ALM Properties, Inc.
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Closing Time: Questions & Answers | John Villafranco
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 Duane Reade subsidiary, the agency had decided not to pursue an enforcement action. "Among the factors we considered was your client's decision to promptly stop selling the Apartment 5 Goes Green plastic trash bags in Duane Reade stores," stated the letter, dated May 18, 2012. "In addition," the letter continued, "Walgreen assured staff that it will carefully review Duane Reade's claims and substantiation to ensure that its future advertising complies with the FTC Act."
Kelley Drye & Warren, which represented Walgreen in the matter, has long analyzed such public closing letters for patterns that explain why the FTC decides to close an investigation. "You can learn a lot by understanding not only the cases that the FTC brings, but the cases that they don't bring," says firm partner John Villafranco.
Staff reporter Catherine Dunn spoke with Villafranco about these lettersand how in-house counsel can prepare to respond to an FTC inquiry. An edited version of their conversation follows.
Corporate Counsel: What is the significance of public closing letters?
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 that formal action isn't warranted. The investigations are conducted pursuant to Part 2 of the FTC's 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.
CC: What is the company's incentive to just hand over information?
JV: If you don't cooperate, there's virtually no chance that the FTC is going to close. In responding, you have an opportunity to state your case, and you want to take advantage of those opportunities. You want to meet deadlines and 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 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 [advertising] claims, product information, or policies are largely in compliance with FTC standards and regulations. You do this by providing documentation. Another argument that we've seen is inadvertent error. The FTC staff is willing to forgive certain errors, particularly where the company has fully investigated the reason for the errors and has taken steps to ensure that those mistakes won't happen again.
CC: Anything else?
JV: There's one other pattern that we see a lot in these closing letters. An advertiser will explain that the claim has been discontinued, and the FTC will elect oftentimes not to proceed. It is an agency of limited resources, and it can't chase down every violation of the law.
CC: What kinds of issues is the FTC focused on right now?
JV: 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. There's a good deal of attention being directed to third-party liability issues. It's not going to be enough for a company to demonstrate that they've 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 a blogger or an endorser has a material connection to the company that needs to be disclosed is an issue that comes up regularly. And there's no question the FTC is 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 you're doing there is demonstrating your good faith. Not every fact pattern would suggest that this is the way to proceed. But I think it's really important, when you have a situation like that, to demonstrate your good faith to the FTC staff, because ultimately they're judge and jury.They're going to decide whether to recommend a complaint.