Tag: FTC

Revisions to HSR Form Released

On October 7, 2024, the Federal Trade Commission (FTC), with the concurrence of the U.S. Department of Justice (DOJ), released its long-awaited final rule related to the revision of the Hart-Scott-Rodino (HSR) premerger notification form (the “Final Rule”).

The Final Rule will be effective 90 days after its publication in the Federal Register. The FTC and DOJ state that the revisions are intended to close the perceived gaps in current information provided in the HSR process, such as the disclosure of entities and individuals within the acquiring person; identification of potential labor market effects; identification of acquisitions that create a risk of foreclosure; identification of actions that may involve innovation effects, future market entry, or nascent competitive threats; and disclosure of roll-up or serial acquisition strategies.

The Final Rule dictates the use of two separate forms: one for the acquiring entity and one for the entity to be acquired. Each party will have to designate a “deal team lead” whose files must be searched for 4(c) and 4(d) documents, even if the deal team lead is not an officer or director. In addition, the acquiring entity must provide details not previously requested, including an organization chart, a list of officers and directors, a description of the ownership structure of the entity, and information on the transaction rationale.

While the information requested in the Final Rule is more limited than what was included in the original proposed rule, there are substantial changes that parties should expect to add significant time and cost to the filing process.

©2024 Epstein Becker & Green, P.C. All rights reserved.
For more on Hart-Scott-Rodino, visit the NLR Antitrust Trade Regulation section.

FTC Social Media Staff Report Suggests Enforcement Direction and Expectations

The FTC’s staff report summarizes how it views the operations of social media and video streaming companies. Of particular interest is the insight it gives into potential enforcement focus in the coming months, and into 2025. Of particular concern for the FTC in the report, issued last month, were the following:

  1. The high volume of information collected from users, including in ways they may not expect;
  2. Companies relying on advertising revenue that was based on use of that information;
  3. Use of AI over which the FTC felt users did not have control; and
  4. A gap in protection of teens (who are not subject to COPPA).

As part of its report, the FTC recommended changes in how social media companies collect and use personal information. Those recommendations stretched over five pages of the report and fell into four categories. Namely:

  1. Minimizing what information is collected to that which is needed to provide the company’s services. This recommendation also folded in concepts of data deletion and limits on information sharing.
  2. Putting guardrails around targeted digital advertising. Especially, the FTC indicated, if the targeting is based on use of sensitive personal information.
  3. Providing users with information about how automated decisions are being made. This would include not just transparency, the FTC indicated, but also having “more stringent testing and monitoring standards.”
  4. Using COPPA as a baseline in interactions with not only children under 13, but also as a model for interacting with teens.

The FTC also signaled in the report its support of federal privacy legislation that would (a) limit “surveillance” of users and (b) give consumers the type of rights that we are seeing passed at a state level.

Putting it into Practice: While this report was directed at social media companies, the FTC recommendations can be helpful for all entities. They signal the types of safeguards and restrictions that the agency is beginning to expect when companies are using large amounts of personal data, especially that of children and/or within automated decision-making tools like AI.

Listen to this post 

Copyright © 2024, Sheppard Mullin Richter & Hampton LLP.
For more on Social Media, visit the NLR Communications Media Internet section.

FTC Finalizes Major Rewrite of HSR Filing Requirements

Last week, the Federal Trade Commission (FTC) voted unanimously to issue a final rule that implements significant changes to the Hart-Scott-Rodino (HSR) premerger notification form and accompanying instructions. While the final rule includes numerous modifications from the draft proposal that was announced in June 2023 (see our previous client alert), this still represents the most substantial change to the HSR filing requirements in decades, and will require parties to HSR-reportable transactions to gather and provide considerably more information and documents than under the current rules. The final rule will take effect 90 days after publication in the Federal Register (unless there is a successful court challenge in the interim).

Under the HSR Act, parties to certain mergers and acquisitions are required to submit premerger notification forms that disclose information about their proposed deal and business operations. The FTC and the Antitrust Division of the US Department of Justice (DOJ) use this information to conduct a competitive impact assessment within the statutory HSR waiting period, which is typically 30 calendar days. According to the FTC’s press release accompanying the final rule, the new requirements are a necessary response “to changes in corporate structure and deal-making, as well as market realities in the ways businesses compete, that have created or exposed information gaps that prevent the agencies from conducting a thorough antitrust assessment of transactions subject to mandatory premerger review.”

Key Changes to HSR Filing Requirements

Some of the main changes will require the following:

  • A description of each party’s strategic rationales for the transaction, with cross-references to documents submitted with the HSR filings that support the stated rationales.
  • A new Overlap Narrative section that will require the buyer and target to identify and provide (i) a written description of current or planned products or services where they compete (or could compete) with each other, (ii) actual or projected revenues for each such product or service, (iii) a description of all categories of customers that purchase or use the product or service, and (iv) the top 10 customers for each customer category (e.g., retailer, distributor, broker, national account, local account, etc.).
  • A narrative describing supply relationships between the transaction parties or between the buyer and any other business that competes with the target, including the amount of revenue involved and the top 10 customers or suppliers.
  • In addition to requiring documents discussing the competitive aspects of the proposed transactions that were prepared by or for officers and directors (current Item 4(c)), filing persons must also submit (i) transaction-related documents prepared by or for a “supervisory deal team lead”, and (ii) ordinary course business plans and reports about overlapping products and services that were provided to the CEO or Board of Directors within a year prior to filing.
  • Acquiring persons must list all current and recent officers and directors (or in the case of unincorporated entities, individuals exercising similar functions) in cases where those individuals hold similar positions in entities that have overlapping operations with the target.
  • Identification of minority holders of additional entities related to the transaction parties, as well as more information about minority interest holders, including limited partners in partnerships where the limited partner has certain rights related to the board (or similar bodies) of the acquiring entity and its related parties, and in some cases, the target. (Currently, the HSR form only requires disclosure of the general partner.)
  • Additional information regarding certain prior acquisitions by both the buyer and the target. (Currently, only buyers must provide information regarding prior acquisitions.)
  • If an HSR filing is being made based on an executed letter of intent or term sheet rather than a definitive agreement, the filing must include a dated document containing sufficient details about the transaction.
  • Parties must submit the entirety of all agreements related to the transaction (not just the principal transaction agreement).
  • All foreign-language documents must be accompanied by English-language translations.
  • Filing parties must disclose economic subsidies received from certain foreign governments or entities of concern to the United States.
  • Information related to certain contracts with defense or intelligence agencies. 

    It is worth noting that a few particularly onerous or controversial proposals from the initial draft rule were not adopted, including the proposal to require collection and production of all drafts of responsive documents (rather than just final versions), as well as specific information about labor markets and each filing party’s workers.

