If You Engage in False Advertising, Will the FTC Require You to Notify Your Customers?

Earlier this week, the Federal Trade Commission announced that it reached a settlement with motocross and ATV parts make Cycra and its owner, resolving allegations that the company made false claims that its products were made in the United States.  

In the FTC's announcement of the action, Samuel Levine, the Director of the FTC's Bureau of Consumer Protection, said, "False 'Made in USA' claims hurt consumers and honest businesses.  We will continue to work with our colleagues at U.S. Customs and Border Protection and across the federal government to hold bad actors accountable."  

The complaint

The allegations in the case aren't that newsworthy.  According to the FTC, Cycra made claims in advertising such as, "Proudly made in the USA," "Made in the USA," and "Proudly designed, developed and manufactured in Lexington, North Carolina."  The FTC charged, however, that many of Cycra's products were not actually made in the United states.  

The FTC's Enforcement Policy Statement on U.S. Origin Claims says that in order to make an unqualified "made in USA" claim about a product, the advertiser must be able to substantiate that the product was "all or virtually all" made in the United States.  This long-standing FTC policy was also recently codified in its Made in USA Labeling Rule, which allows the FTC to seek civil penalties if the Rule is violated. The Rule covers claims made on product labels, as well as claims made in catalogs (including e-commerce websites).

At least according to the allegations in the complaint, then, this enforcement action was pretty straightforward.  There's no new law here.  If you're going to make claims that your product is "made in the United States, it better actually be made here. 

The consent order

While the case isn't covering any new legal ground, the relief that the FTC obtained is worth paying attention to. 

Most significantly, the consent order requires Cycra to send an e-mail to customers who purchased improperly labeled products, as follows:  "We're writing to tell you that the Federal Trade Commission, the nation's consumer protection agency, has sued us for making false claims.  To settle the FTC's lawsuit, we're contacting you to tell you that the product you bought was not all or virtually all Made in the USA.  In fact, the product was imported from Taiwan."  While customer notification provisions like this aren't unheard of, they are not something that is typically included in run-of-the-mill FTC consent orders resolving false advertising cases.  The fact that the notice provision was included here may be a sign that the FTC intends to make customer notice provisions like this a more common feature of its settlements.  Advertisers should be prepared, then, that if the FTC decides that your advertising claims were not properly substantiated, you may be in a situation where you're having to deal with the fallout associated with contacting each of your customers to let them know that the government has determined that you misled them.  

Another important aspect of the relief in this case is the fact that the advertiser is paying more than $200,000 in civil penalties. There's a reason why the FTC is engaging in rulemakings and sending out notices of penalty offenses.  After an advertiser has been caught engaging in false advertising, the agency doesn't just want a promise from the advertiser that it won't do it again.  The FTC wants the advertiser to pay up, big.  It's also worth noting here that the FTC looked for penalties -- and plans to provide consumer redress -- even though it doesn't appear that there were any concerns about the products themselves (except where they were made). 

It's also important to note the FTC brought the case against both the company and the company's chief operating officer.  Corporate officers with control over the company's decision-making, and who have knowledge of what the company is doing, may be held liable for false advertising as well.  While historically the FTC has tended to go after corporate officers in more limited situations -- such as when it's a small, closely-held corporation engaging in outright fraud -- marketers should be aware that the FTC may go after officers of larger, more established companies as well. 

Finally, the consent order also provides guidance on how to properly qualify "Made in USA" claims.  Advertisers are permitted to make qualified U.S.-origin claims -- so long as the limitations on the claim are clearly and conspicuously disclosed.  What's worth noting here, though, is what the FTC is saying about where that qualification should be.  If you're thinking of making a "Made in USA" claim in the headline and then including some fine print that explains that the product is made of imported parts, it's not likely that the FTC is going to think you've properly qualified the claim.  Here, the consent order actually requires that the qualification appear "immediately adjacent to the representation."