In the United States of America, commercial cannabis businesses must be aware of Section 5 of the Federal Trade Commission Act, often known as UDAP, which prohibits businesses from engaging in unfair or deceptive practices that could harm consumers. The Federal Trade Commission (FTC) uses this authority to take action against companies that engage in misleading or harmful practices, safeguarding consumers and promoting fair competition in the marketplace.
Risk Factors
An act or practice is unfair when it (1) causes or is likely to cause substantial injury to consumers, (2) cannot be reasonably avoided by consumers, and (3) is not outweighed by countervailing benefits to consumers or to competition. Congress codified the three-part unfairness test in 1994.
A representation, omission, act, or practice is deceptive when (1) The representation, omission, act, or practice misleads or is likely to mislead the consumer; (2) The consumer’s interpretation of the representation, omission, act, or practice is reasonable under the circumstances; and (3) The misleading representation, omission, act, or practice is material.
Consumer complaints play a key role in the detection of an FTC UDAP risk. Consumer complaints should be monitored for indications of weakness in the company’s risk program. The presence of complaints may be a red flag indicating that a more detailed review is warranted. This is especially the case when similar complaints are received from several consumers regarding the same product or service. One of the three tests in evaluating an apparent deceptive practice is: “The act or practice must be considered from the perspective of the reasonable consumer.” Consumer complaints provide a window into the perspective of the reasonable consumer.
Promotional, marketing, and advertising materials, including web pages, should be monitored for indications of unfair or deceptive acts or practices. Consider past enforcement actions by the FTC such as :
- FTC Sends Cease and Desist Letters with FDA to Companies Selling Edible Products Containing Delta-8 THC in Packaging Nearly Identical to Food Children Eat | Federal Trade Commission
- FTC Joins FDA in Sending Warning Letters to Companies Advertising and Selling Products Containing Cannabidiol (CBD) Claiming to Treat Alzheimer’s, Cancer, and Other Diseases | Federal Trade Commission
- FTC Sends Warning Letters to Companies Advertising Their CBD-Infused Products as Treatments for Serious Diseases, Including Cancer, Alzheimer’s, and Multiple Sclerosis | Federal Trade Commission
An unfair, deceptive, or abusive act or practice may also violate other federal or state laws. For example, As defined in section 201(s) of the FD&C Act (21 U.S.C. 321(s)), the term “food additive” refers to any substance the intended use of which results in it becoming a component of any food, unless the substance is generally recognized as safe (GRAS) among qualified experts under the conditions of its intended use, or unless the substance meets a listed exception. An act or practice that does not comply with this provision of the FD&C act may also be unfair or deceptive.
Red Flags
The following should be considered red flags for UDAP risk.
- Consumers formally complain about an unfair or deceptive act or practice
- Promotional, marketing, or advertising materials contain unfair or deceptive acts or practices
- Noncompliance with other federal or state laws that may indicate unfair or deceptive acts or practices
Risk Mitigation
Commercial cannabis businesses that have a higher UDAP risk should establish or enhance the internal control environment, risk assessment, control activities, information and communication, training, and assurance. The following is a sample of risk mitigations that should be considered:
- Assign a qualified individual the day to day management of UDAP risk
- Enhance the risk assessment to include an evaluation of UDAP risks
- Implement Procedures for
- Receiving and responding to consumer complaints and to receive complaints made to third parties
- Complaint resolution that demonstrates the company’s expectation to resolve individual complaints and improve its business practices and risk program, when appropriate
- Management is made aware of and review significant deficiencies and their causes
- Initial and ongoing UDAP training
- Transaction-related monitoring of
- Promotional, marketing, and advertising materials
- Packaging
- The frequency and depth of assurance reviews are appropriate to the nature of the activities and size of the company.