    Related Changes to the Merger Review Process

    Significantly, the FTC announced that, following the final rule coming into full effect, it will lift its suspension on early termination of the waiting period for HSR filings involving transactions that clearly raise no competitive issues. According to the FTC, “[b]ecause the final rule will provide the agencies with additional information necessary to conduct antitrust assessments, the rule will help inform the processes and procedures used to grant early terminations.”

    The FTC also stated that it is introducing a new online portal for market participants, stakeholders, and the general public to directly submit comments on proposed transactions that may be under review by the FTC (it is unclear if the DOJ will follow suit). According to its press release, the FTC “welcomes information on specific transactions and how they may affect competition from consumers, workers, suppliers, rivals, business partners, advocacy organizations, professional and trade associations, local, state, and federal elected officials, academics, and others.”

    Practical Implications for Deals

    The final rule issued by the FTC marks a sea change in the preparation of filings for HSR-reportable transactions. The new requirements will significantly increase the time, effort and cost of preparing all HSR filings, with the impact likely to be magnified for deals where the buyer and target are competitors or operate within the same supply chain. Transaction parties will need to account for this new reality in their deal timelines and budgets. Transaction agreements will need to allow for more time to file HSR, and it may be advantageous for some parties to begin filing preparations much earlier in the deal process. In addition, the new transaction agreement requirements mean that key terms of deals will need to be more fully fleshed out before parties can file HSR and start the 30-day clock.

    Also, since filing parties will now have an affirmative obligation to disclose competitive overlaps as well as supplier-customer relationships, careful consideration will need to be given to how those are described, since statements made in the HSR filing could later be used against the parties in an in-depth investigation (if the reviewing agency issues a “Second Request”) or in litigation (if the agency challenges the deal). Moreover, for serial acquirors, descriptions of products and overlaps in one filing could have consequences for future HSR-reportable transactions.

    Additionally, the new obligation on filers to provide customer and/or supplier information in the HSR filing may cause parties to re-evaluate their approach towards third party outreach regarding proposed transactions, given the possibility of earlier and more frequent FTC/DOJ calls to those customers and suppliers.

    © 2024 Bracewell LLP
    For more on HSR, visit the NLR Antitrust Trade Regulation section.

FTC Finalizes “Click-to-Cancel” Rule

The Federal Trade Commission (FTC) has finalized amendments to the Negative Option Rule, now retitled the “Rule Concerning Recurring Subscriptions and Other Negative Option Programs“ (“Rule”), which represents a significant overhaul of the regulatory framework governing how companies handle subscription services and automatic renewals.

Over the years, the FTC has received numerous complaints about deceptive practices related to negative option programs, prompting the need for updated regulations. The original rule, established in 1973, was focused primarily on protecting consumers from deceptive practices in physical goods such as book and record clubs. However, with the rise of e-commerce, the need for more robust protections for online subscriptions has grown significantly. The FTC’s amendments aim to address these issues and bring more transparency and fairness to this business model.

“Negative option marketing” is a broad term that encompasses a variety of subscription and membership practices. The Rule expands coverage to apply broadly to all forms of negative option marketing in any form of media, including, but not limited to, electronic media, telephone, print, and in-person transactions. It defines the negative option feature as “a contract provision under which the consumer’s silence or failure to take affirmative action to reject a good or service or to cancel the agreement is interpreted by the negative option seller as acceptance or continuing acceptance of the offer.” Negative option programs generally fall into four categories: prenotification plans, continuity plans, automatic renewals, and free trial (i.e., free-to-pay or nominal-fee-to-pay) conversion offers.

Most provisions of the Rule will go into effect 60 days after its publication in the Federal Register, except the provisions regarding disclosure of important information (§ 425.4), consent (§ 425.5) and simple cancellation (§ 425.6), which will become effective 180 days after publication in the Federal Register, thus providing businesses with a period to adapt their subscription practices to these new requirements.

Key Updates

  • Clear and Conspicuous Disclosures: The FTC now requires businesses to present subscription terms in a clear and conspicuous manner before any billing occurs. Sellers must provide the following “important information” prior to obtaining the consumer’s billing information: (1) that consumers’ payments will increase or recur, if applicable, unless the consumer takes steps to prevent or stop such charges; (2) the deadline by which consumers must act to stop charges; (3) the amount or ranges of costs consumers may incur, and frequency of the charges; (4) information about the mechanism consumers may use to cancel the recurring payments. Each of the required disclosures must be clear and conspicuous, and failure to provide this information is a deceptive or unfair practice.
  • Consent: The Rule requires negative option sellers to obtain consumers’ express informed consent before charging the consumer. The failure to obtain such consent is a deceptive or unfair practice. Sellers must keep or maintain verification of the consumer’s consent for at least three years.
  • Click-to-Cancel Requirement: One of the most notable changes in the Rule is the introduction of the “click-to-cancel” provision. This new requirement mandates that companies provide a straightforward and user-friendly method for consumers to cancel their subscriptions. At a minimum, the simple mechanism for cancellation must be provided through the same medium the consumer used to consent to the Negative Option Feature. For example, for services that are subscribed to online, the cancellation process must also be available online and must be as easy as signing up for the service in the first place. This is especially significant because many businesses have been criticized for making cancellation intentionally difficult, such as by requiring consumers to call a customer service line or navigate multiple steps just to cancel their service.
  • Removal of Annual Reminder Requirement: During the rulemaking process, the FTC had initially proposed requiring businesses to send consumers an annual reminder of their ongoing subscription services and provide information on how to cancel. However, this provision was ultimately removed from the final Rule. While consumer advocates had supported the inclusion of annual reminders, which would have provided an extra layer of protection for consumer, businesses argued that this requirement would be overly burdensome, especially for companies with large subscriber bases. However, the Rule still mandates that sellers must provide consumers with clear and timely notifications regarding recurring charges.
  • Removal of Prohibition on Upsell Offers: Another key provision of the proposed version of the Rule was the regulation of upsell offers during the cancellation process, which would have required sellers to immediately effectuate cancellation unless they obtained the consumer’s unambiguously affirmative consent to receive a save prior to cancellation. Companies often attempt to retain customers by offering lower-priced alternatives or special deals when a consumer tries to cancel a subscription. While these offers are not inherently problematic, the FTC has expressed concern that some businesses use upsell tactics to confuse consumers or prevent them from successfully canceling their service. However, the finalized version did not adopt this amendment. The FTC has determined that revisions to this proposed provision are necessary, for which it would need to seek additional comment. This means that while businesses are free to present alternatives to consumers, they also must provide a clear and direct path to cancelation without requiring consumers to navigate multiple steps or reject numerous offers.
  • Enforcement and Penalties: To ensure compliance with the new Rule, the FTC has increased the potential penalties for violations. Businesses that fail to adhere to the new requirements can face significant fines. The FTC has the authority to pursue penalties of up to $51,744 per violation, which could quickly add up for companies with large subscriber bases. This enforcement mechanism underscores the seriousness of the FTC’s efforts to crack down on deceptive subscription practices and provides a strong incentive for businesses to comply with the Rule.
  • Relation to Other Laws: The Rule does not preempt state laws that require more protection for consumers. Rather, it reflects the FTC’s intention to align with other laws and regulations, such as the Restore Online Shoppers’ Confidence Act (ROSCA), The Telemarketing Sales Rule, and state-level automatic renewal laws.

