Five months after the Federal Trade Commission (FTC) issued updated guidance regarding paid endorsements, it is clearer than ever that it plans to take increasing action against retailers for soliciting reviews on social media. The FTC’s plans were reinforced on October 15, 2015, when FTC Commissioner Julie Brill, in a keynote address at the Better Business Bureau’s National Advertising Division Annual Conference, identified paid endorsements as a current priority for the Commission.
As the FTC begins targeting endorsements more aggressively, private actions brought under state laws are also likely to arise. In light of increased FTC enforcement and a higher risk of private lawsuits, retailers should make sure that their in-house and outside marketing teams are complying with applicable guidelines.
The FTC’s Endorsement Guides
For years, the FTC has considered it deceptive for an advertiser to solicit a review or endorsement that may lead consumers to believe that the review is unbiased. The “Guides Concerning the Use of Endorsements and Testimonials in Advertising” (Guides), which have been in effect since 1980, provide:
When there exists a connection between the endorser and the seller of the advertised product that might materially affect the weight or credibility of the endorsement (i.e., the connection is not reasonably expected by the audience), such connection must be fully disclosed.
16 C.F.R. § 255.5. The Guides were revised in 2009 to include examples of how this rule may apply to consumer-generated media, such as blogs and online message boards. On May 29, 2015, the FTC issued an updated version of “What People Are Asking,” a FAQ document created after the Guides were last revised (hereinafter, FAQ’s). This update advises business on how to apply the FTC’s endorsement standards to evolving forms of digital marketing and promotion, many of which were in their infancy in 2009.
The new Guides explain that an endorsement should always disclose a “material connection” between the endorser and the advertiser, even where space is limited, when, “knowing about that gift or incentive would affect the weight or credibility your readers give to your recommendation.” At a minimum, sponsored posts on Twitter, Instagram, Facebook and Pinterest should be accompanied by #ad or #sponsored (which the FTC points out only require three and ten characters, respectively).
The Guides also make clear that a company can have a material relationship with anyone with an incentive to post about it, including: employees that discuss the company’s product on their personal social media pages; bloggers who receive free products (or money) to do reviews on their websites; reviewers who make money each time a visitor clicks an affiliate link on their website; and customers who post about a specific product in order to enter an advertiser’s contest. The disclosure requirement even applies where the reviewer agrees to do a review without agreeing that the review will be positive (and even where it is ultimately negative).
The FTC has explained that where it does take action, it will in most cases not focus on the person who offered the endorsement. Instead, it will target the company whose goods or services are being advertised, and their ad agencies and public relations firms.
Although the Guides and FAQ’s don’t have the force of law, they do offer guidance on practices that the FTC considers violating the FTC Act. There are no fines for violations of the FTC Act, but law enforcement actions can result in orders requiring the advertiser to give up money it received as a result of the deceptive endorsement.
To satisfy the Guides, the disclosure must be clear and conspicuous. This means that consumers must be able to see and understand the disclosure easily — they shouldn’t have to look for it. Bloggers cannot satisfy this requirement by posting a single disclosure on their home page stating that many of the products they review are given to them for free by advertisers. For video endorsements, the FTC advises that the disclosure should be in the video itself, not the video’s text description. And where it is likely that viewers may not
watch the video from start to finish, disclosures should be made throughout the video to ensure that they are viewed.
Despite the thoroughness of the FAQ’s, several questions still remain. First, how will the FTC decide whether a customer would care that the reviewer was given something for his or her review? For example, would a makeup company be liable if it gave a blogger a free lipstick to review? What if a chewing gum company offered free samples to reviewers?
Also, what kind of “endorsement” is material to consumers in the first place? For example, the FTC has noted that it doesn’t know how much stock a consumer puts into “likes” when deciding whether to patronize a business. (The FTC realizes that Facebook’s “like” feature does not allow consumers to make a disclosure, and says that businesses should not encourage endorsements using features that don’t allow for disclosures).
