Thought Leadership

FTC Initiates Rulemaking to Ban Deceptive and Unsubstantiated Earnings Claims

On February 17, the U.S. Federal Trade Commission (FTC) voted unanimously to issue an Advance Notice of Proposed Rulemaking (ANPR) for a trade regulation rule addressing the unfair and deceptive use of earnings claims.  The ANPR is the first of many steps required under Section 18 of the FTC Act, which authorizes the FTC to make rules addressing unfair and deceptive acts or practices that are prevalent in the market.  While some earnings claims are already prohibited under existing rules like the FTC’s Franchise Rule, Business Opportunity Rule, and Telemarketing Sales Rule, the scope of coverage of these rules is limited.  The proposed rule will reach many businesses that aren’t necessarily covered under existing rules, such as multi-level marketing (MLM) firms and gig economy employers, while allowing the FTC to obtain civil penalties and equitable monetary relief for first-time violations.  Interested parties have 60 days to submit comments.
  
Increased Focus on Rulemaking After AMG 

Although the FTC has brought many cases concerning unfair and deceptive earnings claims, rulemaking has taken on new urgency at the agency in the wake of the Supreme Court’s decision last year in AMG Capital Management LLC v. FTC, which barred the FTC from seeking redress and other equitable relief in federal court under Section 13(b) of the FTC Act.  Post-AMG, the FTC has been forced to dig deep into the agency’s toolkit to obtain monetary relief, such as by reviving the FTC’s “penalty offense authority” and commencing new rulemaking under Section 18 of the FTC Act (so-called “Magnuson-Moss” rulemaking).  Rule violations grant the FTC authority to seek civil penalties and obtain consumer redress that otherwise wouldn’t be available for most first-time violations of the FTC Act.  

Who Will Be Covered? MLMs, Gig Employers, For-Profit Schools, and More 

The ANPR is the first step in a lengthy rulemaking process and is intended to describe the general subject matter under consideration, the objectives to be achieved by a rulemaking, and any possible regulatory alternatives under consideration. Although the ANPR does not include any proposed rule text, it provides some insight into what the agency is considering and an opportunity for the public to help shape the proposed rule. 

The FTC argues that consumers are frequently misled about how much money they can or will make in various money-making opportunities in a wide variety of industries, specifically calling out recent law enforcement actions against MLM companies, gig employers, and for-profit educational opportunities. 

In prepared remarks, Chair Lina Khan argued that deceptive earnings claims cause particular harm in the “gig” economy, “where information and power asymmetries between platform companies and their workers can be especially ripe for abuse,” noting a 2017 settlement with Uber alleging the company exaggerated the yearly and hourly income that drivers could earn, and a recent settlement with Amazon that alleged the company wrongly withheld tips intended for drivers who deliver packages through Amazon Flex.  

What Topics Does the ANPR Include? 

The FTC has solicited comments on 28 topics, some of which include: 

  • Are false, unsubstantiated or otherwise misleading earnings claims prevalent in certain industries or business contexts, and to what extent do such claims cause injury to consumers and other businesses?
  • Should a rule addressing earnings claims define or describe the substantiation necessary to make a claim?
  • Should a rule impose requirements for earnings claims made by agents or others interacting with prospective purchasers, employees, or others on a company’s behalf?
  • How should the rule address disclaimers? Are there circumstances where disclaimers can dispel a misleading impression about potential earnings or profits? Are there circumstances where a disclaimer should be required, such as with atypical earnings claims?
  • Should the rule address “lifestyle” claims, such as images or references to mansions, yachts, and luxury goods that convey an impression that a money-making opportunity will provide sufficient income to afford a similar lifestyle?
  • Should the rule exempt from its coverage businesses or individuals already subject to the Business Opportunity Rule, the Franchise Rule, or the Telemarketing Sales Rule?
  • Should a rule prohibiting deceptive earnings claims require disclosure documents be provided to consumers prior to purchase, prior to accepting an offer for work, or at any other time (as is required by the Franchise Rule)? 

What Comes Next? 

Interested parties have 60 days to submit comments on the ANPR, including any regulatory alternatives that the agency should consider during the rulemaking process.  But the ANPR is just the start of the FTC’s lengthy rulemaking process.  Assuming the FTC decides to proceed with the rule, it would then issue a Notice of Proposed Rulemaking (NPR) that includes the proposed rule’s text, any alternatives considered, and the reasons for the proposed rule.  Interested parties may also request informal hearings, where they may present orally or submit documents and, if there are disputed issues of fact, participants may submit rebuttal evidence and conduct cross-examination.  All these steps can take considerable time before the FTC is able to promulgate a final rule. 

Companies that may be subject to the proposed rule may wish to consider submitting comments to help shape the FTC’s rulemaking process.  Experienced FTC counsel that know the procedural rules and the relevant agency staff can keep you up to date and assist with providing meaningful participation in the rulemaking process.  We will continue to monitor developments of this proposed rule and are here to answer any questions you may have.  

 

ABOUT BAKER BOTTS L.L.P.
Baker Botts is an international law firm whose lawyers practice throughout a network of offices around the globe. Based on our experience and knowledge of our clients' industries, we are recognized as a leading firm in the energy, technology and life sciences sectors. Since 1840, we have provided creative and effective legal solutions for our clients while demonstrating an unrelenting commitment to excellence. For more information, please visit bakerbotts.com.

Related Professionals