Industry Impact

The new regulatory landscape for Negative Option Programs will have several notable impacts on industries that rely heavily on subscription-based revenue models, such as e-commerce, streaming platforms, Software as a Service providers, health and fitness subscriptions, and other online services. Companies will need to reassess their subscription practices, ensure that their cancellation processes are in line with the new requirements, and update their disclosures to meet the transparency standards set by the FTC. Businesses will also need to invest in employee trainings and possibly make changes to their subscription systems and software. This could lead to increased compliance and operational costs as companies try to come into compliance with these new requirements, on top of the potential for lost revenue due to less automatic renewal income.

© 2024 Foley & Lardner LLP
For more on the FTC, visit the NLR Antitrust Trade Regulation section

TCPA Rules on Revoking Consent for Unwanted Robocalls and Robotexts Effective April 2025

On October 11, 2024, the Federal Communications Commission announced that the effective date for Telephone Consumer Protection Act (TCPA) rules on revoking consent for unwanted robocalls and robotexts is set for April 11, 2025.

On February 15, 2024, the FCC adopted the TCPA Consent Order in the above-captioned proceeding. In that rulemaking, the FCC adopted rules making it simpler for consumers to revoke consent to receive unwanted robocalls and robotexts. Callers and texters must honor these opt-out requests in a timely manner.

The TCPA Consent Order established that these rules would become effective six months following publication in the Federal Register that the Office of Management and Budget has completed its review of the modified information collection requirements under the Paperwork Reduction Act of 1995. OMB approved these modified information collection requirements on September 26, 2024.

On October 11, 2024, the FCC announced in the Federal Register that compliance with the amendments and new rules set forth in the TCPA Consent Order as contained in 47 CFR §§ 64.1200(a)(9)(i)(F), (10), (11) and (d)(3) is required as of April 11, 2025.

Background of the TCPA Rules on Revoking Consent for Unwanted Robocalls and Robotexts

The TCPA restricts robocalls and robotexts absent the prior express consent of the called party or a recognized exemption. The FCC has made clear that consumers have a right to decide which robocalls and robotexts they wish to receive by exercising their ability to grant or revoke consent to receive such calls and texts.

The FCC has now adopted new rules to strengthen the ability of consumers to decide which robocalls and robotexts they wish to receive, codified the FCC’s past guidance on consent to make these requirements easily accessible and apparent to callers and consumers, and closed purported loopholes that allow wireless providers to make robocalls and robotexts without the ability for the subscriber to opt out.

What is the Practical Impact of the TCPA Revocation Rules?

As previously discussed by FTC defense and telemarketing compliance attorney Richard B. Newman, in March 2024 the Federal Communications Commission announced that it adopted new rules and codified previously adopted protections that make it simpler for consumers to revoke consent to unwanted robocalls and robotexts (specifically, autodialed and/or artificial/ prerecorded voice calls and texts) while requiring that callers and texters honor these requests in a timely manner.

In pertinent part:

  • Revocation of prior express consent for autodialed, prerecorded or artificial voice calls (and autodialed texts) can be made in any reasonable manner (callers may not infringe on that right by designating an exclusive means to revoke consent that precludes the use of any other reasonable method).
  • Callers are required to honor do-not-call and consent revocation requests within a reasonable time not to exceed ten (10) business days of receipt.
  • Text senders are limited to a prompt one-time text message confirming a consumer’s request that no further text messages be sent under the TCPA (the longer the delay, the more difficult it will be to demonstrate that such a message falls within the original prior consent).
  • Revocation of consent applies only to those autodialed and/or artificial/prerecorded voice calls and texts for which consent is required.
  • A revocation to marketing messages precludes all further telephone calls or text messages unless an enumerated exemption exists.

Telemarketers and lead generators should consult with an experienced FTC defense lawyer to discuss the scope of the new rules and protections, including, but not limited to, the scope and applicability of a revocation for one purpose to other communication purposes.

© 2024 Hinch Newman LLP

by: Richard B. Newman of Hinch Newman LLP

For more news on FCC TCPA Regulations, visit the NLR Communications, Media, & Internet section.

Rytr or Wrong: Is the FTC’s Operation AI Comply a Prudent Defense Against Deception or an Assault on Innovation and Constitutional Free Speech?

In today’s rapidly evolving digital economy, new artificial intelligence tools promise to transform every industry. Sometimes, those promises are overblown or outright deceptive. So, as the AI hype cycle continues, regulators are left with the unenviable role of determining their duties to shape the impact of these developing tools on businesses and the public. Although the EEOC, SEC, DOJ and several State Attorneys General are issuing warnings and increasingly investigating the risks of AI, this tension is on full display with the Federal Trade Commission’s recent enforcement actions announced as part of its “Operation AI Comply,” which marks the beginning of its “new law enforcement sweep” against companies that are relying on AI “as a way to supercharge deceptive or unfair conduct that harms consumers.”1

Although many of the initial targets of Operation AI Comply were accused of conduct that plausibly violated Section 5, the FTC’s charges against an AI writing assistant, Rytr, drew strong dissents from two of the FTC Commissioners who accused their fellow commissioners of effectively strangling AI innovation in the crib. There are several important takeaways from Operation AI Comply, particularly if the dissenting commissioners have correctly identified that the FTC is pushing the boundaries of its authority in pursuit of AI.

The FTC and its Role in AI Regulation.

The FTC plays a critical role in protecting consumers from unfair or deceptive practices, and it has long been warning developers about how their algorithms and AI tools might violate one of its broadest sources of statutory authority: Section 5 of the FTC Act.2

In many respects, the FTC’s September 25, 2024, announcement of its “Crackdown on Deceptive AI Claims and Schemes” should not have come as a surprise, as most of the enforcement actions related to overhyping AI.3 For example, the FTC’s Complaint and proposed settlement with DoNotPay – which made bold claims about being “the world’s first robot lawyer” and that it could “generate perfectly valid legal documents in no time,” replacing “the $200-billion-dollar legal industry with artificial intelligence”4– turned on relatively straightforward false or unsubstantiated performance claims in violation of Section 5 of the FTC Act.5 Similarly, the FTC’s charges against Ascend Ecom,6 Ecommerce Empire Builders,7 and FBA Machine8 all relate to allegations of e-commerce business opportunity schemes that generally engaged in AI-washing – i.e., a tactic of exaggerating or falsely representing that a product uses AI in an effort to make the product or company appear more cutting edge than it actually is.9 Each of these four cases was unanimously supported by the Commission, receiving 5-0 votes, and is consistent with other actions brought by the FTC to combat unfair, deceptive, or discriminatory impacts of AI.10

However, with a 3-2 split among its commissioners, the FTC’s complaint against Rytr is a different story.11 Historically, unanimous decisions were more typical; however, split decisions are becoming more common as the FTC pursues more aggressive enforcement actions and reflect a broader ideological conflict about the role of regulation and market intervention.

