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What Else Is Up the FTC’s Sleeve?

1 Nov, 2012 By: Thomas Haire Response

The members of the Response Advisory Board say that a slew of recent rulings should have the DR industry on high alert.

The recent spate of Federal Trade Commission (FTC) announcements against DR marketers is the government agency’s latest notice that the industry is in its crosshairs. In announcements about the marketers of the John Beck financial program, the Ab Circle Pro fitness product and the Your Baby Can Read line of educational products, the FTC levied some of its strongest fines and harshest criticisms of DR marketers in years.

But how effective is the FTC’s practice when it comes to taking down marketers it finds in violation of its rules and laws? And how should DR marketers who are not directly affected by these specific rulings react to them?

For answers to those questions and more, we turned to our Response Advisory Board of industry experts for our fourth and final quarterly edition of the 2012 Advisors’ Forum. Here’s what they had to say.

What do you make of the latest effort by the FTC to come after the DR industry? Are these isolated incidents, or part of a newly widening effort by the FTC to crack down on deceptive advertising?

Doug Garnett, Atomic Direct: It does appear the FTC has taken far more actions recently — or, at least, has been far more public about the actions they’ve taken. And we should be clear that those actions have been taken on deceptive advertising both inside and outside DRTV. My assumption is that this reflects shifts in board make-up and direction. And, without knowing for certain, my guess is this is influenced by more aggressive Justice Department policies, like their pursuit of E-book marketers.

Linda Goldstein, Manatt Phelps & Phillips LLP: The recent big dollar judgments are unfortunately not isolated incidents but part of an increasingly aggressive enforcement trend that has been in the making for several years. The dollar amount of financial settlements that this FTC administration has extracted has been growing exponentially. Many readers may be unaware of the fact that unless a defendant in an enforcement action has violated a previous consent order or a trade regulation rule — like the Telemarketing Sales Rule (TSR) — the FTC does not have the authority to impose fines and penalties. However, the FTC does have the authority to demand restitution or disgorgement of funds that are considered so-called “equitable remedies.” Historically, in cases that merely involved the failure of the advertiser to adequately substantiate claims, the FTC would only seek injunctive relief unless there was also evidence of outright fraud. During the past 10 years, the FTC has been increasingly seeking restitution and/or disgorgement of all funds — even in cases involving only claim substantiation. In many cases, the FTC will seek full restitution of all money paid by the consumer, and if (as is often the case) the company is financially unable to pay this, the FTC will seek to take all of the company’s available assets. In addition, the FTC is increasingly expanding its enforcement activity to include individual defendants as well and to seize all individual assets, even if some of those assets have been unrelated to the alleged conduct.

Tim Hawthorne, Hawthorne Direct: After 28 years in the business, nothing the FTC does surprises me. Every five or six years, they go on a DRTV-indicting binge. Why not? The pickings are easy.

Peter Koeppel, Koeppel Direct: While the judgments have certainly increased, the pattern has been pretty consistent with a handful of major decisions being handed down each year. Long-term, as more consumers check out a product or company’s online reputation, I believe these cases will abate because if the product doesn’t perform as advertised, these marketers simply will not be able to stay afloat.

Rob Medved, Cannella Response Television: It appears to be a rather widening attempt by the FTC to increase the agency’s revenues. I don’t think the FTC is more active in the DRTV space; I think the size of the recent judgments has brought more attention. If cracking down on deceptive advertising were the impetus, earlier actions would benefit the consumer more. As the latest cases reveal, the FTC caught the tail end of the campaigns in question, as if they were waiting for the judgment dollars to hit a more substantive amount.

Greg Sarnow, Direct Response Academy: This is a long-term plan the FTC has been implementing for the past few years. Yes, the stakes seem to get higher every year — with judgments becoming incomprehensible, out of proportion and no longer even relating to the earnings companies have generated. We have a responsibility to our clients. That responsibility is to offer high-quality products and services. The government is overstepping its boundaries and, on the pretense of “protecting the public,” is acting like a for-profit organization. This is not good for the public, for marketers or for our industry. Our collective voice needs to be stronger to at least help the FTC find a legitimate balance — but that seems improbable at this late date.

Richard Stacey, Northern Response Intl. Ltd.: It seems that a central theme of these latest high-profile cases is that, going forward, advertisers will require a much higher level of substantiation to support any advertising claims they may make. This may impact the industry by raising upfront entry cost and deterring investment as other industries maybe begin to look like less risky places to invest. I’m not sure if these cases indicate a new widening effort, but they may suggest that our industry needs to re-double its efforts to continue educating itself and also work more closely with regulators.

What do you think of the massive “first dollar earned” orders and judgments against these marketers? How do you think the FTC should handle the financial aspects of these cases?

