The Enforcers1 Sep, 2013 By: Doug McPherson Response
Regulatory experts say you won’t appear paranoid looking over your shoulder in today’s heated enforcement environment.
Yes, everyone knows the Federal Trade Commission (FTC) and state attorneys general look to enforce the laws at every turn in the direct response industry. But today, regulatory experts are saying the heat is reaching record high temperatures. Things are different. And those who don’t take notice may be shelling out some serious cash for record fines — seven- and even eight-figure settlements in some instances.
Response Magazine spoke with four top names in the regulatory and compliance arena to learn what DR professionals — and those who support the industry — need to know about enforcement and other key topics:
Linda Goldstein is an attorney at Manatt Phelps & Phillips LLP in New York, where she is widely recognized as one of the country’s leading advertising lawyers. She is a member of the Response Advisory Board and has spoken at Response Expo a number of times.
Jeffrey Knowles is a partner at Venable LLP in Washington, where he heads Advertising, Marketing and New Media practice group. He is also a regular speaker at Response Expo.
David G. Mallen is the deputy director for legal affairs in the National Advertising Division (NAD) of the Better Business Bureau, where he reviews national advertising campaigns, analyzes claim substantiation issues and resolves disputes. Based in Washington, Mallen spoke at Response Expo 2013.
William I. Rothbard works in the advertising and direct response industries as an attorney in private practice in Santa Monica, Calif. He’s also a former senior staff official with the FTC and a regular contributor to the DRMA Voice E-newsletter.
Let’s read, in their words, what industry insiders need to know about the legal and regulatory space.
Linda Goldstein: “The FTC is using more aggressive enforcement tactics.”
“The direct response industry is facing a number of significant and highly threatening legal and regulatory challenges. The principal challenge continues to be the increasingly aggressive enforcement actions that the FTC is pursuing against DR marketers, and more recently, against third-party vendors who provide support services to the DR industry.”
“The challenges posed by the FTC today exist on multiple levels. For marketers, the greatest challenge is the increased substantiation standard that the FTC is imposing for health and weight-loss products. From a practical standpoint, any marketer who proceeds to make a health-safety or weight-loss claim for a dietary supplement or any type of weight-loss product faces significant risk of a challenge unless the marketer has — at a minimum — a double-blind, placebo-controlled study conducted on the product itself. And even those marketers who have invested the money and resources to conduct a study often find themselves in the position of facing stringent scrutiny of the testing protocol, methodology and results by the FTC. It’s simply becoming increasingly difficult to support claims with studies that meet the FTC’s rigorous standards.”
“This heightened substantiation burden certainly makes it difficult for smaller companies to get product to market and increases the barriers to entry.”
“These challenges are compounded by the fact that the FTC is using more aggressive enforcement tactics in the actions it’s bringing. Increasingly, the FTC is looking to name individual officers — directors and principals — in addition to the corporate entities, and the FTC is looking to extract as much money as possible from everyone in the food chain. Today’s cases invariably involve significant payments for consumer restitution and seven- or eight-figure settlement amounts are the new norm.”
“A newly developing challenge facing DR marketers is reflected in the lawsuits that the FTC has recently filed against two payment processing companies who provided merchant processing services for marketers who allegedly offered debt relief services via outbound telemarketing campaigns. The Telemarketing Sales Rule (TSR) gives the FTC broad authority to pursue enforcement actions against companies who provide substantial assistance to companies allegedly engaged in deceptive telemarketing practices.”
“With these broad statutory powers, the FTC can easily pursue not only payment processors, but also any third-party vendors who provide support services to companies engaged in telemarketing campaigns. The risk of such action to those who provide support services to the DR industry is certainly a threat to the ecosystem.”
“For those venturing into new media formats, such as digital and mobile media, FTC initiatives present additional challenges. The FTC Dot-Com Disclosure requirements make it increasingly difficult for marketers to advertise negative option offers on these platforms, while the FTC’s social media guidelines are presenting challenges for marketers seeking to include testimonials in their shows.”
“In addition to the FTC, the DR industry is also facing increased scrutiny from district attorneys in California. Many of these district attorneys have been heavily targeting marketers of supplements and cosmetic products and seeking significant monetary settlements.”
“And, of course, the class action bar remains a thorn in the side of many marketers, increasingly targeting the DR community.”
“Finally, perhaps the greatest challenge for direct marketers is the threat of any or all of these actions on multiple fronts. The FTC has brought several recent actions on the heels of class action settlements, and class action lawyers look to the FTC docket as a source of new cases. The price of pace for the DR marketer is growing higher and higher.”
Jeffrey Knowles: “Today, everyone in the industry has a target on their back.”
“The increased amount and breadth of regulatory enforcement and the rapid rise of counterfeiting are by far the two most important legal issues facing the direct response industry today.”
“Broad-based enforcement is a looming issue for the industry, and many will be surprised that it looms over every segment of the industry. There has been a substantial uptick in regulatory enforcement during the past few years. Although the FTC and state attorneys general have been aggressive in the past, it’s different this time. State and federal regulators aren’t only looking at the business practices of marketers; they’re also examining the practices of the service providers working with those marketers.”
