FTC’s Ban of “Biodegradable” Claims in the ECM Case Threatens an Expansion of FTC Authority (Case Comment)

By Peter A. Arhangelsky, Esq.

On October 19, 2015, the Federal Trade Commission issued its Final Decision and Order (“Decision”) against ECM Biofilms, an Ohio-based company that produces additives used in plastics manufacturing. See In re ECM Biofilms, FTC Docket No. 9358 (Oct. 19, 2015). A copy of ECM’s press release concerning that decision is available here. We earlier posted about that ruling here. The FTC’s Decision, if upheld, would substantially expand FTC authority in the consumer deception sphere. Consumers, industry regulatees, and legal scholars should take notice of the FTC’s outright rejection of scientific facts in favor of its “significant minority” doctrine. Below I outline the FTC’s unprecedented decision and explain its significance in prospective administrative cases.

Those in the plastics industry may have followed this case closely. Others might benefit from a short outline. The procedural history is complex and tortured, but can be summarized as follows. ECM is a small company based in Painesville, Ohio that developed an additive for use in plastics manufacturing. Its additive technology renders conventional plastics “biodegradable” when infused throughout the plastic via heat melding. When uniformly distributed within plastic, the additive technology substantially accelerates biodegradation, which provides a long-term environmental benefit. Conventional plastics otherwise require thousands of years to biodegrade (perhaps more). ECM’s laboratory tests showed that plastic products manufactured with the ECM additive substantially biodegraded when compared to untreated plastics. ECM showed that the biodegradation observed in its tests (i.e., the methane production) was sourced from the plastic itself and not the additive alone, thus proving that the additive rendered the conventional plastic “biodegradable.” ECM’s technology, which keeps plastics recyclable, became a cost-effective way to reduce the overall environmental burden of certain plastics without requiring manufacturers to dramatically change processes or equipment.

In 2014, the FTC charged ECM with false advertising, alleging that ECM could not prove that its technology worked. The central question became whether ECM could say plastics made with its additive were “biodegradable” if they required longer than five years to fully biodegrade in a landfill. According to FTC, the problem stemmed from consumer impression. Consumers know little about “biodegradation,” the FTC argued. And whenever certain consumers see the word “biodegradable” on packaging, they think the product should disappear within one year after disposal—at least, that was FTC’s position in 2014 (FTC later changed its position to “five years”). It therefore alleged that the naked word “biodegradable” was actually an implied claim that ECM’s plastics would fully biodegrade within one year. Because ECM’s packaging used the simple “biodegradable” claim, and ECM could not prove that its products biodegraded within one year in a landfill, the FTC charged ECM with a violation of the FTC Act.

ECM prevailed at the ALJ level. In perhaps the most favorable ALJ ruling in modern Commission history, the FTC’s Chief Administrative Law Judge D. Michael Chappell confirmed that, based on “competent and reliable” scientific testing, ECM had “demonstrat[ed] that plastics manufactured with the ECM Additive are anaerobically biodegradable.” See ALJ Dec. at 284. ECM’s testing proved that its additive accelerates the biodegradation of plastics, including those deposited in landfills. See ALJ Findings of Fact Nos. 917, 951 (finding that “Inclusion of the ECM Additive … contributes to an acceleration of biodegradation” and that “[p]eer-reviewed literatures supports [the finding] that the ECM additive contributes to an acceleration of biodegradation”).

Despite that evidence, the Commission nonetheless ruled against ECM, rejecting the ALJ’s well-reasoned 323 page decision and most of his 1,539 findings of fact, almost all of which contradicted the Commission’s allegations. The Commission’s final decision overturned or rejected all but several pages of the ALJ’s decision. The Commission held that scientific definitions and standards concerning “biodegradability” were irrelevant. The only relevant analysis was how consumers interpreted the word “biodegradable.” The Commission then entered an order that prohibits ECM from conveying truthful information about its beneficial technology. Under that Order, ECM cannot inform consumers that plastics made with its additive are “biodegradable” without substantial qualifications—language that presents a misleading impression of the science.

The FTC’s Final Order

The FTC’s decision in the ECM case now governs how and when any company can label its products “biodegradable.” The Order prevents the entire plastics additive industry from advertising unqualified biodegradable claims because the standards set by the Commission concerning “biodegradable” labeling are scientifically impossible to satisfy. The Commission will permit a “biodegradable” claim only if an advertiser can prove that the product fully and completely breaks down into elements in nature within five years after customary disposal. “Customary disposal” is generally regarded as “landfilling.” If the product does not degrade fully into elements within that time frame, it may not be called “biodegradable” without substantial qualifications explaining precisely when that product will degrade, or the “rate” by which it degrades.

