FTC initiates Crackdown on Deceptive Earnings Claims

Economic Policy Brief #137 | By: Stephen Thomas | May 22, 2022

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ftc building 0 — The FTC plans to follow Europe’s precautionary approach to antitrust by enacting preemptive rules of per se illegality. But American precautionary antitrust is both unlawful and economically harmful, as it opposes dynamic competition, which benefits consumers and innovation.

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Policy Summary

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There is an adage which, simply put, means that if a deal appears too good to be true, then it probably is. The U.S. Federal Trade Commission has seen so many consumers misled by so-called deceptive earnings claims that the agency is developing a regulation to crackdown on the practice. The solution is composed of two phases.

First, the FTC from March 11 through May 10 received public comments via the Federal Register on how it should approach its proposed rulemaking; there were compliments and criticisms. Second, with the public comment period closed, the agency is now turning its attention to crafting a rule that ideally will become a sweeping prohibition on unfair and deceptive earnings statements that will be contained in the Code of Federal Regulations.

The FTC cannot pull a regulation out of thin air of its own volition. That is not the way the administrative rulemaking process works. Congress must grant an agency rulemaking authority. In this case, the FTC has the authority to draft a rule under the Federal Trade Commission Act. A regulation is a part of the playbook for how to enforce a congressionally passed and presidentially signed statute.

Policy Analysis

The FTC specified its purpose in its advanced notice of proposed rulemaking published in the Federal Register.

“The Commission anticipates that a rule prohibiting the use of misleading earnings claims would enhance deterrence and help the Commission move quickly to stop illegal conduct,” the agency wrote in the Register.

“Such a rule also may further clarify for businesses what constitutes a deceptive earnings claim and what it means to have substantiation for an earnings claim. In addition, a rule would enable the Commission to seek monetary relief for consumers harmed by deceptive earnings claims, as well as civil penalties against those who make the deceptive claims.”

Under the FTC Act, the agency can seek, as it reads in the Register, ‘‘rescission or reformation of contracts, the refund of money or return of property, [and] the payment of damages.” Further, the notice reads, “section 5 of the [statute] allows the Commission to recover civil penalties against those who violate such a rule.”

A deceptive earnings statement, in a nutshell, can lead a consumer to believe that an investment is likely to be more profitable than it usually is. The FTC’s notice points out from the outset that certain deceptive earnings claims incorporate marketing materials. Indeed, the notice begins, “The Federal Trade Commission is considering proposing a rule to address deceptive or unfair marketing using earnings claims.”

Additionally, in a footnote to the notice that refers to the nature of a deceptive earnings statement, the FTC explains, “For example, the Business Opportunity Rule bars business opportunity sellers from disseminating industry financial information to prospective purchasers unless they have substantiation that the information reflects, or does not exceed, the typical or ordinary experience of purchasers.” The notice goes a step further in its practical definition of a deceptive earnings statement and explains that “earnings claims that reflect gross income and omit material expenses are misleading.”

There was a range of public comments on the FTC’s notice of proposed rulemaking. (The reason this process is called “rulemaking” is that the FTC’s result will not be an “act” passed by Congress. It will be a “regulation” implemented by an agency through the rulemaking process. Acts and regulations are two different aspects of the law.)

Some of the comments applauded the FTC.

Two organizations that defend consumer rights submitted comments in response to the invitation contained in the Federal Register. In support of the FTC’s rulemaking, the National Consumers League and the Consumer Federation of America wrote, “… we urge the Commission to adopt a broad earnings claims rule, including a prohibition on false, misleading, and deceptive lifestyle claims and imagery. The rule should also prohibit false, misleading, and deceptive earnings claims related to wages and salary.”

FKD7dyrXsAkl3 X — Unfairness requires the FTC to demonstrate “significant injury” to support a rule. Our paper urges the FTC to adopt an expansive view of injury that secondary collection and sharing intrinsically exposes consumers to risk, and violates a fundamental “right to be left alone.”

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While income disclosures are no substitute for strong prohibitions on unfair or deceptive earning claims, they can be useful tools for consumers, anti-fraud researchers, and law enforcement agencies like the FTC. The Commission should therefore require operators of multi-level marketing and gig economy businesses to provide verifiable, easy-to-understand income disclosures to potential recruits.”

There is, of course, another side of the regulatory coin. For instance, Kevin Thompson, managing partner at the law firm Thompson Burton PLLC, warns against making this rulemaking process political rather than legal.

“The implication that earnings claims that promote the earnings of an individual inherently labels those individuals as bad actors, absent malintent, is what truly hinders the growth of small businesses and what has raised and continues to raise our concerns,” Thompson wrote in his public comment on the proposed rulemaking.

“From our extensive experience with startups and the difficulties that small businesses face, specifically within the network marketing industry, we find that a substantive rule should go beyond the facial issue of misleading and/or deceptive earnings claims and attempt to balance what constitutes consumer harm that would warrant appropriate redress.”

The attorney continued by writing, “It is our belief that the rule should not be a political tool but rather a substantive test to apply for small and large businesses alike to be provided with appropriate goalposts by which to gauge conduct. Bad actors will remain bad actors, regardless of the rules, so instead of providing a framework that punishes the majority due to the actions of the few, provide an accurate assessment that focuses on consumer harm and what that actually means as opposed to the incidental failing to follow technicalities across the board.”

The FTC and the states have pulled no punches on alleged false-earnings claims, even without a new regulation on the books. The FTC announced in February that the agency, working alongside the Utah Department of Commerce Division of Consumer Protection, reached a settlement with Zurixx LLC, its owners and its corporate associates in which the real estate investment-coaching operators would pay roughly $12 million for “consumer redress.”

The operators of the real estate program, according to the FTC’s Feb. 16 statement, “sold live seminars and telephone coaching using false earnings claims that convinced tens of thousands of consumers to pay them thousands or tens of thousands of dollars.”