Greenwashing into the Red: The New Risks of Deceptive Environmental Marketing

Capitalizing on consumer interest in sustainability just got a lot more difficult. In the wake of BP’s Deepwater Horizon disaster, a renewed interest in greenwashing by the FTC, courts and legislatures makes prosecution for greenwashing more likely than ever before. By Jonathan Storper and Lance Alarcón

Capitalizing on consumer interest in sustainability just got more complicated. BP's Gulf of Mexico oil disaster has reversed years of goodwill built by its "Beyond Petroleum" rebranding campaign, perhaps the best-known green marketing effort in history. But consumers' growing environmental-marketing skepticism is not the only challenge companies will need to overcome when they tout environmental benefits to their products. The Deepwater Horizon spill is also a political disaster, and it is occurring in the context of renewed interest by the Federal Trade Commission, the courts, and state legislatures in curbing misleading environmental claims. Marketers take note: Prosecution for "greenwashing" is now more likely than ever before.  

Resurgence in FTC's Greenwashing Prosecutions
 
After filing 37 misleading-environmental-marketing complaints between 1992 and 2000, the FTC took an 8-year hiatus during the Bush administration, during which it filed none. The FTC is now back on greenwashing duty. Speaking to Congress six months after Pres. Obama took office, FTC Chairman Kovacic testified that prosecuting misleading green marketing would be one of the seven priority areas for the agency's consumer protection division. The agency reported in a March 2009 press release that it had developed an "ambitious plan to address the virtual “explosion of green marketing claims." Since then, the FTC has prosecuted seven companies for greenwashing and issued warning letters to a great many more, including some of the nation's largest retailers.
 
The first wave of prosecutions focused on products deceptively labeled as "biodegradable." These included disposable plates (Kmart), moist wipes (Tender Corp.), and disposable towels (Dyna-E). The second wave targeted clothing and other textile products advertised and labeled as being made of environmentally-friendly and biodegradable bamboo fiber when they were actually made of rayon. The FTC charged four manufacturers, and sent warning letters to 78 retailers, including Wal-Mart, Target, Kmart, and Amazon.
 
Green Packaging Claims, Carbon Offsets, and Green Building: The Next Wave of Prosecutions?
 
The FTC's latest green-marketing policing priorities are expected to be revealed soon with the update to its Guides for the Use of Environmental Marketing Claims ("Green Guides"). The Guides were last updated in 1998. The latest revision process was initiated a year earlier than planned "in response to the explosion of green marketing," according to FTC Consumer Protection Enforcement Division Associate Director James Kohm. Although the content of the update has not been made public, the FTC's updating process provides clues about likely new content -- and likely new areas of prosecution.
 
In a move that reveals how seriously the FTC is now approaching greenwashing, the FTC gained approval in 2009 to fund its own research on consumer understandings of green marketing terms such as "sustainable" and "carbon neutral," terms that were less common when the Green Guides were last updated. (The Green Guides already provide standards for terms such as "recyclable," "biodegradable," and "environmentally friendly.") The FTC also held a series of public workshops bringing together representatives from industry, government, consumer groups, environmental organizations, and academia to identify issues surrounding the marketing of carbon offsets and renewable energy certificates, green packaging claims, and claims for green building and textiles.
 
The FTC has not yet published its findings, but workshop participants have revealed a range of key issues that may form the basis of emerging policing priorities. With regard to carbon offsets and renewable energy certificates, the main concern was that consumers often have unrealistic expectations about these products, and that there are few ways for consumers to validate product performance. In the area of green packaging claims, key concerns included consumer misunderstanding of the concept of sustainability and the potential abuse of unregulated environmental certifications. In the area of green building and textiles, there were concerns over the misleading use of general terms such as "renewable", "organic," and "non-toxic," as well as confusion over whether green claims applied to a product's contents or to the process of making the product. Given the FTC's investment in the Green Guides' update process, these issues seem likely to influence future policing efforts.
 
Avoiding Unwanted FTC Attention
 
FTC greenwashing enforcement actions can be costly and embarrassing for targeted companies. Past sanctions have included: (i) halting misleading advertising; (ii) reporting periodically to FTC staff about substantiation for new claims; (iii) civil penalties ranging from thousands to millions of dollars, depending on the nature of the violation; (vi) full or partial refunds to all consumers who bought the product; (v) requiring new advertisements to correct the misinformation conveyed in the original advertisements.
 