The Commission has essentially doubled-down on its flawed “Green Guides” published in 2012, only instead of a “one year” rule for unqualified biodegradable claims, it adopted a new “five year” standard. The agency endorsed that position despite serious concerns with the scientific legitimacy of the Green Guide standards.

The Commission’s decision has many egregious procedural and scientific flaws—too many to address here. On the scientific issues concerning biodegradation, the Commission’s opinion flatly ignored almost all of the ALJ’s well-reasoned decision. The Commission concocted scientific analyses and opinions that were wholly unsupported by the underlying record, directly conflicted with the ALJ findings, and were against basic scientific principles. The Commission provided no explanation for many of those departures, and cited no applicable evidence that would justify same. It disregarded independent laboratory tests of ECM-containing plastics based on unfounded criticisms, all of which the ALJ soundly rejected or discredited. It did so without citing supportive expert testimony. The Commission also rejected uncontroverted expert opinion in favor of on its own scientific argument that was nowhere advanced by other experts in the case. It rejected principles of accelerated biodegradation testing and extrapolation of data despite the ALJ’s recognition that those principles were generally accepted. Perhaps most troubling, the Commission adopted the “five year” standard despite having overwhelming evidence that nothing biodegrades within five years under customary conditions of disposal (i.e., landfills).

Scientists with expertise in the field have already been quick to discredit the FTC’s position. Now the FTC must defend its erroneous standard before the United States Court of Appeals, a challenging task given the basic scientific flaws in the FTC’s opinion and self-contradictory standards in the final Order. To fully appreciate the gaps in FTC’s approach, consider the restrictions in the FTC’s Final Order reproduced below. To claim that a product is “biodegradable,” companies must now show:

[That] the entire item will completely decompose into elements found in nature within five (5) years after customary disposal; or

The representation [that a product is biodegradable] is clearly and prominently and in close proximity qualified by:

Either (1) the time to complete decomposition into elements found in nature; or (2) the rate and extent of decomposition into elements found in nature, provided that such qualification must disclose that the stated rate and extent of decomposition does not mean that the product or package will continue to decompose; and

See Final Order, at Part I.

First, as the FTC knows, nothing biodegrades in a landfill within five years. Not banana peels, paper, or other “rapidly degrading” materials like food waste or sewage. At trial, a representative of the Environmental Protection Agency (EPA)—the FTC’s own witness—explained that nothing would biodegrade within five years. All of the other experts agreed. So, at the outset, the Commission’s standard actually bars unqualified “biodegradable” claims completely, regardless of whether a product is actually “biodegradable” from a scientific perspective. In other words, if the product biodegrades in seven years—which would be an exceptional outcome given that even paper requires decades to decompose—a company cannot call that product “biodegradable” absent detailed qualifications.

Second, as the FTC also knows, no company can show with any precision the rate or extent of biodegradation in a landfill. Landfill environments are highly variable and heterogeneous. Conditions fluctuate substantially even within the same landfill from cell to cell. Moisture and temperature (two conditions needed for biodegradation) vary substantially within landfills and over time. No expert in the ECM case (on either side) could offer a generally accepted test or combination of tests that would measure the rate or extent of plastics biodegradation in landfills. Yet the “rate” requirement still appears in the Final Order.

Finally, the FTC also limited the type of testing that can support the required “qualifications,” and those testing standards are also deficient from a scientific perspective. The FTC explains that, “[f]or qualified degradability claims, any scientific technical protocol (or combination of protocols) substantiating such claims must both:”

Assure the entire product will (1) completely decompose into elements found in nature in any stated timeframe or; (2) decompose into elements found in nature at the rate and to the extent stated in the representation; and simulate the physical conditions found in the type of disposal facility or method stated in the representation …

See Final Order, Definitions.

Looking at those standards in conjunction with the above restrictions on claims, one can readily see that FTC erected an impossible barrier to “biodegradability” claims (qualified or unqualified). Those standards give the agency plenary discretion to prosecute any company making such claims.

