The FTC announced earlier this week that it had sent copies of a warning letter to certain members of the travel industry alerting them to the FTC’s position that any price advertising should clearly and prominently include all mandatory charges.  Yesterday the FTC announced sending warning letters to makers of sports equipment over health claims in connection with announcing a final settlement with a mouth guard marketer as to reduced concussions claims.

While any letter from the FTC deserves serious scrutiny, there is one type of letter, not used here, that should be especially alarming.  Under Section 5(m)(1)(B) of the FTC Act, if the Commission enters a final cease and desist order (other than a consent order) with respect to an act or practice then it may seek civil penalties against any company that engages in such act or practice with actual knowledge that it is unlawful.

Pursuant to this provision the FTC sometimes sends out warning letters to companies citing such final cease and desist orders entered against other companies and setting the recipients up potentially for a subsequent civil penalty action.  The question, however, is how closely must the acts or practices in the cease and desist order match the acts and practices that form the basis for the civil penalty action.  For example, if the FTC enters a final cease and desist order against a company for a biodegradable claim, can it send out a letter citing the case warning other companies not to make misleading environmental claims or is the fit more narrow (or even potentially broader) than that?

We are aware of at least one circuit court decision on this question.  In that case the FTC sought civil penalties against an automobile dealer for failing to adequately disclose credit terms.  However, the court found that only one of the cases cited by the FTC in its notice involved a deceptive act or practice and that this one case did not concern an automobile dealer and related to a bait and switch and not disclosure of credit terms.  Thus, the court found that the FTC had not established the necessary basis for seeking civil penalties.  However, while it’s clear that the 8th Circuit wasn’t prepared to write the FTC a blank check in terms of how closely the cease and desist order must match the practice of the party under notice, the case does little to shed light on how closely the two must align.