FTC Strikes Again—Company Found to Make False and Misleading Biodegradable Claims

On October 20, 2015, the United States Federal Trade Commission (FTC) released a Final Order with a corresponding Opinion against ECM BioFilms, Inc. (ECM) stating that ECM made false and unsubstantiated environmental claims that its additives for plastics (ECM Plastics) would make treated plastics biodegrade in a landfill. The FTC Final Order and Opinion come two years after FTC issued an administrative complaint against ECM and ten months after an FTC Administrative Law Judge (ALJ) issued an Initial Decision finding ECM violated Section 5 of the FTC Act because its express claims, that ECM Plastics would biodegrade plastics within nine months to five years, were not supported by the evidence. Further, these claims were material to ECM customers, and ECM customers then passed these deceptive claims on to its downstream sellers and distributors. Significantly, FTC reverses the part of the ALJ’s decision finding that FTC counsel had not met its burden in proving that ECM made false, misleading, and material implied biodegradable claims that the ECM Plastics will completely biodegrade in a landfill within one year. Although no penalties were assessed against ECM, the Final Order imposes several restrictions, including but not limited to prohibiting ECM from making such claims in the future without adequate scientific substantiation.

ECM may file a petition for review of the Commission decision with the U.S. Circuit Court of Appeals within 60 days of service of the Final Order.

This Order is another example of FTC’s increased interest in and enforcement of companies making claims that violate FTC Act Section 5 and FTC’s Guides for the Use of Environmental Marketing Claims (Green Guides). More information regarding the Green Guides is available in our October 3, 2012, memorandum, FTC Releases Revised Green Guides.

Background

FTC released the long-awaited revised Green Guides on October 1, 2012. FTC intends the Green Guides to help marketers ensure that the claims they make about the environmental attributes of their products are “truthful and non-deceptive.” While the Green Guides are administrative interpretations of law, and are not independently enforceable, they describe the types of environmental claims FTC may find deceptive under Section 5 of the FTC Act. Under the FTC Act, all marketers that make express or implied claims about their products must have a reasonable basis for their claims. What constitutes a “reasonable basis” requires competent and reliable scientific evidence. In various FTC rules and guides, FTC provides general principles with which claims must comply.

In its Green Guides related to environmental marketing claims, FTC set forth some general principles with which all environmental marketing claims must comply. These include:

• Substantiation: Marketers must substantiate claims under a “reasonable basis” test;
   
• Qualification and Disclosure: Marketers must qualify claims where the claimed environmental attribute relates only to a portion of the product (e.g., packaging) if the claim would otherwise expressly or impliedly overstate the attribute or benefit;
   
• Display of Qualifying Language: Any qualification should be clear to prevent consumer deception; avoidance of overstated claims — marketers should avoid implications of significant environmental benefits if the benefit is negligible; and
   
• Comparative Statements: Where marketing materials make explicit or implicit comparisons between the environmental attributes of different products, the materials should be clear to avoid consumer deception.

In its Green Guides, FTC includes specific guidance on certain environmental claims, for example, compostable, degradable, ozone-safe and ozone-friendly, recyclable, and recycled content. With regard to biodegradable claims, FTC states:

• “Degradable claims should be qualified clearly and prominently to the extent necessary to avoid deception about: (1) [t]he product’s or package’s ability to degrade in the environment where it is customarily disposed; and (2) [t]he rate and extent of degradation.” 16 C.F.R. § 260.8(d).
   
• Marketers may make an unqualified degradable claim only if they can prove that the “entire product or package will completely break down and return to nature within a reasonably short period of time after customary disposal.”
   
• The “reasonably short period of time” for complete decomposition of solid waste products is one year.
   
• Items destined for landfills, incinerators, or recycling facilities will not degrade within a year, so unqualified biodegradable claims for them shouldn’t be made.
   
• FTC states: “Notwithstanding this advice, neither Section 5 nor the Guides can prohibit a marketer from making an unqualified degradable claim if it has substantiation for all reasonable interpretations of such claim.”

