The Federal Trade Commission (FTC) announced a $2 million settlement with ad agency Marketing Architects (MA) that should send a clear warning to the industry that agencies can and will be held liable if they participate in the creation or dissemination of false and misleading advertising claims and offers. In the words of the FTC, as stated in its blog post announcing the settlement, “I’m not the advertiser is a dubious defense.”
The FTC’s complaint (which was joined by the State of Maine), charges MA with creating and disseminating false and deceptive radio commercials for various weight-loss supplements marketed by its client, Direct Alternative, including: Puranol; Pur-Hoodia Plus; PH Plus; Acai Fresh; AF Plus; and Final Trim. The complaint alleges that the commercials contained false and unsubstantiated weight-loss claims, fictitious testimonials, and deceptive formats. The complaint also charges MA with creating deceptive and misleading interactive voice response (IVR) scripts that did not adequately disclose the terms of Direct Alternative’s auto-ship (continuity) program.
Both the FTC and Maine had settled similar charges against Direct Alternative in 2016. While this is not the first time that the FTC has targeted an advertising agency, the judgment represents one of the largest ever imposed against an advertising agency. In addition, the consent order prohibits MA from making certain weight-loss claims in the future, requires the company to have competent and reliable scientific evidence to support other health and weight-loss claims, and prohibits the company from misrepresenting or failing to adequately disclose the terms of free trials, automatic renewal, and other negative-option programs. The detailed complaint provides a treasure trove of insights as to some of the factors that led the FTC to take such harsh action and a number of important takeaways for the industry.
First, although the FTC’s action arose principally as a result of the radio ads and IVR scripts that MA had developed for Direct Alternative, the FTC took particular note of the fact that Marketing Architects had previously created advertising containing similar claims for other weight-loss products – such as Sensa – that the FTC found to be unsubstantiated. Although Marketing Architects was not named in that case, it was provided with a copy of the consent order as part of the settlement, which in the FTC’s view, put them on notice of the need to have proper substantiation for weight-loss claims. Thus, the FTC viewed MA as a company with a “pattern” of creating deceptive and misleading weight-loss claims that it knew were problematic. Notably, many of the claims at issue fell within the group of claims that the FTC has characterized as “gut check” claims, meaning the FTC has determined that these claims are incapable of substantiation.
- Key Takeaway: The FTC is taking notice of agencies and vendors whose names surface repeatedly in their investigations. If you have provided creative or other marketing services to companies that have been investigated by the FTC in the past, you may be under a heightened risk of scrutiny and should be careful to avoid engaging in conduct that gave rise to the prior FTC action(s).
Second, the FTC had in its possession letters from Direct Alternative’s attorneys advising that certain claims in the advertising would require substantiation. These letters reinforced the FTC’s view that MA was aware of the fact that the weight-loss claims it was creating were false and unsubstantiated. The fact that the FTC was in possession of these letters also underscores the importance of taking steps to ensure that sensitive communications between agencies and their clients should be treated in such a manner as to ensure that they are privileged.
- Key Takeaway: While we do not know the circumstances under which the FTC obtained the letters in question, remember that when communications with an attorney are shared with an unrelated third party – even with others working on the same campaign – the attorney-client privilege can be lost.
Third, it is worth noting that the FTC focused not only on the allegedly unsubstantiated weight-loss claims, but also on the testimonials and format of the ads. The FTC alleged that the testimonials were fictitious, which is a clear violation of the FTC’s Testimonial Guides. The FTC also considered the ad formats to be deceptive, noting that in many cases, the ads appeared to be a news show or health alert. The FTC was particularly troubled by one ad that allegedly began with the statement, “This is not an advertisement.” These allegations are a reminder that once the FTC commences an investigation, it will look into all aspects of the advertising, not just the claims that may have caught its attention.
- Key Takeaway: Testimonials and ad format continue to be a source of concern for the FTC. Agencies and their clients may want to revisit the use of these formats, which are common in the industry. In addition, to the extent that marketers are relying on their agencies to provide testimonials, advertisers should conduct their own due diligence on the origins of those testimonials.
Finally, agencies and call centers should take particular note of the fact that the FTC also held Marketing Architects accountable for the disclosures contained in the IVR scripts regarding the risk- free trial and continuity offers. The FTC alleged that the disclosures did not disclose or adequately disclose the terms of these offers and held MA responsible because the agency wrote the scripts. Companies offering risk-free trials and other negative-option programs would be well advised to read the actual disclosures that the FTC deemed inadequate. While the scripts did disclose that after the 14-day risk-free trial the consumer would be charged and sent a new shipment every month at the “same discounted” price unless canceled, the FTC was troubled by the fact that the scripts did not disclose the actual amount of each monthly shipment, did not detail the steps the consumer needed to take to cancel, and that the prompt at the end of the script asked only if the consumer agreed to the risk-free trial rather than to the continuity program or the amount of the charges.
- Key Takeaway: Call centers, agencies, and those who create telephone scripts can be held liable for the adequacy of the offer term disclosures. In addition, the FTC continues to set a high bar for disclosure of negative-option offer terms. This case teaches us that the FTC wants to see disclosure of the actual amount of the recurring charges and acceptance by the consumer of the negative-option feature of the offer – not just the freebie. Advertisers should evaluate their current disclosures in light of the FTC’s allegations in this case.
Overall, the most important takeaway from this case is that agencies, vendors, and others providing creative, marketing, or support services to advertisers have an independent obligation to ensure that the claims contained in the content they create are adequately substantiated and not misleading, and that any offers terms contained in materials they create fully and accurately disclose the terms of the offers being presented. Reliance on the client will not be sufficient and will not prove to be a viable defense.