Addressing potential FTC liability when your net-zero claims turn out to be false

FTC enforcement action could result in significant investigative and litigation costs, large financial penalties, and negative publicity.

Last year, your company jumped on the net-zero bandwagon, proudly proclaiming “net-zero by 2030” as part of your corporate sustainability program. Perhaps you announced a plan to reach net-zero status by purchasing and retiring a sufficient number of carbon credits, effectively offsetting any emissions produced in your company’s operations.

This puts you in the same position as numerous other companies that are seeking to reduce their greenhouse gas (GHG) emissions and limit their effect on climate change. The number of corporate net-zero commitments has grown significantly, now covering one-fifth of the world’s largest corporations and 68 percent of global GDP, compared to 16 percent in 2019. In striving to reach net zero, organizations are aiming to strike an even balance between the amount of GHG they produce and the amount they remove from the atmosphere.

Companies frequently trumpet their net-zero initiatives in their advertising, including claims made via online advertising, a company’s website, or even in its press releases.

You are proud of your company’s net-zero claims and pleased to deploy them in your marketing efforts.   But this morning, you received a new internal report that shows your company’s projections may have been too optimistic. In fact, you now realize that your company may not achieve net-zero by 2030… or at all.

What should you do? Could your advertising claims create problems with the regulators? Most worryingly, could your company be subject to an FTC action for 0 advertising?

About FTC enforcement

Section 5 of the FTC Act gives the agency authority to regulate unfair and deceptive trade practices, including advertising claims when (1) there is a representation that (2) misleads or is likely to mislead a reasonable consumer, and (3) the misleading representation is material to the consumer’s purchasing decision.

In addition, the FTC requires advertisers to possess a “reasonable basis” for its affirmative product claims prior to the claims’ dissemination in advertising, which in the context of environmental claims should typically consist of “competent and reliable” scientific evidence.

It is highly likely that the FTC will take this approach in looking at net-zero claims, particularly as such claims become more common.  A net-zero claim made without solid evidence to back it up could be seen as likely to mislead reasonable consumers who assume that companies would not make such claims without a solid scientific basis. A company that proclaimed “Net-Zero by 2030,” but now realizes it won’t make that goal, is in danger of FTC enforcement action, which could result in significant investigative and litigation costs, large financial penalties, and negative publicity.

When you realize the claim may be shaky: Mitigation and defense

Given the possibility of FTC investigation, legal counsel should be engaged, and privileged communications protected, as soon as the company becomes aware of potential challenges in realizing its net-zero claims. If the claim can be modified to render it accurate – for example, by changing the year in which the company projects it will achieve net zero – this should be done promptly.

If the claim is not capable of correction, because, for example, you no longer have a basis to make any net-zero predictions, then stop making the claim right away. In that case, it is also prudent to make good-faith efforts to quickly recall any materials in sales channels or retail outlets that reference net-zero claims, as well as removing such claims from your company’s website, social channels, and traditional advertising materials.

While promptly correcting your advertising may not insulate your company from liability, it will limit your exposure solely to the period in which an inaccurate claim was disseminated. In addition, correcting the claim will permit you to credibly argue that your company acted reasonably and in good faith, which may help to persuade the FTC that it should exercise its prosecutorial discretion to forego an enforcement action.

In some cases, you may wish to go beyond merely removing or correcting the claim. For example, there may be compelling business reasons for your company to issue a public statement explaining the changed circumstances that require a modification to your advertising. You’ll want to work closely with your lawyers and your public relations team in weighing the pros and cons of that action and in drafting any public statement.

If the FTC does investigate, one possible response could be to argue that an advertiser cannot be held liable for a prediction of a future event merely because that event does not come to fruition.  It is well established that an advertiser is only liable for claims that are capable of proof or disproof – otherwise, such claims are likely deemed “permissible puffery.” No reasonable consumer would believe that predictions of future events always come 1, because the nature of predictions is that there is inherent uncertainty.

The power of such an argument depends largely on three prerequisites. First, as discussed, it will be critical to show that your company corrected or ceased making the claim as soon as it learned that the claim was not likely to be realized. If your company continued making the claim knowing that it won’t come 1, the “mere prediction” defense would no longer apply.

Second, you’ll need to show that your company had a reasonable basis for making the claim in the first place. Before the FTC staff could accept any arguments about good faith predictions, they would need to first be satisfied that you acted reasonably in making the prediction, which would include having a reasonable basis to believe that the prediction would come 1.

Finally, for these defenses to prevail, it will be critical that the failure to meet the net-zero goal was due to developments outside of your company’s control.  To the extent the FTC gets a whiff that your company’s failure to meet its net-zero claims was due to actions by your company – for example, a business decision to reduce costs or divert resources to other initiatives – all bets will be off.

The bottom line

Should your company come to the unfortunate realization that its net-zero predictions may not come 1, immediate action is necessary to minimize FTC exposure. Any advertising with these claims should be corrected or stopped, and if necessary, materials should be recalled.  You should ensure that your company preserves and maintains its records of its original basis for the prediction, and that the failure to reach your goal is not due to conduct or decisions within your company’s control. Additionally, you should engage your public relations team to help manage any fallout, whether or not the FTC takes action.

To learn more, and for assistance with GHG reduction statements, please contact Andrew Sacks or reach out to us via DLAPiperCommodities@dlapiper.com.