First Circuit Clarifies FTC’s Powers

Published On May 18, 2016 | By Anna Hsia | FTC & State AG
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Clients often ask what the FTC can force a company to do after alleged violations of Section 5 of the FTC Act, which prohibits unfair or deceptive practices. In the FTC’s long-standing battle with Jerk.com, a First Circuit decision provides insight into the scope of the FTC’s enforcement powers.

At issue was the Jerk.com website, which allowed users to vote on profiles of other individuals. Users could rate a person as a “Jerk” or “not a Jerk.” Styled as a reputation-management site, Jerk.com also purported to allow paid members to “create a dispute” regarding their profiles. Those who were labeled as “Jerks” could pay a subscription fee and dispute the “Jerk” rating.

Jerk.com did not, however, disclose that it created the vast majority of profiles by mining Facebook data, and paid members apparently received no benefits. The FTC filed a complaint, alleging that Jerk.com and John Fanning (an individual operator of the site) misrepresented the (1) source of user content by implying that it was entirely user-generated; and (2) benefits of a paid subscription to the site. The FTC issued a summary decision on both counts, and Fanning appealed.

First Circuit affirms deception findings

The First Circuit affirmed the FTC’s findings against Fanning on the deception counts.

On misrepresentations regarding the source of user content, Fanning argued that the site never affirmatively represented that all profiles were user-generated. The First Circuit agreed with the FTC, however, finding that the overall impression of the site implied that Jerk.com contained wholly user-generated content. Consumer complaints to the FTC also indicated that consumers believed content was user-generated. Significantly, the court determined that the FTC was not required to find that all—or even a majority of—consumers would have found a misleading claim to be implied. Rather, a seller can be liable for making a statement that could be subject to a misleading interpretation, even where non-misleading interpretations are possible. So long as “at least a significant minority of reasonable consumers [would be] likely to take away the misleading claim,” the FTC’s finding of deception would be affirmed.

On misrepresentations regarding the value of a Jerk.com subscription, the court affirmed the FTC’s finding, noting that multiple people (including two FTC investigators) paid for a membership and received nothing in return.

First Circuit scales back FTC’s monitoring capabilities

Fanning also appealed the injunctive relief in the FTC Order.

First, the Order enjoined Fanning from misrepresenting the “source of any content on a website” and “the benefits of joining any service.” Fanning argued that this impermissibly abridged his First Amendment right to free speech, but the court disagreed, finding that the First Amendment does not protect misleading commercial speech.

Second, Fanning objected to the Order’s requirement that he provide a copy of the Commission’s Order to all employers, employees, and agents who have responsibilities with respect to the subject matter of the Order. The First Circuit ruled that this Order acknowledgment provision was within the FTC’s authority, because Fanning was only required to notify individuals who have responsibilities related to the subject matter of the Order. Mandating distribution would make it more difficult for Fanning to receive assistance in replicating Jerk.com’s deceptive practices.

The court did, however, vacate the Order’s requirement that Fanning “notify the Commission of . . . his affiliation with any new business or employment.” The court determined that this monitoring provision bore no reasonable relation to the unlawful practices found to exist. As written, it would require Fanning to report to the FTC if he obtained a job as a waiter at a restaurant, but such a position bears no relationship to the deceptive practices associated with Jerk.com.

The battle between the FTC and Jerk.com demonstrates that the FTC may pursue deceptive conduct, even where such conduct does not deceive a majority of consumers. The FTC’s Order further shows that, even where the FTC does not impose monetary penalties, the injunctive relief in such Orders may have long-lasting effects on a business and the individuals who run a business.

About The Author

Anna Hsia maintains a diverse practice litigating complex business disputes and counseling clients on privacy issues. With broad litigation experience in unfair competition, false advertising, class actions, and other complex litigation, Anna guides clients through disputes in federal and state courts. As a Certified Information Privacy Professional, Anna has assisted clients with product development and compliance with privacy regulations such as the TCPA, HIPAA, COPPA, state-specific privacy regulations, the Gramm-Leach-Bliley Act, and the Fair Credit Reporting Act.

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