A broader question arises from the ambiguity of the FTC’s Section 5 authority over “unfair conduct.” For example, is it “unfair,” and thus actionable, for a company to ask customers to follow it on Facebook? What about if a company runs a contest on its social media channels that would require customers to participate in those channels in order to compete?
FTC Enforcement of the Guides
Since revising the Guides in 2009, the FTC has investigated a number of companies that have solicited positive reviews on social media or elsewhere:
- The FTC’s first investigation under the revised Guides was in 2010, when the FTC looked into Ann Taylor’s promotion in which it gave gifts to bloggers the company expected would promote its Loft division. The FTC ultimately declined to take action, given the small size of the promotion, the fact that it was the first of its kind from Ann Taylor, and because the retailer responded to the FTC investigation by creating a policy to notify bloggers that they must disclose any material connection to the company in the future.
- In August 2010, the FTC entered a settlement agreement with public relations agency Reverb Communications Inc., which agreed to remove any game reviews in the online iTunes stores that were posted by employees posing as ordinary consumers.
- In 2011, Legacy Learning Systems Inc., maker of at-home guitar DVDs, agreed to pay $250,000 as part of a settlement with the FTC. The company allegedly paid affiliates a commission to promote the DVDs in articles, blog posts, and other online editorial material.
- In December 2011, the FTC investigated gift certificates that were allegedly given to bloggers who promoted Hyundai Motor America’s then-upcoming Super Bowl ads. The FTC ultimately closed the investigation, noting that Hyundai had a policy in place calling the bloggers to disclose the compensation they received (Hyundai’s advertising firm had hired the bloggers).
- In April 2014, the FTC investigated a Cole Haan marketing campaign that asked customers to make Pinterest boards titled “Wandering Sole,” and to include Cole Haan shoes on that board; the retailer incentivized these boards by offering a $1,000 shopping spree for the best board, but did not require entries to label their boards as advertisements. Although the FTC ultimately decided not to pursue an enforcement action — largely because it had not previously publicly addressed whether entry into a contest is a form of material connection, or whether a pin on Pinterest may constitute an endorsement — it did issue a “closing letter” that warned Cole Haan that its campaign likely violated Section 5 of the FTC Act.
- In November 2014, advertising agency Deutsch LA settled with the FTC in response to the FTC’s allegations that Deutsch LA encouraged its employees to use their personal Twitter accounts to generate buzz about the Sony PlayStation Vita without requiring the employees to disclose their affiliations with Deutsch LA or Sony.
- In April 2015, the FTC approved a final consent order with AmeriFreight, an automobile shipment broker, based on the FTC’s claim that AmeriFreight compensated positive reviewers with discounts and other incentives, and then advertised its goods as being top-rated, based on those reviews.
- Most recently, on September 2, 2015, the FTC announced a proposed settlement with Machinima Inc. (which touts itself as “the most notorious purveyor and cultivator of fandom and gamer culture”) for paying “influencers” up to $30,000 each to post YouTube videos endorsing Microsoft’s Xbox One system and several games.
Thus far, the FTC has looked kindly on retailers that either had policies in place that called for reviewers to disclose any material relationship, or that ended the allegedly deceptive practice soon after it occurred. In the Machinima case, for example, the FTC decided not to take action against Microsoft, largely because Microsoft had in place a “robust” compliance program that included specific guidance relating to the Guides; the FTC’s closing letter to Microsoft noted that company offered training on the Guides to its personnel, vendors and the employees of its advertising agency that have managed the relationship between Microsoft and Machinima.
Developing a compliance program could therefore have a double benefit for companies looking to protect themselves. First, it would reduce the likelihood that the company would violate the Guides in the first place. Second, a strong program may compel the FTC not to take action, in the case that a violation ever does occur.
Risk of Private Action
Although private individuals cannot bring lawsuits under the FTC Act, retailers may also be subject to lawsuits under state laws or the Lanham Act for the same practices prohibited by the Guides.