Rytr: Creative Assistant or Assistant to Fraud?

Rytr is a generative AI writing assistant that produces unlimited written content for subscribers for over 43 use cases.12 At the core of the FTC’s complaint against Rytr is the risk that one of its use cases – a “Testimonial & Review” feature – can be used to create customer reviews that may be false or misleading.13

Based on limited user input, users can generate “genuine-sounding, detailed reviews quickly and with little user effort,” which the FTC believes “would almost certainly be false for users who copy the generated content and publish it online.”14 The FTC gives one example where a user provided minimal inputs of “this product” and “dog shampoo” to generate a detailed paragraph boasting how the dog shampoo smelled great, reduced shedding, improved the shine of their dog’s coat, and recommended the product.15 Based on example inputs and outputs like this, the FTC concluded that Rytr’s services “causes or is likely to cause substantial harm to consumers” and “its likely only use is to facilitate subscribers posting fake reviews with which to deceive consumers.”16 As such, the FTC’s complaint argues that Rytr – by offering a tool that could be readily used to generate false reviews — provided the “means and instrumentalities for deception” and engaged in unfair acts or practices in violation of Section 5 of the FTC Act.17

In other words, the majority of the FTC Commissioners were concerned about an infinite potential for inaccurate or deceptive product reviews by Rytr’s subscribers and did not recognize countervailing reasons to allow this use of technology. Without admitting or denying the allegations in the Complaint, Rytr agreed to a proposed settlement with the FTC by which Rytr would stop offering the Testimonial & Review use case at issue in this case18 – a pragmatic solution to avoid litigation with the government.

Dissents from the FTC’s Direction.

Commissioners Melissa Holyoak and Andrew Ferguson submitted two dissenting statements, criticizing the complaint against Rytr as an aggressive expansion of the FTC’s authority under Section 5 and cautioned against its chilling effect on a nascent industry.19

Commissioner Ferguson framed the internal conflict well: “Treating as categorically illegal a generative AI tool merely because of the possibility that someone might use it for fraud is inconsistent with our precedents and common sense. And it threatens to turn honest innovators into lawbreakers and risks strangling a potentially revolutionary technology in its cradle.”20 The dissenting statements identified three broad objections to the Rytr complaint.

First, as a threshold matter, the complaint failed to identify any evidence of actual harmful or deceptive acts stemming from Rytr’s product – a clear requirement under Section 5 of the FTC Act.21 Both dissents criticized the complaint for effectively treating draft outputs from Rytr as the final reviews published by users; however, “the Commission does not allege a single example of a Rytr-generated review being used to deceive consumers in violation of Section 5 [.]22 Both dissents criticized the complaint for ignoring the obvious benefits of generative AI in this context. Namely, that “much of the promise of AI stems from its remarkable ability to provide such benefits to consumers using AI tools. . . . If Rytr’s tool helped users draft reviews about their experiences that they would not have posted without the benefit of a drafting aid, consumers seeing their reviews benefitted, too.”23

Second, the dissenters rejected the complaint as “a dramatic extension of means-and-instrumentalities liability,”24 particularly in a case “where there is no allegation that Rytr itself made misrepresentations.”25 The complaint focused on the fact that Rytr “has furnished its users and subscribers with the means to generate written content for consumer reviews that is false and deceptive[,]” thus providing “the means and instrumentalities for the commissions of deceptive acts and practices.”26 However, the dissenters note that the “critical element for primary liability is the existence of a representation, either by statement or omission, made by the defendant.”27 The theory advanced against Rytr could be “true of an almost unlimited number of products and services: pencils, paper, printers, computers, smartphones, word processors, . . . etc.”28 Accordingly, both dissenting commissioners rejected this expansion of means-and-instrumentalities liability because a “knowledge requirement avoids treating innocent and productive conduct as illegal merely because of the subsequent acts of independent third parties.”29

Finally, the dissenters offered several reasons why the FTC’s complaint was not in the public’s interest. Both dissenters expressed concerns that this case was too aggressive and would undermine innovation in the AI industry.30 Commissioner Ferguson went further to note that the complaint could violate important First Amendment interests, noting that the complaint “holds a company liable under Section 5 for a product that helps people speak, quite literally.”31 He criticized the theory behind the complaint; “[y]et because the technology in question is new and unfamiliar, I fear we are giving short shrift to common sense and to fundamental constitutional values.”32

Conclusion

It bears repeating that the FTC Commissioners unanimously approved almost every case listed in Operation AI Comply; “[w]hen people use generative AI technology to lie, cheat, and steal, the law should punish them no differently than if they use quill and parchment.”33 So, the FTC’s warnings about marketing AI systems for professional services, using AI to engage in misleading marketing, or overstating a product’s AI integration should be heeded, especially with the FTC’s statements that this is only the beginning of its enforcement activity.34 In prepared remarks, Chair Lina Khan has stated that the FTC is “making clear that there is no AI exemption from the laws on the books[,]35 so companies should take care to protect against whether their AI and other automated tools are being used for unfair or deceptive purposes or have biased or discriminatory impacts. Just because a technology is new does not mean that it can ignore existing laws – and we’ve seen similar sentiments and disputes in other areas of emerging technology enforcement, such as the SEC’s view that, with respect to U.S. securities laws, “[t]here’s no reason to treat the crypto market differently just because different technology is used.”36

However, the Rytr case could be an indicator that the majority intends to pursue a broader theory of liability under Section 5 of the FTC Act to include tools that merely could be misused – without proof of actual harm or intent. If that continues to be the case, developers should be vigilant in identifying how their products and platforms could be misused for fraudulent purposes, as well-intentioned developers may become the target of investigations or other inquiries by the FTC. The FTC is accepting public comments on the proposed consent agreement with Rytr through November 4, 2024,37 which could develop the FTC’s position further.

1) FTC Announces Crackdown on Deceptive AI Claims and Schemes, Press Release, Federal Trade Commission (Sept. 25, 2024), available at https://www.ftc.gov/news-events/news/press-releases/2024/09/ftc-announces-crackdown-deceptive-ai-claims-schemes.

2) See, e.g., Aiming for truth, fairness, and equity in your company’s use of AI, Elisa Johnson, Federal Trade Commission (April 19, 2021), available at https://www.ftc.gov/business-guidance/blog/2021/04/aiming-truth-fairness-equity-your-companys-use-ai.

3) Operation AI Comply: Detecting AI-infused frauds and deceptions, Alvaro Puig, Federal Trade Commission (Sept. 25, 2024), available at https://consumer.ftc.gov/consumer-alerts/2024/09/operation-ai-comply-detecting-ai-infused-frauds-and-deceptions.

4) See, e.g., id.

