United States: US FTC Launches Rulemaking To Bar Deceptive Earnings Claims, Targeting Gig Economy

The upshot, for busy people:

• During its February 17, 2022, open commissioner meeting, the Federal Trade Commission (FTC) voted unanimously to issue an Advanced Notice of Proposed Rulemaking (ANPR) that would regulate the manner in which companies can advertise that consumers or users of their platforms would make certain earnings in connection with jobs or other opportunities. The FTC explained that this rulemaking was intended to cover a number of industries, including companies in the gig economy.
• The ANPR raised a series of questions for public comment and did not propose the text of the rule. However, the questions and the FTC's commentary indicate that the agency is interested in regulating the use of disclaimers, requiring companies to provide actual earnings data to recruits, limit the use of testimonials, and provide specific guidance regarding the substantiation needed to make an earnings claim.
• Comments are due 60 days after the ANPR is published in the Federal Register, which should happen soon. A final rule ultimately would allow the FTC to force companies to pay civil penalties and restitution for first-time offenses. But the FTC's rulemaking procedures under Section 18 of the FTC Act are much more cumbersome than rulemaking under the Administrative Procedure Act and likely will take years to finalize.
• While the rulemaking is pending, companies should look closely at any earnings claims they make, with particular attention to the data they keep on hand to substantiate any claims, and the disclaimers and testimonials they rely on. The FTC now has these practices firmly within its sights.

Background—The FTC's rulemaking authority.

Although the FTC primarily considers itself a law enforcement entity, Chair Lina Khan has big plans to exercise its rulemaking authority, including its authority to write rules outlawing specific "unfair and deceptive" acts and practices. The agency's rulemaking authority comes from Section 18 of the FTC Act, added by Congress as part of the Magnusson Moss Warranty Act – Federal Trade Commission Improvements Act of 1975. Referred to as "Mag-Moss" rulemaking, these provisions include a number of additional procedures beyond the basic notice-and-comment rulemaking from the Administrative Procedure Act. Among other things, Mag-Moss rulemaking requires the FTC to:

• Issue an ANPR explaining the area of possible rulemaking and allow for public comment.
• Issue a Notice of Proposed rulemaking to outlaw specific "unfair or deceptive" acts or practices. This document must spell out why the FTC has reason to believe these practices are "prevalent."
• Hold an informational hearing before a "hearing officer" where concerned individuals can present their own evidence against the rule and, if necessary, cross-examine the FTC's evidence.
• Issue a final rule.
• Survive judicial review.

So, why would the FTC bother?

Money penalties. For the past four decades, the FTC relied on favorable court interpretations holding that Section 13(b) of the FTC Act—which allows the FTC to seek "injunctions" against unfair and deceptive acts and practices—also allows courts to order companies to pay restitution. The Supreme Court rejected this practice unanimously in AMG Capital Management v. FTC, issued in April 2021. That decision left the FTC scrambling to find other ways—including some very creative strategies—to force companies to pay money in connection with enforcement actions. Rulemaking under Mag-Moss provides one path to monetary relief, as the FTC Act expressly allows the agency to obtain civil penalties and restitution for first-time violations.

Context—A brief overview of the FTC's interest in earnings claims.

Deceptive earnings cases generally look like the following: A company says, "Take my class" or "work at my company" and you can make X thousand dollars a year, when in fact most consumers/workers make less. The FTC has long policed deceptive earnings claims in a variety of contexts, including scams and multi-level marketing opportunities. In 2017 and 2021, the agency branched out into the gig economy, bringing cases against major players in the space. After the Supreme Court's AMG decision, the FTC attempted to restore some ability to obtain monetary penalties for first-time offenders when, in September 2021, the agency issued a Notice of Penalty Offense to more than a thousand companies, informing them of prior FTC-litigated decisions barring deceptive earnings claims. This strategy—largely untested in the courts—relies on Section 5(m)(1)(B) of the FTC Act and allows the FTC to collect civil penalties against companies that violate the law in the same way as in the prior decisions, provided they had actual knowledge of the decision.

What does the ANPR say?

Overview. On February 17, 2022, the FTC voted 4-0 to approve the issuance of an ANPR for a rule that would address earnings claims. The four commissioners each outlined their own rationales for approving the measure. Chair Khan and Commissioner Rebecca Kelly Slaughter referenced concerns over gig-economy workers; Commissioner Noah Philips raised concerns over multi-level marketing opportunities; and Commissioner Christine Wilson indicated that she opposes rulemaking generally but supported the ANPR here because it would restore the FTC's ability to obtain money penalties for deceptive earnings claims.

The ANPR itself begins with an overview of the FTC experience enforcing consumer protection laws against false, unsubstantiated, or misleading earnings claims. This brief discussion lays out, with copious citations, a number of the FTC's first principles when thinking about earnings claims:

• Representations regarding possible earnings usually imply that the earnings are typical.
• Representations of typical earnings can be implied, including through testimonials of successful participants.
• Substantiation is necessary before making an earnings claim.
• Disclaimers often are ineffective at altering misleading, prominent representations.
• Good faith is not a defense.
• Even if consumers ultimately learn the truth, the FTC will sue companies for misstatements in initial communications as "misleading door openers."

Although the FTC states that deceptive earnings claims already are prohibited by Section 5 of the FTC Act and other FTC rules covering specific industries, the ANPR explains that rulemaking is warranted to increase deterrence by allowing the FTC to obtain money penalties for all instances of deceptive earnings claims.

Areas of interest. The ANPR then lays out the areas of interest to the agency in connection with this rulemaking. This discussion provides a very helpful window for companies into the FTC's thinking—highlighting its concerns with common industry practices.

• Industries. The FTC lays out a number of industries that use earnings claims to recruit workers, participants, or platform users, including gig-economy companies, e-commerce, and companies that offer multi-level marketing opportunities. The ANPR asks commenters for other industries in which earnings claims are prevalent.
• Effect of disclaimers. The ANPR asks whether disclaimers can effectively correct misleading impressions caused by an "atypical" earnings claim. Interestingly, the FTC shows its cards and explains that it doesn't believe disclaimers are effective—even prominent disclaimers that testimonials "are based on the experiences of a few people and you are not likely to have similar results."
• Earnings disclosures. Other FTC rules that govern earnings claims in specific contexts—the Franchise Rule and the Business Opportunity Rule—require companies to disclose specific earnings information if they make earnings claims. The ANPR asks whether to incorporate that requirement here.
• Industry earnings data. The ANPR then asks whether the rule should address claims regarding earnings in an industry or professional field, explaining that these types of claims imply to consumers that they will achieve those levels.
• Substantiation. Earnings claims require substantiation, and the FTC indicates that it will use this rulemaking to provide clarity regarding these requirements. The ANPR provides two examples: whether to require earnings claims also to incorporate likely material expenses; and how substantiation might apply for testimonials, where the FTC clearly believes consumers think they will achieve the same level of success.
• Lifestyle claims. The FTC is considering whether lifestyle claims—that an opportunity will allow you to "quit your job" or "buy a luxury car"—could be deceptive and, if so, what substantiation would be required.

Comments are due 60 days from the date that the FTC publishes the ANPR in the Federal Register. This hasn't happened yet, but expect that comments will be due in late April or early May.

What does this mean for my business?

The FTC is laser-focused on enforcing the consumer protection laws against companies that make earnings claims. So companies that rely on earnings claims should make sure to have, on file, data to substantiate any claims. And given the FTC's negative discussion of testimonials and reliance on disclaimers, companies that use these mechanisms should carefully scrutinize whether to adjust their advertising strategies given that they now carry clear enforcement risks.

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