Interpreting FTC's New Endorsement Guidelines

[Editor's Note: Many celebrities serve as product endorsers in advertisements. But outside these traditional endorsement settings, some celebrities tout goods during press interviews without disclosing that the product companies are compensating the celebrities for the accolades. In part to address this concern, for the first time since the 1980s the Federal Trade Commission (FTC) recently overhauled its guidelines and liability parameters for product endorsements and testimonials. The new guidelines also address the promotion of products through Internet, social networking and other new media. These updated guidelines, which took effect Dec. 1, also cover the use of consumer endorsements and reviews. Entertainment companies that promote products ' and celebrities who blog and tweet ' through new media should consider how these guidelines may affect their marketing practices.]

Increasingly, marketing is occurring virally, particularly via the Internet, mobile and other evolving media, through word-of-mouth (WOM), including by means of the use of product sampling and consumer reviews, comments and recommendations. Product sampling involves distributing products to influential new-media users/authors in the hope that they will positively discuss the product with their followers and friends. Such so-called “recommendation marketing,” which may or may not encompass product sampling, is well suited for consumer-driven social media and can take many forms ' ranging from paying or encouraging an influencer to write a blog or post or tweet about a brand.

Recommendation marketing also includes: motivating consumers to initiate e-mails that send product listings or other information to friends via “send-to-a-friend” e-mail tools made available to consumers by online merchants or marketers (notwithstanding the FTC recent guidance on send-to-a-friend campaigns, see, FTC CAN SPAM FIND Rule, 16 CFR Part 316, Federal Register, Vol. 73, No. 99, pp 29654-29680 (May 21, 2008), this technique has spawned several recent lawsuits, one of which is being defended by the author and his firm); displaying a user's name and/or picture in connection with an ad that is directed to the user's friends on a social networking site (this practice is among the types of social media advertising that formed the basis of a lawsuit filed against Facebook in California in August 2009. Melkonian v. Facebook Inc., CA Superior Court, Orange County, 30-2009-00293755); and eliciting product reviews on retail Web sites.

In one of its more insidious forms, recommendation marketing can involve a marketer paying Internet users to post disingenuous positive product reviews at online retailers or “astroturfing,” where advertisers or their agents pretend to be unaffiliated consumers and spread misleading or false information in furtherance of the advertiser's objectives. (The Electronic Retailing Self-Regulation Program of the National Advertising Review Counsel, a self-regulatory board, brought actions in 2009 against advertisers who ran seemingly objective informational blogs about topics such as diet and beauty and used them to promote their own products in seemingly objective editorial reviews. See, Case #219, Urban Nutrition LLC (WeKnowDiets.com); and Case #222 E-Commerce Solutions Inc. (Vibrant White Tooth Whitener).)

For example, last January it was widely reported in the media that the lead sales rep of networking-technology manufacturer Belkin was allegedly covertly paying consumers to post positive reviews on Amazon.com and Newegg.com, without regard to whether they used or liked the product, and to mark negative reviews posted by others as “not helpful,” and was further counseling them on how to do so and to keep the connection to the company a secret (see, Callari, “Top Ten Branded Social Media Nightmares,” http://investorspot.com/articles/top_ten_branded_social_media_nightmares_30874).

The New Rules

The FTC, which regulates both online and traditional advertising, has been concerned with the growth of such activities and, after much public comment by industry to its proposals, recently promulgated new guidelines that can impact both rogue and good-intentioned evolving media marketers. The FTC's new guidance makes it clear that companies that are involved in encouraging a message about their products or services in non-traditional media, such that they are essentially sponsoring the messages, even if by consumers or celebrities, will be responsible as the advertiser for the message. Although the FTC acknowledges the limited ability in social and other evolving media to clear and control these types of messages, it places the burden of the risk on both the sponsor and the speaker. The FTC notes that it has prosecutorial discretion and would likely target the more egregious cases and repeat offenders; however, it also instructs that it expects advertisers to have rules requiring disclosure of material connections and prohibiting the speakers not to make unsubstantiated or misleading claims, to train them in these requirements and to monitor them and take appropriate corrective actions if not followed.

Advertisers may be surprised at how little consideration or connection, such as providing free product for a blogger to review, may be enough to trigger a company's responsibility for what the blogger says about the product. The Commission does note, in '255.0 of its Guides, that its finding of deception will depend on specific factual circumstances, suggesting that reasonable efforts and consumer perception based on Netiquette may shape enforcement decisions. The FTC has also provided additional examples and commentary to elucidate when it would be more or less likely to deem a company a sponsor and a consumer-generated social media message an endorsement for which it is responsible.

The Prior and New Guides

In January 1980, the FTC published its Guides Concerning Use of Endorsements and Testimonials in Advertising. Although intended as guidance for self-regulation, failure of marketers to comply with the Guides is grounds for the FTC to bring enforcement actions under its authority to regulate “unfair or deceptive acts or practices in or affecting commerce.” 15 U.S.C. '45(a)(1). In Jan. 2007, the FTC began the process of reviewing and revising the Guides and, in Nov. 2008, published a proposed version of the new Guides (Proposed Guides). The Proposed Guides were in part a response to a growing trend among evolving media marketers to get consumers more involved with brands and their promotion, including by means of social media.