5) In re DoNotPay, Inc., FTC Matter No. 2323042, Complaint available at https://www.ftc.gov/system/files/ftc_gov/pdf/DoNotPayInc-Complaint.pdf.

6) FTC v. Ascend Capventures, Inc., et al., C.D. Ca. Case No. 2:24-CV-07660-SPG-JPR (Filed Sept. 9, 2024).

7) FTC v. Empire Holdings Group LLC, et al., E.D. Pa. Case No. 2:24-CV-04949 (Filed Sept. 18, 2024).

8) FTC v. TheFBAMachine Inc., et al., D. N.J. Case No. 2:24-CV-06635-JXN-LDW (Filed June 3, 2024).

9) See generally, FTC Announces Crackdown on Deceptive AI Claims and Schemes, supra.

10) The FTC aggregated several summaries for its recent cases related to AI and other automated tools, which can be found here: https://www.ftc.gov/business-guidance/blog/2024/09/operation-ai-comply-continuing-crackdown-overpromises-ai-related-lies#:~:text=These%20cases%20are,CRI%20Genetics.

11) See generally Cases and Proceedings: Rytr, FTC Matter No. 2323052 (last updated Sept. 25, 2024), available at https://www.ftc.gov/legal-library/browse/cases-proceedings/rytr.

12) See, e.g., In re Rytr LLC, FTC Matter No. 2323052, Complaint ¶ 2, available at https://www.ftc.gov/system/files/ftc_gov/pdf/2323052rytrcomplaint.pdf.

13) Id. ¶ 6.

14) Id. ¶¶ 6-8.

15)  Id. ¶ 10.

16) Id. ¶ 14.

17) Id. ¶¶ 15-18.

18)  See In re Rytr LLC, Agreement Containing Consent Order, available at https://www.ftc.gov/system/files/ftc_gov/pdf/2323052rytracco.pdf.

19) See, e.g., Dissenting Statement of Commissioner Melissa Holyoak, Joined by Commissioner Andrew N. Ferguson, In re Rytr LLC, FTC Matter No. 2323052 at p.1 (cautioning against settlements to “advance claims or obtain orders that a court is highly unlikely to credit or grant in litigation,” as it may encourage the use of “questionable or misguided theories or cases.”) [hereinafter, “Holyoak Dissent”].

20) Dissenting Statement of Commissioner Andrew N. Ferguson, Joined by Commissioner Melissa Holyoak, In re Rytr LLC, FTC Matter No. 2323052 at p.1 [hereinafter, “Ferguson Dissent”].

21) See 15 U.S.C. § 45(n) (prohibiting the FTC from declaring an act or practice unfair unless it “causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition.”).

22) Ferguson Dissent at p.6; see also Holyoak Dissent at p.2.

23) Holyoak Dissent at p.3; see also Ferguson Dissent at p.7 (noting the challenges of writing a thoughtful review and that “a tool that produces a well-written first draft of a review based on some keyword inputs can make the task more accessible.”).

24) Ferguson Dissent at p.5.

25) Holyoak Dissent at p.4 (emphasis original).

26) Complaint ¶¶ 15-16.

27) Holyoak Dissent at p.4 (emphasis original) (cleaned up with citations omitted); see also Ferguson Dissent at pp.3-5 (discussing the circumstances in which means-and-instrumentalities liability arises).

28) Ferguson Dissent at p.5.

29) Ferguson Dissent at p.7; see also Holyoak Dissent at p.5 (“Section 5 does not categorically prohibit a product or service merely because someone might use it to deceive someone else.”).

30)  Holyoak Dissent at p.5 (“Today’s misguided complaint and its erroneous application of Section 5 will likely undermine innovation in the AI space.”); Ferguson Dissent at p.10 (“But we should not bend the law to get at AI. And we certainly should not chill innovation by threatening to hold AI companies liable for whatever illegal use some clever fraudster might find for their technology.”).

31) Ferguson Dissent at p.10.

32) Id.

33) Id. at p.9 (citing Concurring and Dissenting Statement of Commissioner Andrew N. Ferguson, A Look Behind the Screens: Examining the Data Practices of Social Media and Video Streaming Services, at pp.10-11 (Sept. 19, 2024)).

34) Operation AI Comply: Detecting AI-infused frauds and deceptions, supra.

35) A few key principles: An excerpt from Chair Khan’s Remarks at the January Tech Summit on AI, FTC (Feb. 8, 2024), available at https://www.ftc.gov/policy/advocacy-research/tech-at-ftc/2024/02/few-key-principles-excerpt-chair-khans-remarks-january-tech-summit-ai.

36) Prepared Remarks of Gary Gensler on Crypto Markets at Penn Law Capital Markets Association Annual Conference, Chair Gary Gensler, SEC (April 4, 2022), available at https://www.sec.gov/newsroom/speeches-statements/gensler-remarks-crypto-markets-040422.

37) Rytr LLC; Analysis of Proposed Consent Order To Aid Public Comment, Federal Register, available at https://www.federalregister.gov/documents/2024/10/03/2024-22767/rytr-llc-analysis-of-proposed-consent-order-to-aid-public-comment.

Copyright ©2024 Nelson Mullins Riley & Scarborough LLP

What Digital Advertisers and Influencers Need to Know About the FTC Final Rule Banning Fake Consumer Reviews and Testimonials

As previously blogged about here, following notices of proposed rulemaking in 2022 and 2023, on August 22, 2024 the Federal Trade Commission finalized a rule that will impose monetary civil penalties false and misleading consumer reviews and testimonials.  Those covered by the Final Rule, including, but not limited to, advertisers, marketers, manufacturers, brands and various intermediaries, and businesses that promote and assist such entities, should consult with an experienced FTC compliance lawyer and begin to prepare for its enforcement, immediately.

What Does the FTC Final Rule Banning Fake Consumer Reviews and Testimonials Cover?

The FTC Final Rule Banning Fake Consumer Reviews and Testimonials formalizes the prohibition of various practices relating to the use of consumer reviews and testimonials and sets forth which practices may be considered unfair or deceptive pursuant to the FTC Act.

In short, the Final Rule is intended to foster fair competition and protect consumers’ purchasing decisions.  In general, the Final Rule covers: (i) the purchase, sale or procuring of fake reviews or testimonials (for example and without limitation, a reviewer that does not exist, a reviewer that did not actually use or possess experience with the product or service, or a review that misrepresents actual experience); (ii) providing compensation or other incentives in exchange for reviews that express a particular sentiment; (iii) facilitating “insider” consumer reviews and testimonials that do not contain a clear and conspicuous disclosure of the relationship; (iv) utilizing websites that appear to be independent review websites when, in fact, they are controlled by the business whose products or services are reviewed; (v) suppressing reviews, either by intimidation or by merely publishing certain reviews or ratings (for example and without limitation, only positive reviews or ratings); and (vi) misusing fake indicators of social media influence.