FTC Order

Before the revised Green Guides were issued in October 2012, ECM’s claims included but were not limited to a logo of a tree with the word “biodegradable” and a claim that ECM Plastics will break down in approximately nine months to five years in nearly all landfills. After the ECM began to omit the “9 months to 5 years” claim from its marketing materials, it instead stated that ECM Plastics will biodegrade in any biologically-active environment (including most landfills) in some period greater than a year.

In the January 28, 2015, Initial Decision, the ALJ found that the evidence supported the fact that ECM Plastics do not fully biodegrade within five years in a landfill, and thus ECM’s express claims of biodegradation within nine months to five years were false, misleading, and material, in violation of Section 5 of the FTC Act. FTC upheld the ALJ’s decision with regard to these express claims, noting that ECM had not appealed the ALJ’s ruling that its nine months to five years express biodegradation claim was false and unsubstantiated (although ECM did appeal whether these claims are material).

The crux of the FTC Opinion addresses the ALJ’s finding that FTC’s Counsel had failed to prove that ECM’s claims that ECM Plastics are “biodegradable,” and “biodegradable in some period greater than a year” imply that ECM Plastics will completely biodegrade in a landfill within one year. In a significant development, FTC reversed this finding by the ALJ, stating that “based on our own de novo examination of the evidence, we find that ECM also made implied claims that ECM Plastics will biodegrade in a reasonably short period of time, or within five years, and the implied claims are false, unsubstantiated, and material.” With regard to the rate of biodegradation that is implied by an unqualified biodegradable claim, FTC states that it finds “that the extrinsic evidence in the record establishes that reasonable consumers expect that plastic products labeled ‘biodegradable’ will decompose within a reasonably short period of time (i.e., within five years), and would be misled if a plastic product labeled ‘biodegradable’ did not do so.”

The Commission’s Final Order bars ECM from representing that a plastic product or package is degradable, or that any product or service affects a plastic product’s degradability, unless the representation is true, not misleading, and substantiated by competent and reliable scientific evidence. The Final Order additionally requires that for claims relating to degradability of plastic products, ECM must ensure that either: (1) the entire plastic item will completely decompose into elements found in nature within five years after customary disposal; or (2) the claim is clearly and prominently qualified by either the time for complete decomposition or the type of non-customary disposal required, and the availability of such disposal facilities. The Final Order also bars ECM from providing others with the “means and instrumentalities” to make any false, unsubstantiated, or otherwise misleading representations of material fact or environmental benefits; and bars the company from misrepresenting the existence, contents, validity, results, or conclusions of any test, study, or research.

Discussion

FTC’s Final Order and Opinion establish significant precedents for the types of biodegradation claims that FTC would consider to be false or misleading, and could have a chilling effect on any company making such claims. To make such claims, companies will need to have, for example, reliable evidence to substantiate the rate/extent of decomposition and the time to complete decomposition, which may be difficult evidence to obtain depending on the varying factors at play (e.g., temperature, soil composition).

This decision also establishes a “reasonable” interpretation of the word “biodegradable” as total biodegradation within five years. Specifically, FTC states: “based on our weighing of all the evidence, we find that at least a significant minority of reasonable consumers would interpret ECM’s unqualified representation that ECM Plastics are ‘biodegradable,’ to convey the claim that ECM Plastics fully biodegrade in landfills within a reasonably short period of time, i.e., five years.” On this point, one FTC Commissioner dissented, and instead agreed with the ALJ in the Initial Decision that FTC’s Counsel failed to prove that ECM’s unqualified “biodegradable” claim caused reasonable consumers to believe that treated products would biodegrade in a reasonably short time period. The Partial Dissent concludes: “Rather than reinforce consumer ignorance by setting an arbitrary, unjustifiable five-year threshold that conflicts with our own previous guidance, we should start a proceeding to revise the Green Guides, seeking public comment and running our own well-designed consumer survey to inform the results.”

ECM may file a petition for review of the Commission decision with the U.S. Circuit Court of Appeals within 60 days of service of the Final Order. Considering the likely controversy over the FTC’s decision and the dissenting opinion with regard to permissible biodegradable claims, it would not be surprising if ECM sought judicial review.