Back in February 2022, the Federal Trade Commission (FTC) announced an advance notice of proposed rulemaking (ANPRM) on “deceptive or unfair earnings claims.” According to the FTC:
[The Deceptive or Unfair ANPRM was aimed at] challenging bogus money-making claims used to lure consumers, workers, and prospective entrepreneurs into risky business ventures that often turn into dead-end debt traps. If finalized, a rule in this area would allow the Commission to recover redress for defrauded consumers, and seek steep penalties against the multilevel marketers, for-profit colleges, “gig economy” platforms, and other bad actors who prey on people’s hopes for economic advancement.
The FTC has not yet proposed a final rule in this matter.
A just released Mercatus Center policy brief by my colleague Tracy Miller concludes that the FTC should not issue a new Magnuson-Moss rule (pursuant to 15 U.S.C. § 57a) directed at deceptive or unfair marketing earnings claims (footnote references omitted):
The FTC has a long history of enforcement actions—in the form of adjudication—against firms that make unfair and deceptive earnings claims. It also has provided extensive guidance concerning practices that it considers unfair and deceptive. While a rule could make it easier to seek and obtain monetary relief, rulemaking, especially given the commission’s current membership, can result in more onerous rules that inhibit innovation and entrepreneurship in firms’ communications about earnings opportunities. Rather than completing the proposed rulemaking process, the FTC would be better off addressing deceptive claims by combining its penalty offense authority with continued adjudication.
Miller’s recommendation is sound. The legal and policy reasons that militate against enactment of an FTC earnings-claim rule are summarized below.
Discussion
Prior to April 2021, the FTC could proceed directly against a private party for equitable monetary relief under its injunctive authority, found in Section 13(b) of the FTC Act. The U.S. Supreme Court, however, held in AMG Capital Management LLC v. FTC that Section 13(b) does not authorize the commission to obtain court-ordered monetary relief (such as restitution or disgorgement). As such, the FTC was denied an important vehicle that it could use to deter (and sometimes extract money settlements against) specific conduct it deemed illegal—including deceptive or unfair earnings claims. (I discussed the future of FTC equitable monetary relief following AMG in a 2021 Truth on the Market commentary.)
The FTC, nevertheless, still retains two potential monetary-enforcement powers that it might employ to discourage or prosecute problematic earnings claims—its penalty-offense authority and its Magnuson-Moss rulemaking authority.
The FTC’s Penalty-Offense Authority
The FTC’s penalty-offense authority (POA) (Section 5(m)(1)(B) of the FTC Act, 15 U.S.C. §45(m)(1)(B)) (see here) authorizes the FTC to seek civil penalties against a company that acted unfairly or deceptively. The commission can obtain POA penalties if it proves that:
- the company knew the conduct was unfair or deceptive in violation of the FTC Act; and
- the FTC had already issued a written decision (see below) that such conduct is unfair or deceptive.
In order to trigger this authority, the 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 final litigated administrative orders (not consent orders), to be unfair or deceptive in violation of the FTC Act. Companies are sent a notice to ensure that they understand the law, and that they are deterred from breaking it.
Firms that receive this notice and nevertheless engage in prohibited practices can face civil penalties of up to $50,120 per violation. (As required by federal statute, the FTC adjusts the amounts of its civil-penalty maximums for inflation every January.) Because the maximum penalty can be assessed for each day that the firm violates a rule, the penalty can greatly exceed a firm’s gains from unfair or deceptive claims. This may be necessary to provide optimal deterrence when the likelihood of detecting wrongdoing is small. (This point was made in a 2021 law review article by former FTC Commissioner Rohit Chopra and current FTC Bureau of Consumer Protection Samuel Levine.)
In October 2021, the FTC announced that it had sent a POA notice informing more than 1,100 businesses that promoted money-making ventures that they would face civil penalties if they deceived or misled consumers about potential earnings.