The Final Rule also includes some important definitions.  For example, the Final Rule defines “consumer reviews” as reviews published to a website or platform dedicated (in whole or in part) to receiving and displaying consumer evaluations, including, for example, via reviews or  ratings.

The Final Rule defines “consumer review hosting” as “providing the technological means by which a website or platform enables consumers to see or hear the consumer reviews that consumers have submitted to the website or platform.”  In simple terms, this means that if an employee posts an unsolicited review on a corporate website concerning a product/service that they have experience using, it may not necessarily be considered deceptive as long as the material connection is disclosed.

“Clear and conspicuous” disclosures (such as, for example and without limitation, those pertaining to material relationships between a manager or officer to a brand), must be unavoidable, and easy to notice and understand for ordinary, reasonable consumers.  Note, for  audiovisual content, disclosures must be presented in “at least the same means as the representations requiring the disclosure.”

The Final Rule follows the FTC’s Updated Endorsement Guidelines (2023).  The FTC Endorsement Guides address a much broader range of conduct than the Final Rule, and provide best practice recommendations regarding the use of product endorsements and reviews in advertising.

What are the Requirements of the FTC Final Rule on Reviews and Testimonials?

The Final Rule largely codifies existing FTC policy related to reviews and testimonials and sets forth limitations for a handful of categories of conduct that the FTC will consider deceptive.  In part, the Final Rule prevents covered entities and their agents from using fake reviews and deceptive testimonials, suppressing honest negative reviews and paying for positive reviews.

In pertinent part and without limitation:

  1. 16 CFR § 465.2: Fake or false consumer reviews, consumer testimonials, or celebrity testimonials

Business and brands are prohibited from creating, buying, selling or disseminating fake or false reviews or testimonials, including, but not limited to, those that expressly or impliedly misrepresent they are by someone that does not exist (for example and without limitation, AI-generated reviews), by someone that does not have experience with the product/service, those that misrepresent experience with a product or service, and negative reviews intended to damage competitors.

Businesses and brands are prohibited from creating, purchasing, procuring or disseminating such reviews (and/or facilitating dissemination) when the business knew or should have known that the reviews or testimonials were not bona fide.

  1. 16 CFR § 465.4: Buying positive or negative consumer reviews

Business and brands are prohibited from incentivizing a consumer to write a review when the incentive is conditioned – expressly or implicitly – on the review expressing a particular sentiment (whether positive or negative) about a business or brand, or related products or services.  It is not unlawful for a company to offer incentives for consumers to write reviews, however, it is unlawful, for example, to condition the incentive upon, for example, a 5-star review.  While the FTC Endorsement Guides separately mandate a clear and conspicuous disclosure when a review is incentivized by monetary payment or another incentive/relationship, a disclosure of the incentive is not a defense when the incentive is conditioned on the review expressing a particular sentiment.

  1. 16 CFR § 465.5: Insider consumer reviews and consumer testimonials

Section 465.5 of the Final Rule prohibits businesses and brands from creating, soliciting or posting reviews or testimonials by officers, managers, employees or agents thereof without clearly and conspicuously disclosing their relationship, or “material connection.”  There are limited exceptions.  First, the prohibition does not apply to unsolicited social media posts by employees or social media posts that result from generalized solicitations (e.g., non-employee specific).  Second, the prohibition does not apply to unsolicited employee reviews that merely appear on a business’s website because of its “consumer review hosting” function.

Additionally, reviews solicited from immediate relatives (e.g., spouse, parent, child or sibling), employees or agents of officers, managers, employees or agents of a business or brand require that latter ensure that the immediate relative clearly, conspicuously and transparently disclose the material connection to the business.  The foregoing also applies, for example and without limitation, to requests that employees or agents solicit reviews from relatives.  Covered “insiders” are required to instruct such reviewers to clearly and conspicuously disclose their relationships to the business or brand and, if they knew or should have known that a related review appears without a disclosure, take remedial steps to address the disclosure.

The Final Rule states that if the business or brand knew or should have known of a material relationship between a testimonialist and the business, it is a violation for the business or brand to disseminate or cause the dissemination of a consumer testimonial from its officer, manager, employee, or agent without a clear and conspicuous disclosure of such relationship.

  1. 16 CFR § 465.6: Company-controlled review websites or entities

Companies and brands are prohibited from creating or controlling review websites or platforms that appear independent when they are, in fact, operated by the company itself.  For example, companies may not expressly or by implication falsely represent that a website they control provides independent reviews or opinions.  Section 456.6 is intended to prevent the creation of illegitimate independent review websites, organizations or entities to review products and services.  It does not apply to general consumer reviews on a brand’s website, for example, so long as those reviews comply with applicable legal regulations.

  1. 16 CFR § 465.7: Review suppression

Pursuant to Section 465.7 of the Final Rule, businesses and brands may not suppress, manipulated or attempt to suppress or manipulate negative reviews (or otherwise manipulate or attempt to manipulate overall perception) by solely displaying positive feedback, with limited exceptions such as when a review contains confidential or personal information, or is false or fake, and/or wholly unrelated to the products/services offered.  The criteria for doing so must be “applied equally to all reviews submitted without regard to sentiment.”

Businesses and brands are also prohibited from suppressing negative reviews or ratings, and misrepresenting (expressly or implicitly) that the selected consumer reviews or ratings represent most or all reviews or ratings.  The Final Rule does not prohibit sorting or organizing reviews – per se – however doing so in a manner that makes it more difficult for consumers to view/learn of negative reviews may be considered an unfair or deceptive act or practice.

All reviews must be treated fairly so that consumers are provided with a true an accurate representation of consumer experiences.

Additionally, the Final Rule prohibits the use of “unfounded or groundless legal threat” or other physical threat, intimidation or false accusation to prevent a review from being written or created or to cause the review to be removed.

Section 465.7, in pertinent part, is consistent with various portions of the January 2022 agency guidance entitled Featuring Online Customer Reviews: A Guide for Platforms.  The foregoing guidance recommends that businesses and brands: (i) that operate a website or platform that features reviews, have processes in place to ensure those reviews truly reflect the feedback received from legitimate customers about their real experiences; (ii) be transparent about your review-related practices; (ii) do not ask for reviews only from people you think will leave positive ones; (iii) that offer an incentive to consumers for leaving a review, not condition it, explicitly or implicitly, on the review being positive (even without that condition, offering an incentive to write a review may introduce bias or change the weight and credibility that readers give that review); (iv) do not prevent or discourage people from submitting negative reviews; (v) have a reasonable processes in place to verify that reviews are genuine and not fake, deceptive, or otherwise manipulated (be proactive in modifying and upgrading your processes); (vi) do not  edit reviews to alter the message (e.g., do not change words to make a negative review sound more positive); (vii) treat positive and negative reviews equally (do not subject negative reviews to greater scrutiny); (viii) publish all genuine reviews and do not exclude negative ones; (ix) do not display reviews in a misleading way (e.g., it could be deceptive to feature the positive ones more prominently or require a click through to view negative reviews); (x) that display reviews when the reviewer has a material connection to the company or brand offering the product or service (e.g., when the reviewer has received compensation or a free product in exchange for their review), clearly and conspicuously disclose such relationships; (xi) clearly and conspicuously disclose how they collect, process and display reviews, and how they determine overall ratings, to the extent necessary to avoid misleading consumers; and (xii) have a reasonable procedure to identify fake or suspicious reviews after publication (if a consumer or business tells a business or brand that a review may be fake, investigation and appropriate action are necessary – that may include taking down suspicious or phony reviews or leaving them up with appropriate labels).

