November 2006 - Legal File

Increasingly Aggressive Enforcement Means Tremendous Risks

By Jeffrey D. Knowles and Ted Atkinson

There was a time when an advertiser facing an enforcement action could avoid litigation and settle with the Federal Trade Commission (FTC) by simply promising not to break the law again. No consumer restitution was required, and no harsh conduct prohibitions were imposed. These types of “go and sin no more” settlements have, in most cases, gone the way of the dinosaur.
Instead, the FTC (and the States) have increasingly sought full and complete consumer redress, and have pressed for broader conduct prohibitions against advertisers who run afoul of the law. An enforcement action can have profound and devastating results for advertisers. For example, in a recent well-publicized FTC case, an Illinois federal court found the marketer of the Q-Ray bracelet liable for false advertising. The court entered a judgment against the company and its president in an amount that could exceed $87 million.

This case is a stark example of how the FTC is taking more aggressive action against those who violate the law-intentionally or not-it is not the only such reminder. In September, the FTC secured a $7 million judgment against an advertiser for violating an existing consent decree, reportedly the largest such judgment of its kind. Given the number of enforcement cases being brought by the FTC, and the growing number of cases referred to the FTC by the National Advertising Division of the Council of Better Business Bureaus, the Electronic Retailing Self-Regulation Program (ERSP), and other self-regulation programs, this type of aggressive enforcement is going to become more common.

Advertisers need to recognize that they face enormous risks by failing to take steps to ensure that their business practices comply with the law. These risks include comprehensive monetary redress, individual liability and exposure in numerous jurisdictions (including civil and criminal actions brought by state and federal authorities).

As the Q-Ray decision shows, advertisers should expect that the FTC and the States will demand that any settlement or judgment include broad consumer restitution or redress. Such restitution can take any number of forms, including disgorgement of all profits, self-administered full refunds to all consumers or payment to the FTC of all monies paid by consumers. In the case of Q-Ray, the court ordered the company to pay at least $22 million in profits, but also ordered that consumers were entitled to full refunds, constituting net sales not to exceed $87 million. Whatever the mechanism of restitution, the Q-Ray decision demonstrates that the FTC will demand that advertisers pay back all or virtually all amounts they collected from consumers. It also demonstrates that courts are willing to grant that relief.

Consequently, advertisers who fail to adequately substantiate advertising claims-or who otherwise engage in unfair or deceptive business practices-are increasingly facing bet-the-company risks. This is in addition to conduct prohibitions that may, at worst, narrowly fence-in the company’s permitted business activities in the future.

Another significant risk is that faced by individual defendants. Corporate entities are legal creations that generally provide business owners with protection from individual exposure in the event of a lawsuit. In private lawsuits, it is generally very difficult to successfully sue individual owners, or to “pierce the corporate veil.”

This is not so in enforcement actions brought by States or the FTC. An individual company owner, officer or even an employee can be found individually liable in an enforcement action if he or she participates in deceptive acts or practices-or has the ability to control them-and if he or she knows or should know that the acts were deceptive.

In the Q-Ray case, the court found the president of the company individually liable because he was intimately involved with the company and possessed more control than any other employee. Additionally, he was aware of the studies being performed on the Q-Ray bracelet and helped review substantiation used to support advertising claims. On the other hand, another officer of the company was not found individually liable, even though she ran the corporate office when the president was away. Significantly, the court found that although she was an officer of the company, she did not participate in any marketing of the product, and did not have any authority or control over the deceptive advertising practices.

Whether or not an individual officer can be found liable will depend on the circumstances. But it is clear that the corporate shield-which is effective in most instances-will not protect any individual who participates in and has control over advertising or other business practices later found to be deceptive.

The impact of being found individually liable can be devastating. Not only will the injunctive terms of an order apply to the individual (and these can range from prohibitions against violating the act in the future to broad bans against engaging sales and marketing), but any monetary liability will be shared by the company and any individual defendants jointly and severally. This means that if the company’s coffers are not sufficient to satisfy any judgment, the FTC (or States) can look to the individual’s personal assets to satisfy the judgment.

The failure to adequately substantiate advertising claims puts the advertiser at risk in multiple jurisdictions. Not only can the FTC bring an enforcement action under Sections 5, 12 and 19 of the FTC Act, but the various States also are charged with enforcing their own consumer protection acts. Moreover, plaintiffs’ attorneys are becoming increasingly willing to bring class actions against advertisers for false or misleading advertising.

More importantly, successfully defending any one action does not prohibit other enforcement or private class action lawsuits. In the Q-Ray case, the president of the company had been named as an individual defendant in a private class action brought in Illinois. He won, but later found himself defending a similar action brought by the FTC.

The court rejected the company president’s argument that the FTC action was barred because he had not been found liable for false advertising in Illinois. The court distinguished private class actions from an FTC enforcement action as having different goals and purposes-private relief vs. public law enforcement. Although the court appeared to agree that an order requiring a defendant to pay consumers in one case would bar a monetary judgment to those same consumers in another case, it is clear that an advertiser who wins in one courtroom may be forced to fight the same battle in another.

The tripwires are everywhere-failure to comply with consumer protection laws leaves companies (and individuals in those companies) exposed. Advertisers can avoid these risks by doing three things: (1) engage in a comprehensive, top-down review of regulated business practices by competent regulatory counsel; (2) do so early-before you begin marketing your product or services-and at least periodically thereafter; and (3) be open to making recommended changes to bring or keep your business in compliance.

By taking these steps, advertisers can help ensure that the next big judgment to drop will not fall on them.

Jeffrey Knowles manages Venable LLP’s Government Division and heads the firm’s Advertising and Marketing Practice Group. Knowles is the immediate past chairman of the ERA Board. He can be reached at (202) 344-4860. Ted Atkinson is an attorney with Venable. He can be reached at (202) 344-8008.


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