As the FTC explained, the notice outlined a number of practices that the FTC had determined to be unfair or deceptive in 12 prior administrative cases. Broadly, the cases found that it was unlawful to make false, misleading, or deceptive representations concerning the profits or earnings that may be anticipated by a participant in a money-making opportunity. This includes, for example, representations that participants will make a profit, or that represented profits are typical.
The notice also described seven other practices used by sellers or marketers of money-making opportunities that the FTC had determined involved deceptive representations (e.g., falsely telling consumers they do not need experience to earn income or that they must act immediately to participate).
As Miller’s earnings-claims brief notes, the FTC’s POA has been used with some success recently, although there are questions about the degree of its effectiveness in challenging deceptive earnings claims (footnote references omitted):
In 2022, the FTC assessed a penalty of $1.7 million in a settlement with WealthPress based on allegations that the company made “outlandish and false claims” deceiving consumers about its investment advisory services. Recently the FTC has issued notices of penalty offenses concerning money-making opportunities and a variety of other topics.
There is some uncertainty about the efficacy of using the penalty offense authority in earnings claims cases. If the authority is challenged in a particular case, the courts would be likely to rule against the FTC if it is too difficult to demonstrate that the current claim is sufficiently like conduct in the prior proceeding(s), which forms the basis of the FTC’s claim. The penalty offense authority includes strong due process protections for the defendants, such as the requirement that the parties must have had actual knowledge of the commission’s prior determination that a specific practice similar to the one they engaged in was unlawful. Nevertheless, it has been used effectively in several cases. Because civil penalties are available, and firms are notified in advance of the offenses that are subject to penalty, firms are more likely to comply, and the need is reduced “to bring enforcement actions for similar conduct over and over again.” In the early years after the commission gained this authority, most firms that received notice complied voluntarily.
Is an FTC Earnings-Claims Rule Welfare-Superior to POA Enforcement?
An earnings-claim rule, which would be promulgated pursuant to the Magnuson-Moss Act, should not be adopted unless it is welfare-superior to POA enforcement. It is not.
In a December 2023 Truth on the Market commentary on FTC rulemaking, I summarized key problems that beset Mag-Moss proceedings (hyperlinks omitted):
[R]ulemakings . . . are resource-intensive, and may take years to come to fruition. With respect to consumer protection [former FTC Bureau of Consumer Protection Director] Jessica Rich explains that, despite 2021 FTC procedural changes to “streamline” Magnuson-Moss (Mag-Moss) rulemaking under Section 18 of the FTC Act, “the hurdles remain high” to the enactment of Magnuson-Moss rules. . . .
Specifically, Rich explains that Mag-Moss initiatives must still follow cumbersome statutory steps prior to enactment. Significantly, the FTC:
- Must seek public comment on a draft rule and hold public hearings if requested;
- It must have “reason to believe” targeted practices are prevalent (that requires hard evidence, not just assertions); and
- It must publish a final rule setting forth a cost-benefit regulatory analysis that also must demonstrate why the rule was chosen over alternatives.
Also, judicial review of a Mag-Moss rule is far more exacting than under the APA’s [Administrative Procedure Act’s] requirements (the relatively lenient “arbitrary and capricious” standard). A court may, of course, choose to strike down a poorly justified Mag-Moss rule under the relatively lenient APA “arbitrary and capricious standard.” But even if a Mag-Moss rule survives APA review, the FTC may still lose in court. Under Mag-Moss, a court may direct the FTC to consider additional submissions, may set aside the rule if it is not supported by “substantial evidence,” and may “set aside the rule if FTC’s limits on rebuttal or cross examination precluded disclosure of material facts.”
Finally, and perhaps most significantly, a reviewing court may decide that the FTC has done an inadequate job of demonstrating that a Mag-Moss rule would be cost-beneficial.
These considerations strongly militate against the enactment of an earnings-claims rule on opportunity-cost grounds. The substantial resources devoted to such a rule would achieve a far higher return in economic surplus if devoted to hardcore fraud, which imposes major harm on consumers and is subject to minimum error costs in application.