  1. 16 CFR § 465.8: Misuse of fake indicators of social media influence

Section 465.7 prohibits selling, distributing, purchasing or procuring “fake indicators of social media influence” (for example and without limitation, likes, saves, shares, subscribers, followers or views generated by a bot or fake account) that are actually known to be or should be known to be fake, and that could potentially be used or are actually used to misrepresent or artificially inflate individual or business importance for a commercial purpose.  Thus, liability will not attach to a business or brand that engages an influencer using fake indicators of social media influence if the business or brand neither knew nor should have known thereof.

How is the FTC Final Rule Different from the Proposed Rule?

Notably, the Final Rule does not include a provision from the proposed rule that would have precluded advertisers from using consumer reviews that were created for a different product.  Known as “review hijacking,” the FTC was unable to resolve various concerns about the meaning of “substantially different product.”  The FTC reserved the right to revisit this issue, going forward via further rulemaking.

What are the Consequences for Violating the FTC Final Rule on Reviews and Testimonials?

The concepts, prohibitions and obligations included in the Final Rule are not entirely new.  However, the Final Rule does significantly enhance the FTC’s ability to pursue civil monetary damages in the form of penalties in the amount of up to $51,744, per violation or per day for ongoing violations.  The Final Rule also will permit the FTC to seek judicial orders that require violators to compensate consumers for the consequences of their unlawful conduct.

Takeaway:

The Final Rule banning fake consumer reviews and testimonials generally prohibits specific  practices that the FTC has determined are deceptive or misleading, including: (i) fake or false consumer reviews, consumer testimonials or celebrity testimonials; (ii) purchasing positive or negative consumer reviews; (iii) insider consumer reviews and consumer testimonials; (iv) company-controlled review websites or entities; (v) review suppression; and (vi) misuse of fake indicators of social media influence.  The Final rule will be effective October 21, 2024.  Violations of the Final Rule can result in significant financial and reputational consequences.  Companies that utilize consumer reviews, consumer testimonials or celebrity endorsements should consult with an experienced eCommerce attorney to discuss proactively implementing responsible written policies and contracts that ensure compliance with the Final Rule and other applicable legal regulations (for example and without limitation, ensure the clear and conspicuous disclosure of material connections), educating employees and agents, reviewing marketing strategies, auditing first and third-party (for example and without limitation, lead generators) promotional materials and activities for non-compliance (for example and without limitation, ensuring that reviews  provide an accurate representation of consumer experiences), and developing and implementing appropriate compliance plans and written policies that include required remedial actions.

© 2024 Hinch Newman LLP
For more on the FTC Fake Consumer Reviews rule, visit the NLR Communications Media Internet section

FTC Staff Issue Report on Multi-Level Marketing Income Disclosure Statements

Staff reviewed income disclosure statements in February 2023 that were publicly available on the websites of a wide array of MLMs, from large household names to smaller, less well-known companies, according to FTC attorneys. “These statements are sometimes provided to consumers who are considering joining MLMs, and often purport to show information about income that recruits could expect to receive.”

According to the report, FTC staff found a number of issues with the statements they reviewed, including that most omit key information when calculating the earnings amounts they present. Specifically, the report notes that most of the reviewed statements do not include participants with low or no earnings in their display of earnings amounts and also don’t account for the expenses faced by participants, which can outstrip the income they make. The report notes that these omissions are often not plainly disclosed in the income statements.

The report also notes that most statements emphasize the high earnings of a small group of participants, and many entirely omit or only inconspicuously disclose key information about the limited earnings made by most participants. In addition, the staff report notes that most of the disclosure statements staff reviewed present earnings information in a potentially confusing way, “like giving average earnings amounts for groups that could have very different actual incomes, or using annual income figures that aren’t based on what an actual group of participants made for the year.”

The report also notes based on staff’s analysis of data in the income disclosure statements, including information included in fine print, that many participants in those MLMs received no payments from the MLMs, and the vast majority received $1,000 or less per year—that is, less than $84 per month, on average.

“The FTC staff report documents an analysis of 70 publicly available income disclosure statements from a wide range of MLMs — big and well-known to smaller companies. The report found that these income disclosure statements showed most participants made $1,000 or less per year — that’s less than $84 dollars per month. And that may not account for expenses. In at least 17 MLMs, most participants didn’t make any money at all.”

As referenced above, the staff report documents (and provides numerous examples of) how most of the publicly available MLM income disclosure statements used all the following tactics:
  • Emphasizing the high dollar amounts made by a relatively small number of MLM participants.
  • Leaving out or downplaying important facts, like the percentage of participants who made no money.
  • Presenting income data in potentially confusing ways.
  • Ignoring expenses incurred by participants — even though expenses can, and in some MLMs often do, outstrip income.
© 2024 Hinch Newman LLP

DOJ, FTC, DOL, and NLRB Join Forces and Announce Memorandum of Understanding on Labor Issues in Merger Investigations

On August 28, the US Department of Justice (DOJ) Antitrust Division, which enforces the US antitrust laws including the Sherman Act and Clayton Act, and the Federal Trade Commission (FTC), which enforces the Federal Trade Commission Act and other laws and regulations prohibiting unfair methods of competition (together, Antitrust Agencies), along with the US Department of Labor (DOL) and National Labor Relations Board (NLRB) (together, Labor Agencies), announced that they entered into a Memorandum of Understanding on Labor Issues in Merger Investigations (MOU).
The MOU took effect on August 28 and expires in five years, unless it is extended or terminated upon written agreement of each of the agencies.

Purpose of the MOU

The MOU outlines a collaborative initiative between the signatory agencies to assist the Antitrust Agencies with labor issues that may arise during the course of antitrust merger and acquisition (M&A) investigations, commenced under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR). The HSR requires that parties to certain large M&As provide information to the Antitrust Agencies prior to the transaction’s consummation, which allows these agencies to analyze the anticipated transaction(s) and provide greater certainty to the parties regarding potential antitrust concerns.

From a labor perspective, these investigations may aim to evaluate whether the effect of a merger or acquisition could substantially lessen competition for labor. The stated goal of this MOU is to protect employees and promote fair competition in labor markets. Specifically, the MOU outlines methods by which the Labor Agencies may aid or advise the Antitrust Agencies on potential labor issues identified during the course of these evaluations. These methods include the following.

