It’s been reported that several websites owned by the FTC were hacked last Thursday. Seven domains were alleged taken down, including, business.ftc.gov, consumer.gov, and consumer.ftc.gov. This is allegedly the second attack on the FTC within a month. The alleged motivation for the attacks was to protest the FTC’s reluctance to prevent a well known search engine from changing its terms of service. Also, the hackers’ efforts were allegedly in protest of the Anti-counterfeiting Trade Agreement, which has come under recent scrutiny for being overreaching and excessively intrusive. So, what did this act really accomplish? The FTC’s consumer protection-related resources were hijacked for a period of time. Taking someone else’s property without their permission does not promote freedom of expression, which seems to be their point.
Yesterday, the FTC reported that it had filed its 11th case involving the promotion of dietary supplements via fake news sites run by affiliate marketers. Sure, companies need to be concerned about how consumers are driven to their websites. However, it appears that the driving factor for many of the FTC’s complaints involving fake news sites was not the misleading claims on the affiliates’ websites, but rather the undisclosed negative option continuity plans on the defendants’ websites and the inability of consumers to get refunds. Even though technology has improved, it’s the same old story. At the end of the day, consumers complain to their state AG’s offices and the FTC because they claim that they were enrolled in undisclosed continuity plans, not that they lost $1.95 for a sample of a product that did not work. The FTC’s Complaint involving the sale of acai berry/colon cleanse products is yet another example of this common fact pattern. The fact that these products were pitched through allegedly fake new sites is only icing on the cake. If companies honored their 100% money back guarantees, not enough people would complain to give the FTC the incentive to bring an action. The FTC has limited resources so many of its cases are derived from consumers’ complaints. Make no mistake that if you make claims that are on its top hit list (e.g., claims to children or claims directed at curing diseases), you could see an FTC inquiry. However, if everyone is happy, then it’s less likely that your claims will come under scrutiny. Now, it might not be economically feasible to offer 100% refunds because companies pay out commissions to affiliates to drive consumers to their websites before consumers request refunds. This makes it even more important for companies to make sure that they have defensible positions for using any negative option continuity plans. Also, companies need to understand how consumers were pitched to arrive at their websites. If the true “product” is the continuity plan, then companies need to be ready to defend why all of the downstream affiliate marketing as well as the marketing on their own websites focused on the $1.95 product. While companies like to blur the issue, the question is fairly simple. If at the end of the day, the consumer believed that it was just buying the $1.95 product instead of signing up for the $79.95 plan, you could have an issue. Also, failing to investigate how consumers got to your website (i.e., by failing to monitor downstream affiliate marketing) can only lead to further trouble. Be clever in your marketing, but make sure that consumers understand what they are buying.
Yesterday, the FTC and DOJ announced the release of their Joint Policy Statement regarding the enforcement of U.S. antitrust laws with respect to Accountable Care Organizations (“ACOs”). This is reminiscent of when the Agencies issued their Joint Healthcare Guidelines in 1994, and capitation, HMOs, PPOs and PHOs were the topics of issue. It should be interesting to see how the industry reacts in light of these guidelines.
Receiving an inquiry from a government agency, like the FTC, is different than being involved in civil litigation. Your client is dealing with the government, which does not have the same motivation or pressure points to settle as a private litigant. Having worked at the FTC, it’s my impression that most of the lawyers working there are passionate about making a difference and protecting consumers. As such, if they get a sense that someone is playing games or being less than forthright, they have the luxury of devoting a substantial amount of time to a single matter and turning over every rock possible. During my tenure, some companies attempted to bury damaging documents in massive document productions with the hope that they would go unnoticed. The problem is that by putting documents in places that you wouldn’t normally expect to find them (e.g., placing a random memo in the middle of financial data), it only highlighted the document’s potential importance. Once a company loses its credibility, it’s hard to get it back. What can be done about producing damaging documents? If they are clearly relevant to the FTC’s inquiry and cannot be withheld based on confidentiality concerns or some applicable privilege, don’t bury them in other documents. Rather, disclose them as the are kept in the ordinary course of business and deal with them as a matter of law. If your company somehow ran afoul of the applicable regulations, look to prior FTC Orders to see how others in your circumstance were treated. Generally speaking, my experience with the FTC was that it tried to be consistent in its approach to dealing with issues. In short, deal with the issues and don’t play games. In the end, it’s been my experience that you’ll achieve better results.
