under Section 5(a)(1)” of the FTC Act:

• Objective Claims Without a Reasonable Basis – “It is an unfair or deceptive act or practice for an advertiser to make an objective product claim without having a reasonable basis, at the time the claim is made, consisting of competent and reliable evidence.”
• Claims Relating to Health Benefits or Safety Features – “It is an unfair or deceptive act or practice for an advertiser to make a claim relating to the health benefits or safety features of a product without possessing and relying upon competent and reliable scientific evidence that has been conducted and evaluated in an objective manner by qualified persons and that is generally accepted in the profession to yield accurate and reliable results, to substantiate that the claim is true.”
• Claims of Cure, Mitigation, or Treatment – “It is an unfair or deceptive act or practice for an advertiser to represent expressly or by implication that a product is effective in the cure, mitigation, or treatment of any serious disease, including heart disease, cancer, arthritis, and erectile dysfunction, without possessing and relying upon at least one human clinical trial of the product that [meets the FTC’s standards].”
• Misrepresenting Substantiation – “It is an unfair or deceptive act or practice for an advertiser to misrepresent the level or type of substantiation for a claim.”
• Claims Relating to Scientific or Clinical Proof – “It is an unfair or deceptive act or practice to represent that a product claim has been scientifically or clinically proven unless, at the time the representation is disseminated, the advertiser possesses and relies upon evidence sufficient to satisfy the relevant scientific community of the claim’s truth.”

To be clear, these are not new prohibitions. The FTC Act has long prohibited unsubstantiated marketing claims, and combating unsubstantiated claims has long been an enforcement priority for the FTC. So, by issuing its Notice of Penalty Offenses Concerning Substantiation of Product Claims, the FTC is sending a clear message that it intends to aggressively enforce compliance in this area going forward.

Other FTC Notices of Penalty Offenses

While the FTC’s Notice of Penalty Offenses Concerning Substantiation of Product Claims is its most recent, the Commission has issued several Notices of Penalty Offenses over the past several years. As discussed above, all companies need to be aware of these Notices, and they should take proactive steps to incorporate the relevant provisions into their marketing compliance programs.

Some of the FTC’s other recent Notices of Penalty Offenses include:

• Notice of Penalty Offenses Concerning Money-Making Opportunities
• Notice of Penalty Offenses Concerning Endorsements
• Notice of Penalty Offenses Concerning Education
• Notice of Penalty Offenses Concerning Bait & Switch
• Notice of Penalty Offenses Concerning Business Opportunities
• Notice of Penalty Offenses Concerning Debt Collection
• Notice of Penalty Offenses Concerning Damaged or Defective Merchandise

What Should You Do if Your Company has Received a Notice of Penalty Offenses from the FTC?

If the FTC has selected your company to receive a Notice of Penalty Offenses, what should you do? As noted above, while this doesn’t necessarily mean that your company is in violation, there is a reason that the FTC has chosen to include your company in its list of recipients.

With this in mind, upon receiving a Notice of Penalty Offenses from the FTC, it is important to promptly review your company’s marketing materials as well as its marketing compliance program. If any of your company’s marketing materials arguably violate the FTC Act, then the best approach may be to pull the relevant advertisements and promptly revise your company’s marketing strategy. At this point, it may be necessary to update your company’s compliance program as well—and then disseminate your company’s updated compliance program while providing training that emphasizes compliance in any areas of concern (i.e., substantiation).

Given the risks of failing to maintain FTC compliance, companies should undertake these steps with the guidance and oversight of outside counsel. If there is a risk that a company could face FTC enforcement action for noncompliance, its executives will also want to work with outside counsel to develop and implement a proactive FTC defense strategy. In the vast majority of cases, addressing potential compliance issues before they lead to scrutiny from the FTC is the best way to avoid unnecessary consequences.

Speak with an FTC Compliance and Defense Lawyer at Oberheiden P.C.

At Oberheiden P.C., we have extensive experience representing companies in all FTC compliance and defense matters. If you need to know more about how to address the FTC’s recent Notice of Penalty Offenses Concerning Substantiation, we invite you to call 888-680-1745 or contact us online for a complimentary consultation.