Federal agencies recognize that what was once treated as an intangible asset—that is, how "green" a company or its products may be—has developed into a true value-add. A year ago, the Federal Trade Commission (FTC) announced that as a part of its modified ten-year regulatory review schedule, it would be reviewing and revising its Green Guides in 2022. Also last year, in discussing Environmental, Social, and Governance factors (ESG), then-Acting Chair of the U.S. Securities and Exchange Commission Allison Herren Lee observed that "climate risks and sustainability are critical issues for the investing public and our capital markets." That same environmental information—encompassing the "E" in trending ESG—is of value to consumers who seek out and, at times, pay a premium for "green" branded products. While being green or eco-friendly is generally a positive attribute, recent enforcement and litigation activity demonstrates that holding yourself out as a green company and making green claims is not without its risks.
There is a limited regulatory framework around green claims, making it prime for litigation. The Federal Trade Commission's (FTC) Green Guides, most recently updated in 2012, aim to ensure that environmental claims are truthful, substantiated, and not confusing to consumers. In isolation, stating a company or product is "green," "sustainable," or otherwise "eco-friendly" may seem like innocuous marketing provided there is no regulated definition of these terms. However, the Green Guides outline how to qualify certain terms, including, for example, "recyclable," "degradable," "free-of," and "non-toxic." The Green Guides also offer hypotheticals for companies to appreciate that what they mean by their choice language may differ from how consumers interpret the same. By example, the Green Guides explain that "eco-friendly" likely conveys that the product has far-reaching environmental benefits and may convey that the product has no negative environmental impact. As the growing "green" diction expands and is intended to give companies a market edge, such terms will be treated as claims and equally misleading if there is no substantiation to support them—this is so despite such terms not being expressly defined in the Green Guides (e.g., sustainable). Claims with more specific representations, such as those that offer percentages (e.g., "made with 30% recyclable materials") or that speak to the sourcing of ingredients and composition must also be backed by reliable data. Overall, the Green Guides encourage proper qualifications to ensure the accuracy of environmental claims, which in practice, requires greater analysis and considerations before going to print. And although Green Guides serve as guidance rather than regulations, they inform actions brought under the FTC Act and state consumer protection laws.
Recently, several companies have been called to court and other forums as alleged perpetrators of so-called "greenwashing." Since the mid-1980s, the term emerged to describe the practice of making unfounded or exaggerated environmental claims in order to attract consumers. These types of actions can be the product of federal agency action, competitors, and consumers alike.
In February 2022, the National Advertising Division (NAD), oversaw two cases concerning environmental claims. In one matter, a company marketed its gum as natural and biodegradable. After declining to participate in NAD's self-regulatory inquiry into those claims, it was referred to the FTC. In the second matter, the NAD found that a company that marked its drain cleaner as "green" did not have sufficient evidence to support the claim. The NAD determined that the green claim conveyed a general environmental benefit message. But absent of any evidence to back such a broad environmental benefit, the NAD recommended the company to discontinue the use of its green claim.
In May of this year, just before the SEC announced proposed enhanced ESG disclosures, the FTC exercised its Penalty Offense Authority to attain the largest-ever civil penalty against two major retailers for untruthful environmental marketing. Both retailers falsely marketed dozens of rayon textiles as "bamboo" and claimed the products provided environmental benefits when, in fact, the process of converting bamboo into rayon involves toxic chemicals and emits hazardous pollutants. In a stipulated order and judgment, the retailers agreed to stop making unsubstantiated bamboo and green marketing claims, cease violations of the FTC's Textile Act and Rules by misrepresenting textile contents, and pay a collective $5.5 million in penalties.
Most recently, at the end of July, a consumer filed a putative class action in federal court against a fast-fashion retailer widely known for selling "consciously" created products. The plaintiff alleges that the retailer's labeling, marketing, and advertising is designed to mislead consumers about its products' environmental attributes through the use of "Sustainability Profiles," which provide "environmental scorecards" for its products. The scorecards were created by a global non-profit organization comprised of a coalition from the fashion industry. In addition, the plaintiff alleges that the company established an "advertising scheme" consisting of misrepresentations about the sustainable nature of its products through the use of green hang tags, in-store signage, and online marketing. Based on this purported conduct, the Complaint brings claims for deceptive acts and false advertising under the State Unfair and Deceptive Practices Act (a.k.a. "little FTC Act" for being modeled after the FTC Act), as well as a count for unjust enrichment. Notably, the lawsuit follows the publication of a news article releasing its findings about how the retailer misstated information from the scorecards on the website, thereby seeking to expose the fast-fashion industry's attempt and failure to self-police its environmental record. At least a dozen similar class actions have been filed this year on the basis of claims about sustainability and responsible sourcing.
Despite a recent surge in litigation, green claims are not new—hence why the concept of "greenwashing" and Green Guides emerged decades ago. What is new is the mindset shift in placing a monetary value on "being green." That is, how green a company or product is plays a role in buying and investment behavior. But whether something is sustainable and how sustainable something is, are amorphous insofar as the practice is not defined by regulation and uniform measurements are not employed. This is troubling for consumers and companies alike, left to devise their own interpretations. To fill the void, we have a number of purported independent certifications and seals that companies and consumers rely on. Just the same, retailers maintain certain product classifications that meet their own green standards. The FTC and SEC can help provide greater clarity and consistency through anticipated rulemaking and enforcement action.
In the interim and as litigation around green claims continue, companies and marketers should be familiar with the Green Guides and the developing law in this space. One element that remains unchanged is that any green claims should be backed by substantiation as with any other type of claim. Companies must substantiate all claims, express and implied, conveyed to reasonable consumers. Being transparent and truthful about the business information supporting your claims is critical for a sustainable company—literally and figuratively.
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