For instance, we saw above that the “qualified” claim must indicate the “time to complete decomposition” or the “rate and extent of decomposition.” And now we see that any test to support the “rate and extent” must precisely “simulate the physical conditions” of a landfill. But we also know that nothing biodegrades in an actual landfill within five years. So if a test must precisely “simulate” those conditions, how could any test prove that a product fully biodegrades within five years? Under those conditions, proof of “full” or “complete” biodegradation is likely impossible.

Even rapidly degrading, natural materials are only expected to biodegrade perhaps ten percent (~10%) in a true “simulated” landfill environment over the course of a shortened laboratory test.[1] But the FTC now limits biodegradable disclosures strictly to the amount observed in the test. Under those limitations, we would advertise a banana peel to be just “10 percent biodegradable,” even though no one reasonably disputes that the material is completely biodegradable. Because the FTC rejected any form of “extrapolation” from test data, a product can only claim to be “fully biodegradable” if the actual test shows that it completely disappeared.

The Final Order Applied

Let’s look at how these restrictions actually play in the market. Say you have a product that biodegrades in about 20 years within a landfill. That would be an exceptional achievement, and one many scientists would consider an environmentally positive outcome. But to inform consumers that your product is fully “biodegradable,” you would need to test it to completion—the full 20 years. Never mind that such a test is impossible to perform in a laboratory over that lengthy period. Indeed, reading through the Commission’s Opinion and Order, there are no exceptions or conditions that would dodge this absurd result. So the FTC outright prohibits a “fully biodegradable” claim.

Instead, you would run your “simulated” landfill test for perhaps 1-2 years. The simulation would be under reduced moisture and temperature conditions, so the test would probably show some biodegradation, but nothing close to complete degradation. Perhaps your test shows 8% biodegradation over 300 days. The FTC now prohibits any suggestion “that the product or package will continue to decompose” after the test period. Therefore, the only viable advertising claim under the FTC standards would be: “This product biodegraded 8% in 2 years of testing.”

Consequently, consumers only receive the misleading impression that the product is just 8% biodegradable, even if that product is likely to fully biodegrade over a relatively short time in the landfill, and even if the product is, in fact, fully “biodegradable” under scientific principles. The FTC cannot trust consumers to understand the word “biodegradable,” but it apparently expects them to correctly interpret and apply that limited gas evolution test data in the market.

Because of the time limitations inherent to commercial testing, the experts in the ECM case agreed that “accelerated” testing and extrapolation of data was essential to determine whether a plastic is “intrinsically biodegradable.” If the material is intrinsically biodegradable, then it will biodegrade whenever conditions favor biodegradation. For instance, a piece of copy paper is biodegradable, and it will biodegrade when exposed to proper conditions. It will not, however, rapidly biodegrade while resting on an office desk, or in a very dry, cool landfill. But the material still remains “biodegradable” because biodegradability is an intrinsic characteristic of that material.

The FTC ALJ found that “accelerated” testing and “extrapolation” of data are two concepts widely used—even by the FTC’s own experts in the field of biodegradation. Scientists need to improve conditions of biodegradation in the laboratory so they can assess the ultimate or “intrinsic biodegradability” of the plastics tested. The ALJ therefore held that “intrinsic biodegradability” was the critical analysis. Conditions will differ from landfill to landfill, and so will rates of biodegradation. But to make a “biodegradable” claim, the most important analysis is simply whether the material is biodegradable. The Commission rejected that analysis completely, and claimed that intrinsic biodegradability was irrelevant. Instead, speed of biodegradation was the only important assessment for the Commission.

ECM has a technology that can transform an otherwise non-biodegradable (or very slowly degrading) plastic into one that degrades in a small fraction of the time. But, as it so happens, ECM’s plastics will not biodegrade within five years—nor will apple cores, banana peels, or copy paper. So ECM cannot make an unqualified “biodegradable” claim. Nor can it make a “qualified” biodegradable claim that accurately reflects the nature of ECM’s biodegradable plastics.

Constitutional and APA Implications

Why did this happen at the FTC level? Perhaps one explanation is politics. Or the need to avoid a cascade of litigation if the Green Guides were exposed. The Commissioners are politically appointed, non-elected government officials who enter office with agendas. One of those agendas was the revision of the FTC’s Green Guides in 2012. Those Green Guides first introduced the concept that no product could be designated “biodegradable” unless it disappeared within “one year” after disposal. That standard was discredited at the ALJ level in the ECM case—so thoroughly that Commissioner Ohlhausen later explained that “our own Green Guides are based on anemic, flawed evidence.” But to accept the ALJ’s decision would have required the Commission to dismantle those Green Guides. The Commission was unwilling to admit mistake, even after conceding in its majority opinion that the “determination about ECM’s implied claim related to the biodegradability of plastics may raise certain broader issues about the Commission’s Green Guides.” See FTC Op. at 33 n.45 (emphasis added). In other words, the Green Guides were wrong.

