On April 14, 2023, the U.S. Supreme Court afforded defendants the ability to directly challenge the structural constitutionality and existence of the Federal Trade Commission (and the Securities and Exchange Commission) in federal court without having to slog their way through pre-enforcement administrative proceedings that many believe deprive defendants of due process. Axon Enterprise, Inc. v. FTC (consolidated with SEC v. Cochran, a similar case involving the Securities and Exchange Commission).
Similar to the Supreme Court’s recent blow to the FTC’s authority in AMG Cap. Mgmt., LLC v. Fed. Trade Comm’n, 141 S. Ct. 1341 (2021), the Axon decision was unanimous.
At issue in Axon was whether defendants in an agency’s administrative enforcement action are permitted to challenge its structure or processes in a federal district court or must first endure the agency’s administrative proceeding, which may be costly and time consuming. By ruling in the affirmative, the Supreme Court has once again brought into question the scope and legitimacy of the agencies’ respective enforcement authority.
The FTC administrative adjudication process, in part, consists of the FTC’s commissioners voting to initiate complaints. Then, FTC staff investigates and prosecutes those complaints before the agency’s Administrative Law Judge. The commissioners themselves then assess (and virtually always affirm) the complaints that they voted to initiate. That is an enormous amount of discretion bestowed upon the prosecutor, judge and jury. Defendants are only permitted to appeal in federal court once all three steps are completed.
The unanimous opinion was written by Justice Elena Kagan.
Axon sued the FTC in 2020 in federal court in Arizona following an investigation by the agency into its 2018 acquisition of a rival body-camera provider. The company said the agency acts as “prosecutor, judge and jury” in violation of the U.S. Constitution’s Fifth Amendment guarantees of due process and equal protection under the law, and that its administrative law judges are unlawfully insulated from the president’s power to control executive branch officers under the Constitution’s Article II. In 2021, the Ninth U.S. Circuit Court of Appeals threw out Axon’s case, ruling that under the FTC Act the company must raise its claims in the administrative proceeding first.
The FTC’s reaction to Axon has not been dissimilar to the agency’s reaction when the Court in AMG held that the FTC is not permitted to utilize Section 13(b) of the FTC Act to obtain monetary relief.
Since that time, the FTC has urged Congress to provide it with expanded 13(b) authority. The agency has also aggressively sought to utilize rulemaking authority to create new legal regulations that provide for statutory civil penalties, including, but not limited to, proposed rulemakings relating to the Negative Option Rule, a Non-Compete Rule, the Use of Reviews and Endorsements, expansion of the Telemarketing Sales Rule, Earnings claims, Dot Com Disclosures, and the Business Opportunity Rule.
The FTC also continues its aggressive use of penalty offense notices in an effort to secure monetary redress. Most recently, the agency sent notices to almost 700 companies regarding the substantiation of product claims. The notices warned recipients that they must avoid deceiving consumers with advertisements that make product claims that cannot be substantiated with reliable evidence or face hefty monetary civil penalties. Health and safety claims must be substantiated with “competent and reliable scientific evidence.”
The claim substantiation penalty offense notices are the fourth round, following prior notices covering education practices, endorsements and money-making opportunities.
“The requirement for advertisers to have adequate support for their advertising claims at the time they’re made is a bedrock principle of FTC law,” said FTC attorney Sam Levine, Director of the FTC’s Bureau of Consumer Protection. “The prospect of steep civil penalties will help ensure that advertisers don’t play fast and loose with the truth.”
The FTC is now using its penalty offense authority to remind advertisers of the legal
requirement to have a reasonable basis to support objective product claims and to deter them from making deceptive claims in the future. Notices of penalty offenses allow the agency to seek civil penalties — up to $50,120 per violation — against a company that engages in conduct that it knows has been found unlawful in a previous FTC administrative order, other than a consent order.
The most recent slew of notices of penalty offenses were directed to marketers of OTC drugs, homeopathic products, dietary supplements and functional foods. The agency has placed them on notice that they could incur significant civil penalties if they fail to adequately substantiate their product claims in ways that run counter to the litigated decisions of prior FTC administrative cases.
The notices outline specific unlawful acts and practices, including failing to have: 1) a reasonable basis consisting of competent and reliable evidence for objective product claims; 2) competent and reliable scientific evidence to support health or safety claims; and 3) at least one well-controlled human clinical trial to support claims that a product is effective in curing, mitigating, or treating a serious disease.
The unlawful acts or practices also include: 1) misrepresenting the level or type of substantiation for a claim, and 2) misrepresenting that a product claim has been scientifically or clinically proven.
Although the initial distribution of the notice is limited to those making or likely to make health claims, the notice is not limited to health claims and applies to any marketer making claims about the efficacy or performance of its products. Clearly, the FTC is seeking to impose a more rigid advertising claim substantiation standard and related disclosure requirements.
The letter to the recipients also provides them with a copy of a previously approved notice of penalty offenses regarding the use of endorsement and testimonials. That notice addresses falsely claiming an endorsement by a third party; misrepresenting whether an endorser is an actual, current, or recent user; using an endorsement to make deceptive performance claims; failing to disclose an unexpected material connection with an endorser; and misrepresenting that the experience of endorsers represents consumers’ typical or ordinary experience.
Finally, the letters suggested that the recipients consult FTC staff’s recently issued “Health Products Compliance Guidance.” The Guidance dramatically overhauled the 1998 dietary supplement guidance and departed from the FTC’s prior, flexible interpretation of the “competent and reliable scientific evidence” threshold.
The March 31, 2023, Commission vote to approve the substantiation notice and authorize the distribution of both notices was 3-1, with then-Commissioner Christine S. Wilson voting no and issuing a separate statement on her final day as a Commissioner.
Commissioner Rebecca Kelly Slaughter issued a statement, joined by Chair Lina M. Khan and Commissioner Alvaro Bedoya. The primary staffers in this matter were Michael Ostheimer and Christine DeLorme in the FTC’s Bureau of Consumer Protection.
Defendants that are interested in learning more about the practical ramifications of the Axon decision, including potential motions to stay judicial enforcement proceedings and attacks on the DOJ’s authority to act on the FTC’s behalf, should consult with an experienced FTC defense lawyer.
Takeaway: To date, defendants have been forced to endure years of costly and arguably unconstitutional agency procedures until being permitted to proceed to court. The practical effect has been pressured and cost-based settlement of potentially defensible enforcement actions. Now, defendants are not forced to wait and spend endlessly in order to get their day in court to raise constitutional claims against the same procedures they contend deprive them of due process, to begin with. Following Axon, the FTC will likely continue to aggressive penalty offense notice and rulemaking efforts. It is also likely that the agency will continue to refer cases to the U.S. Department of Justice, Consumer Protection Branch for civil prosecution and seek Congressional intervention.
Richard B. Newman is an FTC defense attorney at Hinch Newman LLP.
Informational purposes only. Not legal advice. May be considered attorney advertising.