The Green Guides describe how to avoid FTC intervention. Broad claims must be backed up with specifics. Advertising claims will evaluate into the lens of a hypothetical reasonable consumer, which means that vague claims about the environmental impact of a given product might lead to various interpretations. In essence, the FTC deems valid any reasonable meaning a consumer might give to advertising. The way to avoid confusion, then, is to be as specific as possible and making claims regarding a product's environmental impact. Substantiation is best provided with competent and reliable scientific evidence in the form of professional analysis or research into the environmental impact of a product. The duty to substantiate all reasonable interpretations of environmental claims is made more onerous by the fact that the burden is on the company making the claim to prove that the claim is not deceptive. Proactive use of the Green Guides to avoid FTC involvement is strongly recommended.
 
California's Latent Environmental Marketing Law
 
California is among eight states that have enacted laws regulating the use of environmental terms. California's law states that compliance with the FTC's Green Guides provides a safe harbor for marketers in California, with one exception: Any company that advertises its products using broad claims of environmental friendliness such as "ecologically sound," "environmentally safe," "eco-friendly" or any similar term must provide written documentation supporting such claims to any member of the public upon request. This documentation must, in addition to specifying compliance with the Green Guides were applicable, show the following: (1) the reasons why the company believes the representation to be true; (2) any significant adverse environmental impacts directly associated with the production, distribution, use, and disposal of the product; (3) any measures that are taken to reduce the environmental impact directly associated with the production, distribution, and disposal of the product; and (4) violations of any Federal, State, or local permits directly associated with the production or distribution of the product. A violation of the statute is a misdemeanor punishable by jail and/or a fine up to $2500.
 
The California Department of Justice has yet to file a greenwashing complaint under this statute, but attorneys in its Consumer Protection Department indicate that it is an area of concern for the office. Because investigations are kept confidential until the California DOJ begins filing complaints, it is hard to predict whether or when the office may begin initiating its own prosecutions. The office has been overwhelmed with mortgage-fraud investigations over the past several years, but these may begin subsiding as foreclosures run their course. In a state as environmentally conscious as California, is a safe bet that the California DOJ will begin tackling greenwashing in the near future.
 
Consumers Attack Greenwashing under California's Unfair Competition Law
 
Individual consumers, on the other hand, have had several recent successes pursuing greenwashing-type claims under California's Unfair Competition Law. This law allows a consumer who has lost money in reliance on a deceptive-advertising/labeling claim to bring a complaint against the company directly. This year, a consumer won a $100,000 settlement against Honda under this law for misrepresenting the gas mileage of the Honda Civic Hybrid In addition, there are three pending the class-action lawsuits under this law that have survived motions to dismiss. The suits allege that: the maker of Windex put a "Green list" logo on the label to deceive consumers into believing the product was certified as environmentally-friendly by a third party; the maker of Snapple misleads consumers into believing the product is "all natural" when it includes processed high-fructose corn syrup; and that the maker of Healthy Choice pasta sauce also misleads consumers into believing the product is "all natural" when it includes processed corn syrup. The success of these legal actions will certainly generate more.
 
Conclusion
 
Four trends are converging to make greenwashing a practice to avoid. First, the FTC is once again making greenwashing a priority. Second, consumers have discovered their power under California's Unfair Competition Law to sue greenwashing companies for potentially substantial damages. Third, the California Department of Justice may also begin using its latent power under California's Environmental Marketing Law to prosecute greenwashing, particularly as its mortgage-fraud workload begins to subside. Finally, the political and legal fallout from the sudden transformation of BP from "Beyond Petroleum" to "Beyond Propaganda" (among other monikers now being devised by creative detractors) -- and its effect on other companies who make grand environmental pronouncements not entirely tethered to reality -- has yet to be determined. One thing is certain: companies are more likely to pay a price for greenwashing now than ever before.

Jonathan Storper is a partner at Hanson Bridgett LLP and chairs the Corporate, Securities, Tax and Sustainable Business Practice Groups. Reach John at Hanson Bridgett's San Francisco or Silicon Valley Offices at 415-995-5040 or by emailiing jstorper@hansonbridgett.com

Lance Alarcón is a third-year law student at Stanford Law School.