Kevin Lyons, Opportunity Media/A&E Television Networks: This certainly marks an aggressive posture by the FTC in terms of “first dollar earned” orders against marketers. Those marketers that look to cut corners or willfully deceive consumers will certainly think twice in the future if they have paid attention to these recent cases.

Goldstein: There has been an unsettling trend developing at the FTC in which the magnitude of the settlement often bears no relation to the egregiousness of the conduct involved. Because the FTC is increasingly looking for full restitution to consumers in so many of its cases, the larger established companies that have substantial assets from the sale of bona fide products are often forced to pay substantially more than smaller companies whose conduct may have been far worse. There is no longer a rational relationship between the punishment and the crime.

Hawthorne: It’s fair and about time the FTC actually punished serious criminal behavior. It will make many marketers wary of employing the old strategy: illegally reaping huge profits while waiting for the FTC to punish with a slap on the hand that was just a minor expense line item on their P&L. Besides, many of these huge judgments seem to only kick in if the defendants don’t comply with the complete consent decree.

Koeppel: It would be terrific if the FTC would take a percentage of the fines and invest them into a partnership with the industry that would allow marketers greater clarity as to what the government’s expectations are. For example, what about a pre-screening program that would weed out bad actors and protect consumers in advance? This is something that would help promote business and serve the public interest. Legitimate marketers would no longer have to compete with questionable ones for media placement, and consumer protection would be strengthened.

Medved: The FTC’s mission is to protect the consumer without unduly burdening legitimate businesses. Going after the first dollar earned, at the end of a campaign, adheres to neither of those mission objectives. The FTC needs to step in early to advise on questionable claims and practice — not approve or disapprove at onset, but raise a potential red flag. This gives the marketer the warning and time to address the issues, both in financial redress with the consumer, as well as continuing marketing efforts (if possible).

Stacey: The “first dollar earned” idea is a matter of proportionality given the specifics of the situation. Companies that commit offenses should be punished — but if such punishment puts them completely out of business, it may not always be the best outcome.

Instead of jumping in quickly, it seems the FTC policy is to wait until a campaign deemed “deceptive” has maxed out its financial viability before “protecting consumers.” When would you like to see the FTC move on deceptive advertisers — earlier or later — and why?

Garnett: The FTC’s delay is both understandable and, I think, sadly appropriate. I look at it in two key ways. First, we don’t want the FTC to be trigger happy — driving innocent companies through thousands (or millions) of dollars of costs to defend their claims. There should be appropriate caution at the FTC so they only act when there is clarity that the claims are deceptive. And, as a taxpayer, I don’t want the FTC wasting money running around pursuing a lot of small scams that should be handled by state attorneys general and local district attorneys. It’s appropriate for society that they spend their limited resources on the bigger deceptions that harm a larger portion of society. Sadly, this delay causes consumers harm from deceptive advertising in the meantime. But that is an unavoidable consequence.

Goldstein: As a consumer protection agency whose primary goal is to protect consumers from misleading and deceptive acts or practices, the FTC should attempt to take action against advertising it considers problematic as soon as the matter comes to the FTC’s attention. Many years ago, the FTC commenced many actions by way of a less formal access letter that was often a more expeditious way for the FTC to quickly assess the legality of an advertising campaign or marketing practice. A return to such an approach early in a campaign’s life would be far more effective in preventing consumer injury

Hawthorne: I’ve always questioned the FTC’s operating efficiencies, routinely years behind what everyone in the market has been aware of. They need to be sending warning letters even before ERSP (the DR industry’s self-regulation body) does.

Koeppel: It would be interesting for Response to conduct a study on the gap between a product first coming to market and the period of time required for the FTC to complete its action. Here’s the reality: the most suspect advertisers stick out like a sore thumb with claims that are often utterly counterintuitive or just plain preposterous, so it makes sense for the FTC to put these cases at the top of the pile.

Lyons: The FTC should step in swiftly in cases of truly deceptive advertising. Not doing so in a timely manner — in what could be argued as an effort to reap larger monetary penalties — is a disservice to the consumer. Not only that, it contradicts the FTC’s own mission statement.

Medved: Earlier FTC intervention and communication, when initial concerns first arise, would benefit both the consumer and the DRTV marketer. In the least, this would give the marketer the right to fix what could be viewed as deceptive practices, and could potentially help save the campaign, legal woes and jobs. Waiting until a campaign is over provides no benefit to the consumer and appears to simply be a money grab by the FTC.

Sarnow: None of my colleagues are volunteering information on communication they are having with the FTC. If the industry collaborated more on warnings, perhaps negotiated solutions (sometimes monetary and sometimes not) could be agreed to. The FTC’s actions don’t leave any doubt to marketers that they are a “for-profit” governmental organization.

