The FTC’s Proposed Impersonation Scam Rule – Not as Straightforward as it Looks
Since Lina Khan took the reins of the FTC, the agency has launched five new rulemakings under its Section 18 (“Mag-Moss”) authority – specifically, rules to combat government and business impersonation scams, deceptive earnings claims, “commercial surveillance,” deceptive endorsements, and “junk fees.” (I’m excluding here revisions to existing Mag-Moss rules, as well as rulemakings under other statutory authority.) While much has been written about how long Mag-Moss rulemakings generally take to complete (including by us, here), at least one of these rulemakings is proceeding apace – the first one, involving impersonation scams.
Indeed, the FTC issued its ANPR in December 2021, seeking comment for 60 days. Then, in October of 2022, it released its NPR proposing rule text and seeking comment for another 60 days (until December 16). At this point, it seems possible that the FTC could complete the process shortly after the comment period closes, just a little over a year after it started. That’s because one of the key steps under Mag-Moss – an informal public hearing – is only necessary if the FTC determines that it is, or if an interested party requests one. (See FTC Rules of Practice 1.11.) The FTC has said that no hearing is necessary and, so far, we’re unaware of any hearing requests from stakeholders.
Why is this rule moving so fast? Mainly because, for the most part, it’s a narrow, targeted rulemaking to ban practices that everyone agrees are fraudulent, and that have been the subject of many dozens of FTC cases. It’s also based solely on deception, which is far more straightforward than unfairness. For these reasons, even when the FTC was split 2-2 with the Commission sharply divided, both Republicans voted for this rule, paving the way for quick action and signaling to the public that there’s nothing controversial here.
Means and Instrumentalities
One key aspect of this rulemaking isn’t so simple, however, and requires more attention than it’s getting. Specifically, the proposed rule (which, in four short provisions, bans falsely posing as, or misrepresenting affiliation with, a government entity or business) tacks on a prohibition against providing the “means and instrumentalities” to engage in the banned practices. The NPR explains that means and instrumentalities (aka “M&I”) is a form of direct liability under Section 5 that’s distinct from secondary liability theories not allowed under Section 5. As the NPR states:
[T]he case law describes a form of direct liability for a party who, despite not having direct contact with the injured consumers, ‘passes on a false or misleading representation with knowledge or reason to expect that consumers may possibly be deceived as a result.’ In other words: ‘One who places in the hands of another a means of consummating a fraud or competing unfairly in violation of the Federal Trade Commission Act is himself guilty of a violation of the Act.’ (citations omitted)
In fact, while the FTC doesn’t use the M&I theory every day, it has done so over the years (in both litigated cases and settlements) to challenge the “passing along” of deceptive promotional materials, badges, logos, or other items. Still, the precise contours of this legal theory remain somewhat murky. That murkiness raises special concerns where, as here, rule violations could lead to hefty civil penalties.
The confusion here starts with the NPR, which sends mixed messages as to whether knowledge is an element of an M&I violation. The passage from the NPR cited above (referencing “knowledge or reason to expect” consumers may be deceived) suggests that knowledge is required. However, the proposed rule itself doesn’t mention knowledge. Does this mean, then, that a supplier or middleman could be strictly liable if he or she unwittingly passes along misleading claims to purchasers who then uses them to deceive consumers? Yes, it’s possible. Here are some points to consider:
First, knowledge isn’t an element of deception generally, and FTC precedent suggests that it isn’t an element of means and instrumentalities either, at least not technically. For example, the FTC’s recent complaints against ECM Biofilms, Office Depot, and Nerium all include M&I counts that don’t mention knowledge. The same is true in Shell Oil and C. Howard Hunt, two earlier cases that the FTC cites in its NPR.
On the other hand, the facts cited in M&I cases often (though not always) include evidence of knowledge, even if knowledge is absent from the complaint count. In Office Depot, for example, the complaint describes how Support.com (the entity charged with M&I) deliberately furnished Office Depot with a deceptive software program in order to mislead consumers into thinking they needed to buy computer repair services. See also Waltham Watch (court stressed that watch manufacturer knowingly furnished deceptive claims to distributors); Shell Oil (statement accompanying order said Shell knowingly passed along deceptive claims); and Nerium (complaint says Nerium encouraged its partners to make deceptive health claims).
In addition, a 2021 blogpost from former BCP Director Andrew Smith describes means and instrumentalities as “providing a false representation (or a forged or counterfeit item) to another with knowledge that it was possible that the means could be placed in the stream of commerce and passed on to consumers....”
Finally, there’s been debate over the years about the contours of means and instrumentalities, with some Commissioners saying that others are using it as a substitute for “aiding and abetting,” a form of secondary liability not within Section 5 (and that, incidentally, requires proof of knowledge). For example, in his dissent in Shell Oil, then-Commissioner Swindle said that because the claims Shell passed along to marketers were different from the claims ultimately made to consumers, Shell didn’t make its own deceptive claims through intermediaries as required for M&I liability, but at most engaged in aiding and abetting. (See also the partial dissent of then-Commissioner Ohlhausen in the FTC’s case against TRUSTe.)
While some of this gets fairly legalistic, their overarching points are that (1) it’s a big deal to hold someone liable for deceptive claims made by another, and there should be clear legal criteria for doing so; and (2) M&I means that a person or entity has disseminated their own claims through an intermediary.
The FTC’s bare bones rulemaking proposal doesn’t clear up any of these issues and questions. Further, while my research was hardly exhaustive, it suggests that the case law won’t provide quick and easy answers either. With the rulemaking barreling towards completion with an M&I provision on board, stakeholders who may be concerned about these issues should consider (1) submitting comments to the FTC asking for clarification in the final rule and/or (2) requesting an informal hearing to address these questions. (See here for more information.)
We will also be watching carefully to see whether the FTC includes similar means and instrumentalities provisions in the many other rules it is developing.