On the issues of “biodegradable” claims and “biodegradability” generally, ECM won at the ALJ level. The ALJ determined that ECM’s claim was supported by competent and reliable scientific evidence, and the word “biodegradable” did not convey an implied claim of biodegradability within five years. That ruling put the Commission in unchartered territory. In consumer deception cases spanning the last twenty years, no litigant had ever prevailed at the ALJ level to the degree that ECM succeeded. But the Commission has an impeccable record and a history of success to uphold.

In more than twenty years since the Kraft decision expanded FTC authority and the agency increased its administrative adjudications, no respondent has ever prevailed in an FTC consumer deception case at the administrative level. That point bears repeating: The Commission has never lost a case. Perhaps that point is unremarkable, considering that the Commission authorizes the investigation, approves the Complaint, and then reserves plenary authority to decide the facts de novo. The Commission is the investigator, charging officer, prosecutor, judge, and jury.

The FTC’s seemingly impossible success rate recently garnered attention from Congress in the antitrust sphere (where FTC had also enjoyed a standard of perfection for nineteen years). In November 2013, Chairman of the House Judiciary Antitrust Subcommittee Spencer Bachus (R-Ala.) commented on the FTC’s partisan process:

With this kind of record and an unbeaten streak that Perry Mason would envy, a company might wonder whether it is worth putting up a defense at all in a system in which the FTC brings a complaint, the case is tried before an administrative law judge at the FTC, and the FTC holds the authority to overturn a decision adverse to the agency.

Unsurprisingly, the Commission would not let ECM tarnish its record of perfection, even in the face of an unprecedented ALJ decision rebuking the Commission’s charges.

The ECM decision is not within a vacuum. When the ALJ ruled for ECM in January 2015, the Commission had already entered multiple consent orders against other parties selling “biodegradable” products. Those consent decrees spanned several decades, and included other companies selling additive technologies. None of those cases proceeded through a trial. And all such consent decrees were based on the flawed scientific theory memorialized in the FTC’s flawed Green Guides. So, by the time ECM challenged the scientifically flawed standards, the Commission had accrued a substantial, inescapable investment in its policies. Backtracking on those biodegradability standards would risk adverse action from prior litigants, potential difficulties enforcing earlier consent decrees, and possible challenges from industry concerning the Green Guides under APA standards.

But, those points notwithstanding, how could the Commission reach such an untenable scientific position in the ECM case despite the record evidence to the contrary? It simply rejected science.

The Commission determined that a “minority” of consumers think “biodegradable” claims imply complete biodegradation within five years. It did that through the use of Google Consumer Surveys, an untested platform that had never been used in any case, adjudication, or litigation—state, federal, administrative, or otherwise. Commissioner Ohlhausen explained that the consumer evidence used by the Commission was “flawed in methodology and application.” See Dissent at 3. The ALJ rejected that evidence in its totality, finding no redeeming qualities. Yet, still, the Commission relied on that data to find that somewhere between 11-20% of U.S. consumers think the term “biodegradable” promises a product that will disappear in a landfill within five years (the actual percentage was unstated in the Final Opinion).

The fact that those consumer impressions were scientifically impossible or unreasonable never mattered. At oral argument, when pressed on the scientific concerns, the FTC’s Chairwoman Ramirez wondered rhetorically:

But aren’t we concerned about what consumers think, so why should the scientific definition be dispositive?

Oral Argument at 18-19. Well, for one, because scientific truths matter under constitutional principles. A person is constitutionally guaranteed the right to convey truthful scientific information in commercial speech.

Nonetheless, the FTC imposed its arbitrary “five year” standard not based on science, but instead on the opinions of the consumer minority. At oral argument, the FTC prosecuting attorney also dismissed any concerns with scientific facts:

We certainly don’t hold consumers to a scientific definition. What makes a claim reasonable is whether a significant minority of consumers collectively hold a belief about a particular term.

Oral Argument at 56. Reread that statement to properly understand the FTC’s position in this case. The FTC is holding industry responsible for the misguided beliefs of a “minority of consumers,” and enacting legally binding standards applicable only to that minority position, simply because those consumers “collectively hold a belief about” biodegradation in landfills. In other words, if enough consumers share a belief, that belief becomes “reasonable” under FTC law regardless of scientific fact.

