Hey Dude has agreed to settle Federal Trade Commission (“FTC”) charges that it misled consumers by blocking negative reviews from appearing on its website. The digitally-native footwear company – which was acquired by Crocs last year – will pay $1.95 million to settle the consumer protection regulator’s claims that it ran afoul of the FTC Act and the Mail, Internet, or Telephone Order Merchandise Rule between 2020 and 2022 by using a third-party online management review interface to “suppress negative reviews, including more than 80 percent of reviews that failed to provide four or more stars out of a possible five.”
In its September 11 complaint, the FTC claims that Hey Dude violated its Mail Order Rule, which prohibits a seller of merchandise from soliciting sales orders by mail or telephone unless it reasonably expects that it can ship the ordered merchandise by either the date included on the solicitation, or if there was no such date, then within 30 days. In the case at hand, the FTC alleges that Hey Dude violated the Rule in several ways, including by: (1) failing to issue shipping delay notices when it could not timely fulfill consumers’ orders; (2) failing to cancel consumers’ orders and issue prompt refunds after failing to issue such notices; and (3) issuing consumers gift cards instead of sending prompt refunds of the original payment for merchandise ordered but not shipped, as required by the rule.
At the same time, the FTC claims that the Los Angeles-based footwear company also violated the FTC Act – which empowers the agency to investigate and prevent unfair methods of competition, and unfair or deceptive acts or practices affecting commerce – by suppressing negative consumer reviews of its products. In particular, the FTC states that “from January 2020 to June 2022, the company … chose to have all five-star reviews (the best rating) posted on its website with little scrutiny, [and] in many instances, it rejected and did not publish less-favorable reviews.”
The FTC maintains that before June 2022, Hey Dude maintained “written policies and procedures” in furtherance of which it instructed staff to publish “certain types of [consumer] reviews only if they were positive.” The company only started publishing all consumer reviews only after finding out it was under investigation by the Commission, according to the FTC.
Announced on September 12, the parties’ proposed court order, if approved by the court, will require Hey Dude pay a $1.95 million sum to the FTC and to change its conduct going forward. Not only must Hey Dude operate in accordance with Mail Order Rule, it must refrain from making “misrepresentations about consumer reviews,” and thus, must “publish all reviews it receives, including reviews previously withheld from publication, with limited exceptions related to moderation of inappropriate content.”
Reflecting on the matter, Sam Levine, who is the director of the FTC’s Bureau of Consumer Protection, said, “As this case makes clear, when retailers publish consumer reviews online, they cannot suppress negative reviews to paint a deceptive picture of the consumer experience. And when retailers don’t ship merchandise on time, they must give buyers the option to cancel their orders and promptly get their money back. We will continue to hold online retailers accountable for violations of the FTC Act and other laws we enforce.”
The Bigger Picture
Hardly the first headline-making Mail Order Rule matter initiated by the FTC in recent years, the regulator announced back in 2020, for instance, that Fashion Nova would pay $9.3 million for “failing to properly notify customers and give them the chance to cancel their orders when [it] failed to ship merchandise in a timely manner” in violation of the rule. In furtherance of a proposed settlement that was announced in April 2020, the FTC also accused the California-based retailer of “illegally using gift cards to compensate consumers for unshipped merchandise instead of issuing refunds,” which similarly runs afoul of federal rules.
Last year, the FTC went after Fashion Nova again, this time for its alleged practice of concealing negative customer reviews. As part of that settlement, which was announced in January 2022, the FTC prohibited Fashion Nova from suppressing customer reviews of its products and required it to pay a $4.2 million penalty. And in August, the FTC and six U.S. states reached a settlement with roommate finder and roommate search service Roomster on the basis that it had posted “tens of thousands of fake positive reviews to bolster their false claims that properties listed on their Roomster platform are real, available, and verified.” In a steep settlement, Roomster is on the hook for a monetary judgment of $36.2 million and civil penalties of almost $11 million payable to the states.
More broadly, these cases come as the FTC continues to focus on consumer protection enforcement related to e-commerce and technology. In addition to taking action under the Restore Online Shoppers’ Confidence Act, Made in USA Labeling Rule, Mail Order Rule, and Telemarketing Sales Rules, among other rules, the FTC is also “exploring potential rulemaking that could crack down on junk fees, commercial surveillance and lax data security practices, and the use of reviews and endorsements,” Crowell’s Holly Melton, Helen Ogunyanwo, and Tiffany Aguiar noted early this year.
Since then, the FTC issued its final revised Guides Concerning the Use of Endorsements and Testimonials in Advertising in June, and announced a proposed rule, entitled “The Trade Regulation Rule on the Use of Consumer Reviews and Testimonials,” which aims to address deceptive or unfair consumer review and endorsement practices. All the while, the FTC also issued a Policy Statement on Biometric Information and Section 5 of the Federal Trade Commission Act in May, signaling what DLA Piper’s Andrew Serwin, James Sullivan, Raj Shah, Danny Tobey, Eric Roberts, and Matt Dhaiti call “an intent to hold companies” – including e-commerce retailers – “more accountable for their collection and use of consumers’ biometric information.”
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