The FTC has put out a short video with 7 simple things to remember about complying with the CAN-SPAM Act. Although very basic, it presents a short checklist to review if your company uses E-mail to market your products or services.
It’s been reported that the FTC has “dropped” its investigation of a start-up that searches the Internet for employees’ and job applicants’ past bad acts. While the FTC may have suspended its investigation relating to potential Fair Credit Reporting Act violations, it never gives a “stamp of approval” as is being reported. Read the alleged copy of the FTC’s letter. In any event, it’s an interesting intersection of social media and regulatory issues.
Besides telling the truth, what’s the one thing that a company can do to minimize its chances of getting an inquiry from the FTC? Provide a no questions asked, 100% money back guarantee and honor it. Here’s why. Generally speaking, the FTC brings most of its cases with the goal of getting restitution for consumers. If there are no damages (i.e., everyone has been refunded), then it reduces the incentive for the FTC to bring a case. Further, if everyone is happy, there won’t be any complaints to the FTC. Thus, unless you are making outrageous health claims to children, for example, it is less likely that you will wind up on the FTC’s radar screen. Responding to a FTC investigation will surely cost more than the $39.95 refunded to a consumer. So to sum it up, always tell the truth and provide full refunds. You should have less worries.
As I tell my kids, it doesn’t matter what everyone else on the playground is doing, if you get caught, there may be serious consequences for you. The FTC takes the same approach when reviewing substantiation for companies’ claims. It doesn’t matter what anyone else is advertising in the industry. The FTC will want to see what substantiation you have for your claims. Here are six issues that I commonly saw with studies relied upon by companies:
- The study is on animals and not humans. It is difficult to convince regulators that results shown for mice necessarily translate to humans.
- The study is on humans, but does not involve the audience that the advertising targets. For example, the claims in the advertising pertain to ordinary people gaining muscle and the study shows an increase of muscle mass for burn victims, who inherently recover faster and achieve quicker results than ordinary individuals due to their pre-existing condition.
- The study is on the correct audience. However, the product-at-issue does not have anywhere close to the amount of the active ingredient in it as was used in the study. Sometimes the differences can be orders of magnitude.
- The study is not on your product, but just on an ingredient in your product. As many products also have other ingredients, it will not be uncommon for regulators to inquire about whether any beneficial results may be offset by any potentially negative effects of the other ingredients.
- The advertising promises instant results and the study involved weeks of use before any results were achieved. For example, the study is based on six weeks of use and the advertising promises “immediate” or “instant” results.
- The study does not follow generally accepted scientific protocols. For example, no control group or placebo was used in the study, thereby making the results inherently suspect.
Companies often do not seek a coordinated strategy when approaching their IP and regulatory needs. Can this come back to haunt a company? Perhaps. We’ve all seen the following scenario. Many companies choose scientific-sounding names for their products to create an air of credibility with consumers. These products allegedly have been developed after or are based on “years of scientific research.” Understanding the value of a registered trademark, these companies instruct their counsel to file a trademark application with the U.S. Patent and Trademark Office for the product’s name. After receiving an office action indicating that the mark is rejected because the mark is viewed as being descriptive, the company counters that the mark is fanciful and really doesn’t have any meaning in order to get the registration. Then, there is an FTC investigation over substantiation for some of the efficacy claims about the product. The company could be in a predicament. It needs to show the FTC that it has “competent and reliable scientific evidence” for its product’s claims. However, it has now admitted to another government agency that it made up the name. While this is certainly not damning evidence of deception, this may not help the company’s chances of convincing the FTC that it has complied with the law. You can see how this innocent act may be viewed by the FTC. Not only did the company make up the suspect claims, it even made up the scientific sounding name to further deceive consumers. Certainly, companies should not forego making valid arguments to get trademark registrations. However, they should make sure that nothing is being said that could later detract from any arguments that they need to make should an FTC investigation arise. Companies should harmonize their IP and regulatory strategies in order to minimize any later issues.