The FTC solicited public comment to the Proposed Guides, the deadline for which ended on March 2, 2009. Seventeen comments were submitted, most from major advertising-industry organizations. On Oct. 2, 2009, the FTC issued notice of the final revised Guides (“New Guides”), making some modifications and additions to the Proposed Guides regarding evolving media and providing commentary on the public comments that had been filed. The New Guides, which took effect on Dec. 1, call for, among other things, advertisers to institute social and evolving media policies and procedures by that date. [Editor's Note: The FTC's announcement of the New Guides, with links to the Federal Register notice and text of the Guides, is available at www.ftc.gov/opa/2009/10/endortest.shtm.]

Thus advertisers are advised to enact policies and practices regarding social media that explain, and assist in the observance of, the principles of the New Guides, monitor for compliance and, where possible, require corrective action for non-compliance. There are myriad other issues, such as: avoiding vicarious or contributory copyright or trademark infringement; blurring of advertising and editorial; CAN SPAM (the Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003) and the regulations thereunder that create a federal scheme for commercial e-mail, while states have limited retained authority to regulate e-mail in the area of fraud and computer crime; regulation of commercial e-mail; TCPA (the Telephone Consumer Protection Act) and related regulations, which impose requirements on marketing to mobile devices; and the MMA (the Mobile Marketing Association) that provides self-regulatory best practices regarding mobile marketing and updated its U.S. Consumer Best Practices Guidelines on July 1, 2009.

There is also government regulation of mobile marketing, privacy and data security regulation, constraints on marketing to children and sweepstakes and lottery laws, that should also be incorporated into such policies and practices. (See, Friel and Derwin-Weiss, “As Technologies Evolve, Web Sites Play Compliance Catch-Up,” Daily Journal (March 10, 2009) and “Evolving Media Tools Require Companies to Navigate Changing Waters,” Daily Journal (March 17, 2009) (both republished as “Evolving Media Tools,” M/E Insight ' The Journal of the Association of Media and Entertainment Counsel (July 2009); and Friel and Derwin-Weiss, “So You Want to Run a Promotion,” The Corporate Counselor (May 2009). Articles available at www.wildman.com/index.cfm?fa=pubs.home&type=articles).

Purpose and General Considerations

A significant revision to the introductory sections of the Guides is the addition of '255.1(d), which the FTC notes was added to “explicitly recogniz[e] two principles that the FTC's law enforcement activities have already made clear. The first is that advertisers are subject to liability for false or unsubstantiated statements made through endorsements, or for failing for disclose material connections between themselves and their endorsers. The second is that endorsers may also be subject to liability for their statements.”

The Commission added a New Example 5, specifically to illustrate the application of these enforcement principles to evolving media. It involves an advertiser that participates in a blog-promotion service. The service matches up its customers' products with bloggers, who write about the products on their personal sites. The advertiser gives a blogger a new body lotion and asks that she write about it on her blog. This connection is seen by the FTC as enough to create advertiser responsibility for the blogger's posts, as the FTC illustrates:

Although the advertiser does not make any specific claims about the lotion's ability to cure skin conditions and the blogger does not ask the advertiser whether there is substantiation for the claim, in her review the blogger writes that the lotion cures eczema and recommends the product to her [readers]. Because of this posting the advertiser is subject to liability for false or unsubstantiated statements made through the blogger's endorsement. The blogger is also subject to liability for misleading or unsubstantiated representations made in the course of her endorsement. The blogger is also liable if she fails to disclose clearly and conspicuously that she is being paid for her services.

This example should greatly concern any marketer engaging in sampling or recommendation marketing that is not tightly controlled. The final paragraph of New Example 5 suggests some ways sampling and engagement of consumers via evolving media channels should, in the FTC's opinion, be conducted: “In order to limit its potential liability, the advertiser should ensure that the advertising service provides guidance and training to its bloggers concerning the need to ensure that statements they make are truthful and substantiated. The advertiser should also monitor bloggers who are being paid to promote its products and take steps necessary to halt the continued publication of deceptive representations when they are discovered.” That epilogue, however, is not a safe-harbor for advertisers who implement education and monitoring programs. Rather, the FTC will look at the totality of the circumstances in determining whether to bring an action.

Further, in its responses to the comments to the Proposed Rules, the Commission outlined a “construct for analyzing whether or not consumer-generated content falls within the definition of and endorsement ' such that the speaker's comment can be considered 'sponsored' and therefor[sic] an 'advertising message.'” The FTC will ask: “In disseminating positive statements about a product or service, is the speaker: 1) acting solely independently, in which case there is no endorsement; or 2) acting on behalf of the advertiser or its agent, such that the speaker's statement is an 'endorsement' that is part of an overall marketing campaign?”

To make this determination, the FTC will inquire, without limitation as to:

• Whether the speaker is compensated by the advertiser or its agent;
• Whether the product or service in question was provided for free by the advertiser;
• The terms of any agreement;
• The language of the relationship;
• The previous receipt of products or services from the same or similar advertisers;
• The likelihood of future receipt of such products or services; and
• The value of the items or services received.

The FTC's commentary suggests a “spectrum,” where a blogger's onetime receipt of a low-value product would likely not be treated as an endorsement, but if the product had a high value or the blogger routinely was sent product to review, sponsorship would likely be found. And if there is enough to deem sponsorship, '[a]n advertiser's lack of control over the specific statement made via these new forms of consumer-generated media would not automatically disqualify that statement from being deemed an 'endorsement' within the meaning of the Guides.”

The Proposed Guides and the final New Guides also clarified liability for celebrity spokespersons if the endorser makes statements, even if scripted and contractually required to be read, that are contrary to what he or she personally “observed with his own eyes, not for things outside of his control” or that he should know are exceptional or unlikely.