“Shark Tank” APP FTC Case Provides Lessons to Early Stage Tech Companies

Many early stage technology-based companies with promising ideas may compromise substantiating their product’s performance claims with the belief that there is time for compliance down the road.   The FTC’s recent case against the marketers of two app-supported smartphone accessories, advertised to accurately measure consumers’ blood alcohol content, and who received funding on Shark Tank, highlights the risk in waiting.

Breathometer, Inc. and its founder Charles Yim were sued by the FTC for falsely advertising the accuracy of two app-supported breathalyzers that purportedly accurately measured a consumer’s blood alcohol level. The marketers claimed that products’ accuracy was proven by “government-lab grade testing.”   In addition, one of the product’s further claimed that it was a “law-enforcement grade product.”   The FTC charged that these claims were false and that the marketers lacked substantiation supporting the products’ accuracy.    

Under the terms of the FTC settlement, the company and its founder are barred from making future accuracy claims for a consumer breathalyzer product or any other device unless performance claims are supported by specific testing.   In addition, defendants must offer all prior purchasers a no-questions-asked refund.

The action is notable for a few reasons. Even though the product and the company were still relatively small (reportedly $5.1 million in sales according to the FTC’s complaint), FTC brought action. Not only will defendants need to deal with the obligations under the settlement, the case and the negative publicity presumably will impact their ability to successfully raise money and promote the breathalyzer product or other devices in the future.

The settlement is also interesting in that the FTC accepted a claims-based consumer redress program. Recent FTC settlements which include consumer redress typically require a disgorgement of available funds, whether or not the consumer was satisfied with the product.   Here, the FTC appears to have changed course, agreeing that only consumers who request it receive a refund, with a minimum payment of $1 million.

TAKE AWAYS: Tech companies need to be sure that their product claims are truthful and accurate based on competent and reliable support.   Supporting safety and performance claims should be part of the pre-launch phase; companies should not wait until the product has gained sufficient market share.   Additionally, the FTC’s acceptance of a claims-made refund policy may signal a change on the monetary component of future enforcement actions.

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