Unlike hardcore-fraud enforcement, the application of an earnings-claims rule would entail substantial error costs and raise First Amendment concerns to boot. As Miller’s earnings-claims brief notes, citing scholarly critiques of the Earnings Claims ANPRM (footnotes omitted):
Opponents of an earnings claim rule express concern that it “will be too rigid in regulating first amendment protected commercial and non-commercial speech.” The commission argues that the rules may make it easier to determine whether a particular earnings claim is deceptive. But clarifying the rules may also make them more rigid, hindering the ability of some businesses to communicate the unique features of the opportunities they are offering. [[I]n particular, as noted by a former FTC Bureau of Consumer Protection Director, specific restrictions on how an earnings claim may be stated could interfere with the communication process, since restrictive rules likely interfere with communicating idiosyncratic aspects of a business or investment opportunity.] In its ANPRM the commission seems to disparage the use of testimonials, lifestyle claims, or claims about earnings that are atypical, even if such claims are accompanied by disclaimers.
More specifically, future case-specific First Amendment concerns posed by a rigid earnings-claims rule would be grave, even if the rule passed initial judicial muster. The First Amendment sharply limits government’s power to impose content-based restrictions on speech. See Reed v. Town of Gilbert, 576 U.S. 155, 163 (2015). Such restrictions are disfavored and “presumptively invalid.” See R.A.V. v. City of St. Paul, 505 U.S. 377, 382 (1992). Moreover, to the extent an earnings-claim rule were applied to restrain non-commercial speech (for example, discussion of earnings claims in informational newsletters and webinars), it would be subject to judicial strict scrutiny and would be presumed unconstitutional “absent a need to further a state interest of the highest order.” Smith v. Daily Mail Publ’g Co., 443 U.S. 97, 103 (1979).
Even to the extent that an earnings-claims rule applied primarily or almost always to commercial speech (business advertising), its invocation would confront substantial First Amendment hurdles. It would be subject to intermediate scrutiny, which assess speech under four exacting criteria:
- whether the speech at issue concerns lawful activity and is not misleading;
- whether the asserted governmental interest in regulating speech is substantial;
- whether the regulation being scrutinized directly advances the governmental interest asserted; and
- whether it is not more extensive than necessary to serve that interest. See Central Hudson Gas & Electric Corp. v. Public Service Commission, 447 U.S. 557, 561-62 (1980).
A rule that barred or severely limited certain lawful communications regarding actual examples of large earnings, for example, could well be seen to be an overly severe (“more extensive than necessary”) constraint on the ability of businesses to communicate their potential (particularly if serious questions existed as to the materiality of the earnings-claims communications to consumer decision making).
Finally, the FTC would have an extremely difficult time demonstrating that the benefits of an earnings-claims rule would exceed its costs, as required by Mag-Moss. The rule’s interference with businesses’ ability to communicate effectively with consumers, combined with major First Amendment risks posed by its application, could well convince a reviewing judge that the rule would impose enormous costs. The magnitude of those costs might well be seen to vastly outweigh the rule’s speculative benefits, given likely difficulties in showing that specific earnings claims materially affected consumer decision making.
Conclusion
Enactment of an FTC earnings-claims rule is uncalled for. The FTC already has major POA powers (which commendably protect due process rights) to challenge any clearly unfair or deceptive earnings claims on a case-specific basis. The significant resources devoted to an earnings-claims rule would yield far greater economic-welfare gains (consumers’ plus producers’ surplus) if applied instead to attacking hardcore consumer fraud.
Furthermore, the high error costs and First Amendment problems inherent in a one-size-fits-all earnings-claims rule underscore such a rule’s lack of substantive merit and inability to withstand required cost-benefit scrutiny. It follows that the FTC should withdraw the Earnings Claims Rules ANPRM forthwith.