Reading Between the Lines of an FTC Closing Letter
The letter from the Federal Trade Commission to Walgreen Company was good news. After questioning whether the company could substantiate green advertising claims about a line of trash bags, sold through its subsidiary Duane Reade, the agency had decided not to pursue an enforcement action.
Among the factors we considered was your clients decision to promptly stop selling the Apartment 5 Goes Green plastic trash bags in Duane Reade stores, the May 18, 2012, letter stated [PDF]. In addition, Walgreen assured staff that it will carefully review Duane Reades claims and substantiation to ensure that its future advertising complies with the FTC Act.
Kelley Drye & Warren, which represented Walgreen in the matter, has been analyzing such public closing letters for years. Though the letters may contain limited information, they reveal certain patterns about why the FTC decides to close an investigation, according to firm partner John Villafranco. You can learn a lot by understanding not only the cases that the FTC brings, but the cases that they dont bring, he says.
CorpCounsel.com recently spoke with Villafranco about the patterns and principles found in FTC closing lettersand how in-house counsel can prepare to respond to them. An edited version of the conversation follows.
CorpCounsel.com: What is the significance of public closing letters? What can they tell you?
John Villafranco: FTC consent orders and litigated decisions undoubtedly provide the most useful insight into prohibited practices. Closing letters, though, offer some insights too. These are letters that are put on the public record, sometimes very quietly, after an investigation has closed and the FTC staff has determined, for whatever reason, that formal action isnt warranted.
The investigations that are being closed are conducted pursuant to Part 2 of the FTCs rules of practice, which permit a company to respond and provide information voluntarily, in lieu of compulsory process. And the decision to cooperate voluntarily is typically presented to the company in the form of an access letter. So you get a letter, and its basically asking you for information.
CC: What is the companys incentive to just hand over that information to the FTC?
JV: If you dont cooperate, theres virtually no chance that the FTC is going to close the matter. The goal when you get one of these [access] letters is to get the matter closed. That is your goal. The way to do itwhat we always recommend to our clientsis youve got to cooperate with the [FTC] staff, and that means you need to respond to the questions that they raise. In responding, you have an opportunity to state your case oftentimes, and you want to take advantage of those opportunities. You want to meet deadlines and generally treat the FTC staff attorneys with respect. But the objective, as counsel for the respondent, is convincing the Federal Trade Commission that they should close.
CC: How do you do that?
JV: Obviously, one way to do it is to persuade them that no violation of law has occurred. One argument that is frequently madeand [which] the FTC staff has cited in closing letters over the yearsis that the company has substantially complied with the law. Often companies are able to prove that their claims, product information, or policies are largely in compliance with FTC standards and regulations. You do this by providing documentation, and hopefully that will prompt the FTC to close the investigation.
Another argument that weve seen in public closing letters is inadvertent error. Mistakes happen. I should say that the FTC staff is willing to forgive certain errors, particularly where the manufacturer or the company has fully investigated the reason for the errors and has taken steps to ensure that those mistakes wont happen again. Typically, what the FTC is going to want to see is that you have modified your policies or claims to avoid consumer confusion, or you instituted training policies to avoid employee mistakes down the line.
CC: So you could provide documentation that shows youre in compliance, or you could own up to an honest mistake. Anything else?
JV: Theres one other pattern that we see a lot in these closing letters, and that is discontinued use. An advertiser will explain that the claim has been discontinued, or had been previously discontinued, and the FTC will elect oftentimes not to proceed with the matter. It is an agency of limited resources, and it cant chase down every violation of the law that they believe has occurred.
There are certain cases that just dont lend themselves to categorization. But if you do look at the body of those closing letters, substantial compliance, inadvertent error, and discontinued use are the three reasons that you see playing through most often.
CC: What kinds of issues is the FTC focused on right now?
JV: Behavioral advertising is a very big issue with the FTC right now. Anything that touches on use of consumer information, consumer privacy, and data security are very big issues. Advertisements that have health claims attached to themthose are the type of claims that the FTC is going to scrutinize very closely and carefully. Theres a good deal of attention being directed to third-party liability issues. Its not going to be enough for a company to demonstrate that theyve contracted with a third party, and the third party is the entity that is actually making claims and interacting with consumers.
On social media, the issue of whether or not a blogger or an endorser has a material connection to the company that needs to be disclosed is an issue that comes up repeatedly and regularly. And theres no question the FTC is clearly looking at green marketing claims.
CC: Green marketing was at issue in the Walgreen letter, but the company told the FTC it would stop selling the product.
JV: What youre doing there is youre demonstrating your good faith to the FTC staff. Not every fact pattern would suggest that this is the way to proceed. But I think its really important when you have a situation like that, to demonstrate your good faith to the FTC staff, because ultimately theyre judge and jury. Theyre going to decide whether or not to recommend a complaint.
The state Attorneys General are also very active on the consumer protection side, and these same principles apply with equal force to the AGs. Whenever an investigation initiates, its always your objective to make it go away.