“We’ve seen investigations sweep up lead generators, fulfillment houses, payment processors, production companies, call centers and other direct response service providers. In these investigations, the enforcement officials sometimes pursue a theory that the service provider is knowingly aiding a specific marketer’s allegedly deceptive campaigns. Other times, enforcers may see one service provider as a choke point they can use to cut off numerous alleged bad actors served by those companies.”
“The consequence of this shift is that today everyone in the industry has a target on their back. It’s more important than ever to know who your business partners are, what they’re doing, and how they’re doing it. An added twist is that these enforcers, especially the FTC, expect companies to act as cops on the beat and turn in business partners who may be over the line.”
“Continued success in today’s market requires companies across the full breadth of the industry to understand this environment’s effect on their business and develop appropriate risk mitigation strategies.”
“With counterfeiting, what used to be a localized annoyance to luxury brands has exploded into a global pandemic of fake and potentially dangerous products. The amazing thing to me is that the problem isn’t just counterfeit designer handbags, prescription drugs or media, all of which have received tremendous attention. Our clients are discovering illegal copies all the way from the top of the product line down to small gadgets you wouldn’t think were worth ripping off.”
“I read an article recently where an executive from one of the leading companies in the industry said his company estimates between 25 and 50 percent of consumer purchases of their products are counterfeit. He added that other companies have told him they see roughly the same numbers.”
“The good news is that the industry as a whole is becoming much more effective at removing counterfeit products from the marketplace, especially in the United States — but we still have a long way to go.”
David G. Mallen: “Marketers need reliable scientific evidence relating to health and nutrition.”
“There are several important regulatory and legal issues today — important not only because they expose marketers to liability, but also because they fundamentally impact the credibility of direct response marketing. One issue concerns the use of testimonials and the reliance on anecdotal information to make performance claims. Even though there’s lots of guidance on this issue from the FTC and from self-regulatory organizations such as the National Advertising Division and the Electronic Retailing Self-Regulation Program (ERSP), some marketers still rely on anecdotal evidence and think that a disclaimer of ‘results not typical’ will fix everything. It won’t.”
“A second issue remains at the forefront for those marking claims about health and nutrition, such as marketers of dietary supplements. Marketers need competent and reliable scientific evidence in order to make claims relating to health and nutrition.”
“Finally, an important issue in DR and online marketing is the potential liability for affiliate marketers — in particular, the growing use of advertorials and native advertising to drive traffic to a merchant’s website. It’s misleading to pretend that advertising messages are not advertising.”
“In the case of affiliate marketers, anyone in the advertising stream — from merchants to networks and affiliates — who knowingly assists or facilitates deceptive practices is potentially liable for violating the FTC Act and also may draw the attention of self-regulatory organizations. When using testimonials, it’s important to remember that anecdotal evidence is not a substitute for scientific evidence of product performance.”
“One common theme is the failure to adequately disclose material information. If there’s information whose disclosure is necessary to keep the marketing message from being misleading, it must be conveyed in a way that’s clear, conspicuous and able to be understood by consumers. This is particularly a challenge in the case of digital advertising, but there’s important guidance provided from FTC and from the published decisions of self-regulatory bodies such as the NAD and ERSP.”
William I. Rothbard: “FTC enforcement has never been more ferocious.”
“Those in the DR industry need a good understanding of the FTC’s updated Dot-Com Disclosures guide for making required disclosures in online, mobile and social media advertising in compliance with the FTC’s clear and conspicuous disclosure standard.”
“They need a good understanding of and compliance with the FTC’s revised endorsement guides, including requirements for when bloggers and reviewers have to disclose material financial connections to an advertiser and when celebrities have to disclose they’re being paid to promote a product, such as in novel media like Twitter or talk shows.”
“They need to understand the evolving, toughening FTC standards for substantiation of weight-loss and disease treatment claims, as illustrated by the FTC’s POM Wonderful decision now on appeal. The case involves alleged exaggerated health benefits of pomegranate juice and dietary supplements.”
“They should understand compliance with the FTC’s increasingly specific disclosure requirements for what’s called negative option — continuity — marketing.
“They need a good understanding of and compliance with the FTC’s new Business Opportunity Rule, which imposes a seven-day pre-sale disclosure requirement on business opportunity sellers.”
“And they need to know about the increasing FTC liability risk to non-marketer product suppliers and vendors, such as processors and fulfillment houses, for the unlawful actions of their DR or online marketer clients.”
“Whatever the issue, DR professionals need to understand that FTC enforcement has never been more ferocious, and the FTC penalties never greater than now. Penalties include asset freezes and all asset settlement demands upon business and individual defendants, lifetime conduct bans for first time violations, and 20-year compliance reporting requirements.”
“I would also add that online consumer privacy, including a do-not-track option for consumers, is a big FTC issue, but I don’t know how relevant it is to DR or online marketers day-to-day. A do-not-track requirement, if ever implemented, could have an enormous impact on behavioral advertising, affiliate marketing and other lead-generation methods that are the present-day foundation of online commerce.” ■