As the world struggles to move forward, our thoughts and support are with our readers and we hope for their good health and improving situations.
Today’s post involves an FTC settlement that was announced just as New York was going into “lockdown” mode and so we wanted to make sure it did not escape your attention. In March of 2020, the U.S. Federal Trade Commission (FTC) announced a settlement of its federal court complaint against a company that the FTC alleged made unsubstantiated health claims for its teas and skincare products—and used celebrity social media influencers whose endorsements did not disclose their compensation. (Federal Trade Commission v. Teami, LLC, No 8_20-cv-00518 (M.D. Fla. March 5 & March 17, 2020))
The company began selling tea and herbal products online and through retailers. According to the FTC’s complaint, the company’s claims for its products included statements that their products “have been shown” to:
- Fight against cancerous cells
- Unclog arteries
- Decrease migraines
- Prevent colds, flu, and a variety of other illnesses
- Start burning stored fat – “usual average is five to twenty pounds every time you detox.”
The company also paid some celebrities to endorse their products on social media. Those endorsements caught the attention of the FTC in April of 2018. The FTC wrote to the company regarding its obligation to have endorsers disclose “material connections” and payment for endorsements.
As a result of that 2018 letter, the company put clauses in its endorsement contracts to require disclosure of payment. The company also required that the company review any endorsement.
Unfortunately, according to the FTC’s complaint, the social media posts by the influencers did not contain adequate disclosures, especially if the consumer viewed a post using a phone. On a phone, the consumer would see the influencer’s photo with the product and the first three lines of text only—not the disclosure.
The FTC Complaint
The FTC’s complaint, filed in federal court, contained two counts of violations of Sections 5 and 12 of the FTC Act, relating to deceptive acts or practices and the making of false advertisements:
1. False or unsubstantiated efficacy claims; and
2. Deceptive failure to disclose material connection.
Although most of our readers are probably familiar with the FTC’s general authority under Section 5 of the FTC Act, Section 12 gives the FTC authority to prohibit false advertisements for food, drugs, devices, services, and cosmetics in or affecting interstate commerce.
According to the FTC’s complaint, from 2014 through mid-2019, the company’s sales exceeded $15 million.
The FTC Order
Reader quiz: in the FTC’s stipulated Order, what percentage of those $15 million in sales revenues did the judgment order be paid to the FTC:
a. 100% ($15 million)
b. 80% ($12 million)
c. 67% ($10 million)
d. 50% ($7.5 million)
e. 7% ($1 million)
The correct answer is a—100%. The Order also prohibits the company and its principals from making any disease or weight-loss claims unless they “possess and rely upon competent and reliable scientific evidence substantiating that the representation is true.”
With respect to influencers, the company and its principals are permanently enjoined from making or assisting others in making any misrepresentation that the endorser “is an independent ordinary user of a product” and the Order requires that endorsers’ material connections must be disclosed clearly and conspicuously.
In addition, the company must monitor the endorsements and “take sufficient steps designed to endure compliance” by:
1. Providing each endorser with a clear statement of responsibilities and obtaining a signed and dated agreement for each endorser. The FTC did agree to an exception, if the endorsers
only receive free or discounted products sold by Defendants or referral payments not to exceed $20 per month, it will be sufficient to 1) provide them with a Clear and Conspicuous Statement of Disclosure Responsibilities either a) as part of an online sign-up process to participate in the program or b) for those who are already participating in the program as of entry of this Order, by electronic mail and 2) obtain their electronic signature acknowledging their receipt of the statement and agreement to comply with it.
2. Implementing a system to monitor and review the representations and disclosures of endorsers, including reviewing each specifically contracted video and social media post promptly after publication. The FTC agreed to a similar exception as described above, and, for such exceptions, the company need conduct only monthly reviews of the 50 endorsers generating the highest levels of product sales, in dollars, in the prior month.
3. Immediately terminating and ceasing payment for any endorser that has misrepresented his/her independence or impartiality or who failed to make required disclosures clearly and conspicuously and in close proximity to the endorsement. If the company reasonably concludes that the failure to disclose was inadvertent, the company may give the endorser the opportunity to cure, but immediately terminate if there’s any subsequent failure.
4. Creating reports and sharing results of the monitoring.
The Order includes both 5-year and 10-year obligations on the defendants. The FTC also issued a statement in this case that concluded:
The Commission is committed to seeking strong remedies against advertisers that deceive consumers because deceptive or inaccurate information online prevents consumers from making informed purchasing decisions and creates an uneven playing field for those that follow the rules.