1. Labor Information Sharing

The MOU outlines various ways in which the Antitrust Agencies may work with the Labor Agencies to gather information used to evaluate potential impacts of M&As on labor markets. These include:

  1. Soliciting information from relevant worker stakeholders and organizations.
  2. Seeking the production of information and data with respect to labor markets.
  3. Searching publicly available sources of information made available by the Labor Agencies.
  4. Seeking production of non-public information and data related to labor markets from the Labor Agencies.

2. Providing Training and Technical Assistance

Labor Agencies agree to provide technical assistance and training to personnel from the Antitrust Agencies related to subject matter under their jurisdictions. For example, the NLRB will train personnel from Antitrust Agencies on labor-related issues such as the duty to bargain in good faith, successor bargaining obligations, and unfair labor practices. Additionally, the Antitrust Agencies may seek technical assistance on labor and employment law matters in merger reviews, including in the resolution of labor market merger investigations.

3. Collaborative Meetings

The Labor Agencies and Antitrust Agencies will seek to meeting biannually to discuss the implementation and coordination of activities outlined in the MOU.

This MOU expands upon collaborative efforts amongst the agencies and builds upon several MOUs executed in 2022 and 2023. MOUs between the DOJ and DOL, DOJ and NLRB, DOL and FTC, and FTC and NLRB all indicate that the purpose and scope of the agreements are to “strengthen the Agencies’ partnership through greater coordination in information sharing, coordinated investigations and enforcement activity, training, education, and outreach.”

Takeaways

This multi-agency agreement further emphasizes the current administration’s focus on protecting employees from alleged unfair methods of competition. This MOU is further evidence that antitrust regulators are looking at antitrust enforcement from a new perspective. Traditionally, Antitrust Agencies evaluated proposed M&As to identify potential risks of harm to consumers through the reduction of options or increased prices. Now, Antitrust Agencies appear to have turned their focus towards anticompetitive behaviors that may harm employees.

Employers interested or involved in an M&A deal should conduct thorough internal reviews to ensure compliance with both labor-related and fair competition laws. In the event of a review by the DOJ or FTC, employers should partner with experienced labor and employment lawyers to navigate through these investigations.

© 2024 ArentFox Schiff LLP
For more on Merger Investigations, visit the NLR Mergers Acquisitions section

US District Court Sets Aside the FTC’s Noncompete Ban on a Nationwide Basis

On August 20, the US District Court for the Northern District of Texas held that the Federal Trade Commission’s (FTC) final rule banning noncompetes is unlawful and “set aside” the rule. “The Rule shall not be enforced or otherwise take effect on its effective date of September 4, 2024, or thereafter.”

The district court’s decision has a nationwide effect. The FTC is very likely to appeal to the Fifth Circuit. Meanwhile, employers need not concern themselves for now with the rule’s notice obligations, and the FTC’s purported nationwide bar on noncompetes is ineffective. Employers do, however, need to remain mindful of the broader trend of increasing hostility to employee noncompetes.

The Court’s Decision

On April 23, the FTC voted 3-2 to publish a final rule with sweeping effects, purporting to bar prospectively and invalidate retroactively most employee noncompete agreements. The court’s decision addressed cross-motions for summary judgment on the propriety of the FTC’s rule. The court denied the FTC’s motion and granted the plaintiffs’ motion for two reasons.

First, the court held that the FTC lacks substantive rulemaking authority with respect to unfair methods of competition under Section 6(g) of the FTC Act. In reaching its holding, the court considered the statute’s plain language, Section 6(g)’s structure and location within the FTC Act, the absence of any penalty provisions for violations of rules promulgated under Section 6(g), and the history of the FTC Act and subsequent amendments. Because the FTC lacked substantive rulemaking authority with respect to unfair methods of competition, and hence authority to issue the final noncompete rule, the court did not consider additional arguments regarding the scope of the FTC’s statutory rulemaking authority. Notably, the court did not consider whether the final rule could overcome the major questions doctrine.

Second, the court held that the FTC’s final noncompete rule was arbitrary and capricious under the Administrative Procedure Act (APA) because it was “unreasonably overbroad without a reasonable explanation” and failed to establish “‘a rational connection between the facts found and the choice made.’” The court heavily discounted studies that the FTC had relied upon that purported to measure the impact of statewide noncompete bans because no state had ever enacted a ban as broad as the FTC’s ban: “[t]he FTC’s evidence compares different states’ approaches to enforcing non-competes based on specific factual situations — completely inapposite to the Rule’s imposition of a categorical ban.” “In sum, the Rule is based on inconsistent and flawed empirical evidence, fails to consider the positive benefits of non-compete agreements, and disregards the substantial body of evidence supporting these agreements.” The court further held that the FTC failed to sufficiently address alternatives to issuing the rule.

In terms of a remedy, the court “set aside” the FTC’s final noncompete rule. The “set aside” language is drawn verbatim from the APA. The court noted that the FTC’s argument that any relief should be limited to the named plaintiffs in the case was unsupported by the APA. Instead, the court noted that its decision has a nationwide effect, is not limited to the parties in the case, and affects all persons in all judicial districts equally.

Further Litigation

In addition to a likely FTC appeal to the Fifth Circuit, two other cases are pending that likewise challenge the FTC’s final noncompete rule. First, in ATS Tree Services v. FTC, pending in the Eastern District of Pennsylvania, the district court previously denied the plaintiff’s motion for a preliminary injunction. Second, in Properties of the Villages, Inc. v. FTC, pending in the Middle District of Florida, the court enjoined the FTC from enforcing the rule against the named plaintiffs. A final judgment in one of these cases that differs from the result in the Northern District of Texas could eventually reach the courts of appeals and potentially lead to a circuit split to be resolved by the US Supreme Court.

Takeaways for Employers

For now, the FTC’s noncompete rule has been set aside on a nationwide basis, and employers need not comply with the rule’s notice obligations. Noncompetes remain enforceable to the same extent they were before the FTC promulgated its final rule. Depending on how further litigation evolves, the rule could be revived, a temporary split in authority could arise leading to confusion where the rule is enforceable in certain jurisdictions but not in others, or the rule will remain set aside.

An important part of the court’s decision is its rejection of the FTC’s factual findings, which were made in support of the rule, as poorly reasoned and poorly supported. As we discussed in our prior client alerts, we anticipate that employees may cite the FTC’s findings to support challenges to enforceability under state law. The court’s analysis of the FTC’s factual findings may substantially undermine the persuasive authority of the FTC’s findings.

Employers should anticipate that noncompete enforcements in the coming years will remain uncertain as courts, legislatures, and government agencies continue to erode the legal and policy justifications for employee noncompetes. This counsels in favor of a “belt and suspenders” approach for employers to protect their legitimate business interests rather than relying solely on noncompetes.

© 2024 ArentFox Schiff LLP
For more on the FTC Noncompete Ban, visit the NLR Labor Employment section