This column originally ran in the February 2015 issue of AVN magazine.
The Federal Trade Commission has awesome power, although it’s used sparingly. When the FTC does act, though, watch out!
You may be unfortunately familiar with the FTC from the days when it tackled the proliferation of email spam or from its more recent assault on dating sites. In the spam litigation, once the Commission decided that affiliate programs were responsible for the spams of the affiliates, the affiliate programs got hammered—hundreds of thousands of dollars in settlements in many cases. You also may have gotten wind of the Commission’s current shooting gallery—that is, dating sites. Not a pretty picture! However, the FTC has irons in a whole bunch of fires other than just those.
The Commission was created by the Federal Trade Commission Act of1914. Its primary purpose at the outset was as an antitrust mechanism, to deal with the Standard Oils of the world. Congress’ authority to do that was the Commerce Power of Article I of the Constitution, which allows Congress to regulate interstate commerce. Over the years, the FTC Act expanded to include deceptive practices; the CAN-SPAM Act expressly empowered the Commission to regulate spam. Other laws also gave the FTC similar, specific authority.
Now, it’s important to understand the difference between an agency or department on the one hand, and a commission on the other hand. An example of an agency is the FAA (Federal Aviation Agency). The FAA is part of the executive branch of government; likewise is the Department of Labor. While it is subject to administrative requirements, the FAA in essence reports to the president; the IRS, Department of Justice, Department of Labor and so on, are similar. While agencies and departments have regulatory powers, such as the Department of Justice’s 2257 regulations, they are not independent of the executive. Commissions, on the other hand—such as the FTC, the Federal Communications Commission and the Securities and Exchange Commission—are quasi-legislative bodies as well as prosecutorial bodies. They are created by Congress but run by commissioners who are presidential appointees. The FTC has five commissioners, but no more than three can be from the same political party.
The FTC has bureaus, including the Bureau of Competition (the FTC’s original mission), the Bureau of Consumer Protection and the Bureau of Economics. Consumer Protection is the biggie for the readers of this publication.
The FTC has the power to promulgate regulations, which is especially important. For example, there are FTC regulations governing spam, telemarketing, franchises, sweepstakes and a host of other topics, especially those where consumers might be misled. Although the FTC still has a place in antitrust regulation (which, unfortunately, has been underutilized in recent years), its wheelhouse is now consumer protection.
For example, if you are engaged in telemarketing, the FTC regulations are huge. In fact, it is likely that you have placed your home telephone number on the FTC’s Do Not Call List. That is a small part of a blizzard of regulations under the FTC’s Telemarketing Sales Rule. It’s massive; check it out here.
Comparable regulations apply to a variety of other topics. Your attorney needs to be familiar with the ones that might apply to your business.
If you fail to comply, watch out!
More frequently, the Commission will issue a Civil Investigative Demand—a “CID” in Commission parlance. A CID is simply a letter you receive in the mail. Although it looks like a harmless request for some information, it is the beginning of FTC Hell. As this author has told clients receiving such letters, when you receive one, “Your life, as you know it, is over.” (A line shamelessly stolen from the motion picture, The Firm.)
A CID is the legal analogy to a colonoscopy. By the time you respond to a CID to the satisfaction of the Commission (which is almost impossible), it will know more about you than you know about yourself. Now, understand that the Commission’s attorneys and investigators already have concluded that you have violated the FTC Act and/or its underlying regulations when they issue a CID. The point of the CID is to give the Commission a basis for its inevitable settlement offer.
Once the Commission finds your response to the CID acceptable—which, even with the assistance of an attorney and a CPA probably will take at least several tries—the settlement offer comes along. That offer may well be all of the revenue generated by whatever activity that the FTC finds objectionable—and that’s revenue, not profit.
This is where you need to make a tough decision. If you tell the FTC to go pound sand, prepare to start writing sizable checks to your attorney (to whom you already will have written checks). However, there are instances where that pays; and there are instances where it does not. The problem is that you won’t know for sure in advance whether it will. You need an attorney with a whole bunch of litigation experience, including some FTC experience, to help you evaluate this dilemma.
Going to court can have its advantages. In the first place, these all are federal cases, and most every federal district requires some kind of mediation. Usually, a magistrate judge will supervise the mediation. Also, when you go to court, the FTC will probably be represented by the Department of Justice, which might or might not supply a voice of reason—although the DOJ is subservient to its client, the FTC. Litigation often can result in an improved settlement if the magistrate judge is willing to hold the FTC’s feet to the fire and the pre-filing offer was unreasonable.
If it isn’t obvious, the trick is to know the Commission’s rules and regulations before you embark on an adventure than might impact its regulations and result in a CID. Fundamentally, if you are engaged in activities that might result in consumer complaints, then you probably need to have an attorney tell you about the FTC’s regulations that apply to your activity—because there probably are some.
You really don’t want to joust with the FTC!