As the FTC continues to shine a light on this issue, consumers may be tempted to bring false advertising suits against retailers that fail to make adequate disclosures. This trend is currently taking place in the area of deceptive pricing litigation, where the courts have found the FTC’s “Guides Against Deceptive Pricing” to be persuasive.
So far, the civil actions in this area have targeted companies or individuals that sell online review services, or competitors who use those services and thus benefit from allegedly unfair advertising. On October 16, 2015, for example, Amazon filed a lawsuit in Washington Superior Court against more than 1,100 individuals who have allegedly posted fake product reviews on the site (typically for $5 per review). This is the first suit to target individual reviewers, rather than the websites where these reviewers can be hired. This lawsuit was brought pursuant to Washington’s unfair competition law, and also claims breach of contract based on Amazon’s terms of service. Amazon filed a similar suit in April, also in Washington, against several websites that sell fake reviews.
“Fake review” lawsuits have also been brought against retailers that benefit from solicited reviews. In the last year or so, several lawsuits have been filed against Regal Assets, LLC and its affiliates for its “Affiliate Program,” which, the lawsuits allege, induce people to endorse Regal’s products and services, and to disparage those of its competitors. On April 21, 2015, the Central District denied Regal’s motion to dismiss the claims brought pursuant to California’s False Advertising Law and Unfair Competition Law. That case settled and was voluntarily dismissed pursuant to a settlement agreement in July.
Lawsuits targeting false review practices have also been brought outside of California and Washington, in states including Massachusetts, Texas, New York, Pennsylvania and Delaware. In 2013, the New York attorney general investigated and fined 19 companies for procuring or posting false reviews on websites such as Yelp, Google Local and City Search; together, the companies paid over $350,000.
Retailers should also keep in mind that several social media platforms also impose requirements related to endorsements. Facebook, Instagram, YouTube, Pinterest and Twitter all require users to comply with all applicable laws and regulations, including those related to false advertising.
Beyond this general requirement that the law be followed, however, the extent of restrictions on endorsements varies by company. In response to the FTC’s increased action, online video game blog site Twitch updated its rules last fall to require reviewers to reveal when they’ve been paid to post a review of a game. Other companies have taken a less firm stance regarding disclosures on endorsed posts. Twitter, for example, tells users that while they “might want to consider” tagging their contest with the company name or #contest, this is not required.
Facebook’s Advertising Policies specifically prohibit the use of deceptive, false, or misleading content, including deceptive claims, offers or business practices. Facebook allows businesses to administer promotions using Pages or within apps, but prohibits companies from calling on users to participate in a promotion via their personal timelines or friend connections (“share on your Timeline to enter,” “share on your friend’s Timeline to get additional entries,” and “tag your friends in this post to enter” are not permitted).
Like Facebook, Pinterest prohibits users from posting content that is fraudulent or deceptive. Pinterest also has a specific rule against incentivizing users to take actions on Pinterest such as Pinning or following. Its terms explain: “We want people to Pin authentically. We believe that compensating people for doing specific things on Pinterest — like paying them to Pin — can promote inauthentic behavior and create spam-like outcomes.” While Pinterest allows a business to pay a guest blogger to curate a board, it prohibits the business from hiring “BuyMorePins.com” to artificially inflate the popularity of the business’s content. Pinterest also requires anyone using the site for commercial purposes to create a business account and agree to Pinterest’s Business Terms of Service.
YouTube requires users to identify any video that contains sponsored content or product placement by checking a box at the time of posting the video. Videos that contain any endorsement or product placement are subject to YouTube’s Ads Policy. YouTube specifically prohibits certain kinds of advertisements, such as embedding a commercial into the beginning of a video post.
Given the risk of FTC enforcement or expensive litigation, retailers should ensure that their marketing teams and external marketing companies are aware of and complying with the Guides. At a minimum, advertisers should require any endorsers to disclose whether the endorsement was sponsored or otherwise incentivized. Companies considering a social media marketing campaign should consult with counsel with expertise in this area to ensure that the campaign will not put them at risk.