Stacey: The earlier the FTC takes action, the better, because fewer consumers are affected.

How is the industry’s effort at self-regulation (ERSP), promoted by its non-profit association, really working in light of the recent FTC crackdown?

Garnett: My first reaction: There’s a self-regulation effort in the industry? Really? The ESRP’s efforts are toothless. Instead of any real control, the ESRP gives a boilerplate approach for companies to receive meaningless designations.

Goldstein: The FTC is increasingly commencing its own investigations against companies that have participated in and complied with the recommendations of the ERSP and NAD (National Advertising Division of the Better Business Bureau) self-regulatory bodies. In fact, at a recent NAD conference, FTC staff acknowledged that this is a growing trend and indicated that it will be taking a closer look at the science behind many of the advertising claims being made because it does not believe either ERSP or NAD necessarily have the same resources as the FTC to fully vet these claims. While participation in the self-regulatory process has never been a shield against subsequent enforcement action by the FTC, the strength of the self-regulatory process is dependent on FTC’s support. Participation by a company in the self-regulatory process should — at a minimum — be a strong mitigating factor in subsequent enforcement actions.

Hawthorne: With limited manpower, ERSP is performing a respectable job launching dozens of investigations and warnings per year. Unfortunately that represents just a fraction of the combined rogue TV and web advertisers. ERSP, though, has taken some of the work off of the FTC’s desk, allowing them to go after major violators.

Koeppel: ERSP has reviewed thousands of cases, so without it one has to wonder where we’d be. Is it perfect? No, but it is a step in the right direction for the industry as a whole.

Lyons: Obviously, in light of this year’s activity, not well enough! Bad actors do immense harm to the business in general, creating misperceptions that harm reputable marketers. Over-regulation is a bad thing for business. Proper self-regulation avoids that pitfall.

Medved: I still support the effort. The DRTV marketer’s job is to push the marketing envelope in order to be competitive and drive a sale. Claims equal response. How those claims are supported and promoted will always be in need of a third-party check. The recent cases shouldn’t necessarily be a reflection on the ERSP effort. The cases are very few when related to the enormous number of DRTV campaigns airing. In the end, the ERSP effort is only as good as those marketers willing to listen and participate.

Sarnow: While I would like to hear from others that have been up close and personal with the FTC, from the outside it does not look like it is working at all. Let’s start with the meaning of “working” — maybe a lot of progress has been made with the FTC, but I don’t see much evidence of it.

Stacey: ERSP is a great program and is very well run. They are working with a very entrepreneurial industry that is still learning. Some of those entrepreneurs, even well intentioned ones, sometimes push the envelope. Yet, they may not be fully aware of what constitutes deceptive advertising, the regulations covering deceptive advertising, or the seriousness of the punishments involved. ERSP gives these people an early warning and an opportunity to correct themselves before it’s too late.

How can the DR industry best fill what seems to be a major leadership vacuum in working directly with regulators and legislators — whether via beefed-up lobbying or via working partnerships? Would teaming with a larger, better-staffed non-profit group with better government affairs experience and more feet on the ground in Washington make sense for DR leaders?

Garnett: This industry lacks the size and credibility to mount a substantial lobbying effort on this issue. Beginning to crack down on our own or to voluntarily change our business practices would be a good first step.

Hawthorne: A larger, better-staffed non-profit group is the answer, but funding is the challenge. Also, the DR industry needs to step up and be proactive and actually contact ERSP and the FTC whenever they see violations. We all know who’s advertising is suspect — report it.

Koeppel: Getting further clarification around average results and what the FTC expects in terms of research or efficacy within certain categories would certainly be helpful. But, to be realistic, it just isn’t entirely possible or realistic. Take acne for example: how could you possibly quantify an average result — by counting pimples? There has to be a balance between the consumer’s expectations and their compliance with regards to usage and the marketer’s guarantees. Reputable marketers bend over backwards to keep their consumers happy so they can maintain a favorable reputation, but the public has to play its part too.

Lyons: It certainly begs the question. One of the primary goals of an industry association in our business is to lobby government organizations on our behalf. If a better solution can be developed with efficiency in mind, I am all for it.

Stacey: Our industry could learn more from other industries. We need to consider working with larger, more experienced associations that can help us better understand and navigate the political and regulatory landscape. The health food industry, for example, has done an excellent job in this area. We also need to increase our efforts in educating our industry about the seriousness of these regulations and consider more actively communicating with regulators about our industry’s challenges. At the end of the day, our goal is to protect our end consumers while maintaining a thriving industry. ■

About the Author: Thomas Haire

Thomas Haire

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