Long gone are the days when the Federal Trade Commission (FTC) paid no attention to cannabis (marijuana and hemp) companies. These days, the FTC treats consumer complaints about hemp and marijuana companies the same way it treats complaints against companies in other industries.
The self-proclaimed assignment of the FTC is:
“prevent anti-competitive, deceptive, and unfair business practices through enforcement, advocacy, and education without unduly burdening legitimate business activity.”
This blog post contains an overview of what we’ve seen on FTC cannabis litigation.
What is the FTC looking at?
The key words in the FTC’s mission statement are “misleading” and “unfair.”
- An advertisement is misleading if it contains a false statement or omission likely to mislead consumers acting reasonably in the circumstances to their detriment. Misleading claims can only be actioned if they are material to consumers’ decision to buy or use the product, but the Commission does not need to prove the actual harm caused to consumers.
- An advertisement is unfair if it causes or is likely to cause substantial harm to consumers which cannot reasonably be avoided by the consumers themselves and which is not outweighed by countervailing benefits to consumers or competition.
There are two types of claims the FTC can make. The first is the false or unsubstantiated claim, which is a simple assertion of performance. An advertiser is responsible for all claims, express and implied, that are reasonably conveyed by the advertisement, which means that the advertiser is strictly liable for violations of FTC law. The FTC does not have to prove intent to convey a misleading claim or evidence that consumers were actually misled.
The second type of claim is the false establishment claim, which is defined as a claim that contains express or implied statements regarding the advertiser’s degree of support for the product claim. An advertiser must have at least the level of substantiation claimed expressly or implicitly in the advertisement.
To give a quick example to show the difference between these two types of claims, if a company makes the advertising claim that their hemp product reduces symptoms of COVID, that is a potential false or unfounded. On the other hand, if a company claims in its advertisement that a study of 500 adults found that its hemp product reduced symptoms of COVID, that is an establishment claim.
One thing to note is that for health or safety claims, the FTC has generally required a relatively high level of substantiation, usually “competent and reliable scientific evidence.” This proof may consist of:
“tests, analyses, research, studies or other evidence based on the expertise of professionals in the relevant field, which have been conducted and objectively evaluated by persons qualified to do so, using procedures generally accepted in the profession for and reliable results.
And finally, the FTC must show that the defendant violated Section 5 of the FTCA, which gives the Commission broad authority to prohibit “unfair or deceptive acts or practices”, or Section 12 of the FTCA, which prohibits the making of misleading claims for foods. , drugs, devices, services or cosmetics.
An Example of What Not to Do in FTC Cannabis Litigation
Before we get into what not to do, the first point to make is that if a company receives a warning letter or complaint, they should immediately maintain representation. The FTC can act quickly and not give a ton of time to respond.
Now let’s go to the example. In one of the most popular cases in this area, the Food and Drug Administration (“FDA”) and FTC sent a series of warning letters to several companies, several of which sold and marketed CBD products. One such company was California-based distributor Mark Ching, doing business as Whole Leaf Organics.
The FDA gave Mr. Ching 15 days to take corrective action. Despite the FDA warning, Mr. Ching continued to make unsubstantiated medical claims about his CBD products, which were sold and marketed on his website. Then Mr. Ching added fuel to the fire when he began to promote the therapeutic values of Thrive, a dietary supplement made primarily of vitamin C and plant extracts, as an effective treatment, prevention or reduction of risk of contracting COVID-19, and falsely claiming that the effectiveness of Thrive and its CBD products is clinically and scientifically proven.
Within weeks, the FTC took things to the next level and filed a lawsuit for a temporary restraining order and preliminary injunction against Mr. Ching. Shortly thereafter, the parties eventually entered into a stipulated preliminary injunction order, which prohibits Mr. Ching from claiming that Thrive is effective in treating, preventing, or reducing the risk of COVID-19, or that its CBD products are effective cancer treatments, at least until the FTC completes its full administrative procedure.
It is important to note that Mr. Ching is now not only subject to injunctions, but that he probably had to take costly measures like redesigning his website, changing his labels, keeping records, sending notices to consumers and anyone in its supply chain, adhering to record-keeping measures and submitting compliance reports to the FTC, and possibly even paying monetary penalties like civil penalties and restitution of profits.
Final Notes on FTC Cannabis Litigation
Bottom line, be sure to be responsive and adequately protect yourself if the FTC communicates that it has a problem with your advertising practices. Incidentally, it’s also worth noting that there’s a new wave of consumer class action lawsuits precisely because the FTC’s warning letters are leading to these same companies being sued by consumers. It is therefore in a company’s interest to respond and work with the FTC not only to avoid administrative litigation, but also secondary class action lawsuits for the same violations.
For previous FTC updates, see:
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