In data submitted to the Commission, many consumers in the “minority” said they expected a biodegradable product to fully biodegrade in mere “seconds” within a landfill. The Commission counted those responses when aggregating the “minority” position referenced above. According to the Commission, therefore, because 11-20 percent of consumers thought that a biodegradable product degrades fully within five years, ECM was held responsible for conveying that “implied claim” to consumers globally. And because ECM cannot support that “implied” five year claim (nor can anyone in industry), ECM violated law.

If that sounds problematic, also consider that recent polling in 2014 by the reputable National Science Foundation found that twenty six percent (26%) of Americans think the sun revolves around the earth, as opposed to the earth orbiting the sun. Are our classrooms nationwide now deceiving students? Are astronomers violating the FTC Act if they sell maps of our heliocentric solar system?

The tail-wag-the-dog approach to “implied claims” in the ECM case best illustrates the flaws in the FTC’s “significant minority” doctrine. The ECM case is a prime example of our need for constitutional limits on FTC practice. Commissioner Ohlhausen, cautioning the other Commissioners, stated that “[t]he FTC has never used extrinsic evidence of a ‘significant minority’ as a stand-alone basis to determine that a claim interpretation is reasonable.” See Dissent at 9 (emphasis added). Commissioner Ohlhausen wisely cautioned:

The [FTC’s] Deception Statement and FTC precedent show that an interpretation is not reasonable simply because it is held by a small number of consumers. Yet, the majority’s approach of finding reasonableness by assembling enough consumers to comprise a “significant minority” risks reducing the reasonableness test to a mere game of stacking percentages.

See Dissent at 10. “[That] fragile foundation cannot support the conclusion that the ‘average listener,’ ‘typical buyer,’ or ‘general populace’ understood ECM’s unqualified use of the word ‘biodegradable’ to mean that ECM Plastic would biodegrade within five years.” Id. at 11.

The Commission’s result-oriented approach in the ECM case is obviously foreboding for the biodegradable products industry. But that decision, if upheld, also threatens to broadly expand FTC authority beyond any reasonable boundaries. Imagine if FTC could hold a dietary supplement company responsible for “implied” disease claims solely because a small minority of consumers thought that the claim “good source of vitamin C” was really a cancer claim, or the word “healthy” related to heart disease absent any other context. What if Rand McNally could be sued for selling globes because a “significant minority” of consumers thought that the world was flat?

In the consumer deception sphere, the Federal Trade Commission’s sole activity is speech regulation. But the FTC does nothing that other competitors or private plaintiffs cannot do through private litigation (e.g., false advertising or Lanham Act claims). These are lawyers, often with no advanced scientific background or expertise, promulgating scientific standards that are unsupported and arbitrary. The Commission has no particularized scientific expertise. Unlike the FDA or EPA, it employs no army of scientific specialists. But the Commission still plays by different rules in litigation, which include substantial advantages bestowed simply because the FTC is a government agency. And because so many complex scientific issues eventually reach the consumer market through advertising claims, the FTC extends its authority to set policy in nearly all areas, from drugs to environmental plastics. The ECM case is just another example of unbridled administrative authority gone awry. In the end, perhaps Congress needs to revisit whether the FTC should be determining policy in so many areas where it has no demonstrable expertise.

For ECM the fight continues, now at the appellate level where it can finally present its case to a neutral arbiter. Because its technology works, ECM’s product should ultimately reach consumers. But the content of ECM’s message may be substantially truncated, as will the market for this type of product. To be sure, no constitutional basis permits the Commission to censor ECM’s truthful scientific information from consumers. No constitutional basis permits the Commission to redefine basic and undisputed scientific terminology based solely on erroneous beliefs of an uninformed subset of consumers. On those key issues (and others not here discussed), ECM hopes for a positive ruling from the Court of Appeals sometime within the next twenty-four months.

For more information about the ECM case, the next stage of litigation, or to offer support, please visit ECMDefense.com.

* Emord & Associates represented ECM Biofilms before the Federal Trade Commission and represents ECM in its appeal to the Circuit Court of Appeals.

[1] Soil incubation tests relied upon by the Commission in the FTC case showed that natural “rice hulls” biodegraded only about 10% after 300 days of incubation testing. See In re ECM, FTC No. 9358, Exhibit CCX-164 at 2588 (fig. 3).

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