High Risk Categories or “Verticals”
Over the past twenty or so years, the FTC has filed more enforcement actions regarding specific types of offers than others, such as “be your own boss” business opportunities and weight loss products. In some cases, the FTC has gone so far as to formally announce an attack on a particular type of offer, or issue guidelines specific to sales of certain products. Because these high-risk product categories or verticals are subject to special FTC regulations and attract enhanced FTC scrutiny, they are high risk.
The FTC has jurisdiction to investigate and initiate enforcement actions against companies operating deceptive business opportunity offers. There are two types of business opportunity offers in the eyes of the FTC. First, there is a Business Opportunity Rule that is embodied in a federal regulation and enforced by the FTC. That regulatory definition of business opportunities is rather narrow, covering, in short, sellers that maintain some sort of business relationship with the consumer after the initial payment, to provide locations for equipment, to provide outlets or customers for the buyer of the business opportunity, or to buy back goods or services from the buyer of the business opportunity. There are many requirements for sellers of such business opportunities, such as the requirements to disclose certain documents, refund policies, disclose the names of others who have purchased the business opportunity in the last three years, as well as many other requirements.
The second type of business opportunity under the FTC's jurisdiction is general offers to provide information and other tools to allow a consumer to generate profits. Sometimes business opportunities include ongoing "coaching" services, along with ongoing payments for these coaching services. Some examples of internet business opportunities are offers to teach consumers how to make money a) in ways not disclosed until you purchase the business opportunity, b) buying and selling real estate (i.e., flipping houses), c) using various systems to game the stock market, and d) selling products on Amazon. The FTC often characterizes these sort of offers that violate the FTC Act as "get-rich-quick" schemes. Despite this negative moniker of the FTC, there are many ways to run lawful, FTC-compliant business opportunity offers on the internet, including offers that include ongoing coaching services.
To assess the lawfulness of a business opportunity offer, one must break down all the marketing claims. Most importantly, past claims of income success of other consumers who purchased the business opportunity must be true. Often this data is complex, so it must be presented in a manner that reasonable consumers would understand. Also, claims about the amount of time and money that a consumer will need to invest in the business opportunity in the future are also important. There is some overlap between the analysis of business opportunity offers and the FTC Endorsement Regulation. Specifically, if actors are used to sell a business opportunity (for example, in online videos), then one must disclose the use of actors if there is any implication that the characters played by the actors actually used and had success with the business opportunity. Also, if any actual customers provide testimonials about their success with a business opportunity, those testimonials must be truthful, and if the consumer was compensated (with either money or free product/services), the fact that he or she was compensated must be disclosed.
It should also be noted that the marketing of business opportunities, especially those falling outside the Business Opportunity Rule and viewed by the FTC as potential "get-rich-quick" schemes, are high risk offers. In other words, business opportunities is an area that the FTC knows will always be rife with fraud and deceptive practices, and for that reason the FTC will continually be on the lookout for business opportunity offers that violate the law.
Nutraceuticals and dietary supplements range from medium risk (e.g., daily vitamins) to high risk for certain verticals (e.g., weight loss, addressed more fully below). Within the United States, the advertising, labeling, and sale of foods, drugs, and cosmetics are regulated by the FDA. Through various regulations, including the Dietary Supplement Health and Education Act of 1994 (DSHEA), the FDA distinguishes between “drugs” and “dietary supplements.” Under the DSHEA, dietary supplements include products intended to supplement the diet, such as vitamins and minerals. 21 U.S.C. §321(ff). Drugs require a lengthy and expensive approval process before they can be sold, while supplements do not. Ingredients (and combinations thereof) that fall under the purview of DSHEA are legal for sale and consumption in the United States so long as they are manufactured, labeled, and advertised in accordance with FDA guidelines. Such products do not require a prescription and are legal to purchase over-the-counter or online.
There are important restrictions on the advertising claims that can be made about dietary supplements. The manufacturer or distributor of a dietary supplement must ensure that: (1) the supplement is safe for human consumption; (2) the product benefit claims are not false or misleading; and (3) no product benefit claims indicate the supplement is a treatment or cure for a specific disease or medical condition, or to alleviate the symptoms of such. Part of your ongoing compliance challenge is to ensure that the Products stay on the dietary supplement side of the line and that you do not make product benefit claims that require the Products to be treated as a drug regulated by the FDA.
If the FDA feels you are making unauthorized claims about your supplement, it will issue a warning letter to you and force a recall of your product. However, in more egregious cases – such as where (1) outrageous claims about the product’s benefits are made without the requisite substantiation, (2) the product purports to treat medical issues that only an approved drug can, (3) the product does not contain the active ingredients in the concentration promised in advertising or disclosed on the Supplement Facts label, or (4) the product contains undisclosed ingredients, such as drugs and known allergens – the FTC will get involved. The remedies available to the FTC under the FTC Act far exceed those of the FDA under DSHEA. Thus, if you are a nutraceutical merchant, it is imperative to ensure your product is what it purports to be, including by having the product tested by a third-party lab independent of the supplier, and to limit your product benefit claims to those that are appropriate for supplements and that are substantiated by peer-reviewed clinical studies about your active ingredient(s).
