How the Supreme Court’s Recent Procedural Decision May Impact False Advertising and Privacy Policy Enforcement

The Federal Trade Commission (FTC) regularly brings administrative actions for false advertising.

Those actions relate to a wide variety of conduct – everything from influencers claiming to use products they do not actually use to misleading claims about the efficacy of products. One of the FTC’s biggest pushes is bringing false advertising claims related to privacy policies. These are difficult cases to defend, but a recent Supreme Court case has given companies new ammunition.

On March 14, the FTC finalized a settlement with an online game company for $540 million. That settlement included a $275 million penalty and $245 million marked to refund consumers. In that case, the game maker was accused of violating the Children’s Online Privacy Protection Rule. The ultimate settlement included not just these monetary costs, but permanent changes to its business practices.

FTC Enforcement for False Advertising in Privacy Policies

• • The FTC’s enforcement of false advertising related to not following a company’s privacy policy calls for fines of up to $50,120 per violation.
  • The number of individual violations can include each user of a company’s website. That means $50,120 in fines can be levied for every consumer that visits a website.
  • The FTC can also order a company to cease and desist from advertising security or privacy it does not offer.
  • Additionally, the FTC can work to bring resolution of individual harms in some circumstances.

The FTC has made privacy and security enforcement a top priority. The FTC operates a webpage dedicated to these enforcements.

“The Justice Department takes very seriously its mission to protect consumers’ data privacy rights,” said Associate Attorney General Vanita Gupta in announcing the online game company settlement. “This proposed order sends a message to all online providers that collecting children’s personal information without parental consent will not be tolerated.”

In 2022, the FTC only brought five cases. This year, as of April 14, the FTC has already filed or resolved six cases.

“Protecting the public, and especially children, from online privacy invasions and dark patterns is a top priority for the Commission, and these enforcement actions make clear to businesses that the FTC is cracking down on these unlawful practices,” FTC Chair Lina M. Khan said.

Companies should be careful to comply with their own privacy policies and the privacy requirements created by statute. When the government alleges violations of those obligations, a recent Supreme Court decision does give companies a way to defend themselves.

A Powerful Weapon to Combat Allegations

On April 14, a unanimous Supreme Court found that companies facing FTC administrative actions could file federal lawsuits challenging the very existence of the FTC and the constitutionality of the FTC’s administrative procedures. That means companies no longer must slog through the administrative process before raising procedural arguments that they are not subject to that administrative process.

That is important because in recent years, federal courts have almost uniformly found that a number of agencies do not meet constitutional requirements when acting through administrative procedures. In Lucia v. Security and Exchange Commission, the Supreme Court determined that an SEC administrative law judge was not properly appointed pursuant to the Appointments Clause.

In that case “Lucia contended, [the administrative law judge] lacked constitutional authority to do his job.” Ultimately, the Supreme Court agreed, and the SEC’s decision was set aside.

In a 2021 case the Supreme Court held that the appointment of administrative patent law judges who oversee patent inter partes review cases violated the Constitution’s Appointments Clause.

Instead of striking down the law allowing appointment of those judges, the Supreme Court rewrote the statute to allow inter partes review to continue in a constitutional manner.

In 2022, the Fifth Circuit determined that the SEC’s administrative procedures were not constitutional in a case where the SEC alleged an individual had engaged in securities fraud.

The Fifth Circuit determined the defendant was entitled to a jury trial in federal court as opposed to a hearing before the SEC itself.

When faced with an administrative action for false advertising, companies can now weigh the risk they face in an administrative court and determine whether a challenge to the agency’s authority is warranted. In cases where the stakes are high, these collateral challenges can seek to completely thwart an agency’s authority, to increase the protections afforded to defendants, and to create leverage for favorable settlements.

Across the firm, Phelps lawyers will continue to track constitutional challenges to agency authority. Phelps’ Intellectual Property team will continue to track the latest issues in false advertising actions and our Cybersecurity, Privacy and Data Protection team will continue tracking privacy policy issues.

If you have questions about false advertising contact Lindsay Calhoun, Andrew Coffman or the rest of the Phelps Intellectual Property team. If you have questions about privacy policies contact Walt Green or the rest of the Cybersecurity, Privacy and Data Protection team.