Weight loss is arguably the highest-risk vertical when it comes to FTC enforcement. The FTC has regularly taken action against weight loss offers for over twenty years. In the early 1990s, the FTC initiated enforcement actions against each of the “big” programs – namely, Weight Watchers, Jenny Craig, Medifast, and Nutrisystem. In each case, the FTC accused the defendant of making promises of potential weight loss without adequate substantiation. On January 7, 2014, the FTC held a press conference to announce its renewed initiative against deceptive claims made by marketers of weight loss products. This time, the companies targeted by the FTC were not the blue-chip entities that had been around for decades, but new, internet-based businesses that downplayed the role of diet and exercise and overstated the benefit of their supplements, teas, and “hormone” therapies. The FTC has deemed these “bogus” or “fad” weight loss products and has often referred to the campaigns advertising them as “scams.”
Concurrent with the January 2014 press conference, the FTC updated its weight loss advertising guidelines and created a “Gut Check Reference Guide” for consumers and advertisers. As part of this guide, the FTC compiled a list of seven statements in ads “that experts say simply can’t be true.” These statements include the following claims about advertised weight loss products or programs:
- Causes weight loss of two pounds or more a week for a month or more without dieting or exercise (“I lost 30 pounds in 30 days – and still ate all my favorite foods.”);
- Causes substantial weight loss no matter what or how much the consumer eats;
- Causes permanent weight loss even after the consumer stops using the product;
- Blocks the absorption of fat or calories to enable consumers to lose substantial weight;
- Safely enables consumers to lose more than three pounds per week for more than four weeks (“Take off up to 10 pounds a week safely and effectively. Imagine looking into the mirror two months from now and seeing a slim reflection.”);
- Causes substantial weight loss for all users; or
- Causes substantial weight loss by wearing a product on the body or rubbing it into the skin.
Since January 2014, the FTC’s enforcement actions in the weight loss industry have continued to focus on internet-based businesses as opposed to established brands. Through these actions, the FTC has made it clear that, in order to be compliant with the FTC Act, sellers of weight loss offers must have clinical substantiation for their weight-loss claims. Moreover, because individual weight loss results will always vary, any statement of weight loss must be accompanied by a clear and conspicuous disclosure of the measures the featured individual took to lose weight and the provable average amount of weight a user of the product can expect to lose. For example, if the weight loss product is a nutritional supplement, and “Cindy” is claiming it helped her lose 50 lbs. in six months, but in addition to taking the supplement, Cindy also reduced her caloric intake to 1,000 calories per day and worked out three times a week with a personal trainer, this must be disclosed along with the provable average amount of weight lost by users of the product.
One of the biggest problems in the weight loss vertical is that the products are easy to obtain, white label, and sell, but the average results are difficult to calculate. Too many merchants foolishly rely on their competitors to do research about the product, and naively copy their advertising claims with the belief they will be able to substantiate them down the road if needed. If you are selling weight loss products, you need to be willing to do the requisite research and studies. Moreover, you need to be willing to sell them in a manner that emphasizes the role of diet and exercise and otherwise complies with the “Gut Check” principles above.
The FTC has initiated several enforcement actions against offers for wrinkle treatments and anti-aging products concerning, in particular, advertising containing unsubstantiated claims about the benefits of such treatments and products. There are a number of factors that have likely led to the FTC’s heightened interest in these offers:
Anti-Aging offers are often replete with unsubstantiatable claims, such as “Look ten years younger!”
The advertising for anti-aging offers is often peppered with claims or diagrams that tend to be scientific or clinical (e.g., “Our proprietary peptides dissolve the dry upper 10% layer of the epidermis, revealing smooth skin underneath,” or “Clinically Proven”), but are, at best, unsupported by peer-reviewed clinical research and, at worst, can be contradicted by basic dermatological principles.
Anti-aging offers often feature doctored before and after photos, or feature stock photography models that have never used the advertised product.
Anti-aging offers are often sold as subscriptions and/or in conjunction with misleading upsells.
In order to run a compliant anti-aging offer, it is imperative to forego such deceptive advertising techniques. Instead, the use of actual users of the product as models, genuine, unretouched before and after pictures, and conservative, provable statements about how the product works are the way to avoid an FTC investigation.
Testosterone/ Erectile Dysfunction (ED)/ Muscle-building
Nutritional supplements advertised to men – such as testosterone “boosters,” male enhancement or erectile dysfunction, or muscle-building products – have seen increased FTC scrutiny, albeit less than weight-loss and anti-aging. As described above, the issue of whether a substance taken in pill form is a supplement or a highly-regulated drug depends, in large part, on whether it is advertised as treating or curing any known disease. The FDA considers both erectile dysfunction and low testosterone production to be diseases that can only be treated by drugs. Over the past several years, the FDA has paid increased attention to products advertised as “male enhancement” or “male performance” supplements, especially those that claim to provide a natural, over-the-counter alternative to popular prescription drugs for erectile dysfunction, such as Viagra. When tested by the FDA, these supplements proved to contain undisclosed chemical compounds such as sildenafil, the active ingredient in Viagra. In other words, the FDA determined these were not “natural” supplements at all, but were spiked with undeclared pharmaceuticals and subject to FDA regulation as drugs. The vast majority of these supplements had been imported from Asia and white-labeled by U.S. merchants who did not conduct independent testing to ascertain their contents.
Notably, however, FTC enforcement actions regarding male enhancement supplements do not usually focus on the products’ content, and enforcement actions concerning only male enhancement products are very rare. There is some credence to the belief that purchasers of male enhancement products are less likely to file formal FTC complaints about them, resulting in fewer enforcement actions. Indeed, many of the FTC enforcement actions that deal with male enhancement products also deal with other high-risk products and practices – for example, a defendant who sold both weight loss and male enhancement supplements on a subscription basis. Thus, it is possible for sellers of male enhancement products to substantially reduce their risk of FTC investigation by focusing entirely on this vertical and avoiding other high-risk areas.
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