New FTC Blogging Rules Pose Risks for Corporate Advertisers

Following more than a year of public comments, the Federal Trade Commission in December enacted changes to its formal guidance[1] to advertisers as to the steps necessary to keep their endorsement and testimonial ads from running afoul of the Federal Trade Commission Act[2] and its potential consumer protection liabilities.

Many of the changes were required to address issues as to endorsement and testimonial ads in new media such as blogs and Twitter, which did not exist three decades ago, when the Guidance was last addressed. The FTC therefore determined that it was necessary to update the Guidance to address the impact of new media, including the fact that new media’s increasing democratization of publishing access may increase public access and reliance on “expert” opinion while decreasing the transparency of the identity and sponsorship of the “expert.” The most significant of the changes is the new requirement that endorsements or testimonials in new media must disclose the relationship between the endorser and the advertiser.

Interestingly, many of the news reports and analysis about the updated Guidance have focused, to a large extent, on the potential liability of bloggers who violate the new rules.[3] The FTC has indicated, however, that it is unlikely to actually investigate individual bloggers who might receive a free meal or product to review but fail to disclose that, given its limited resources and the large (and growing) pool of bloggers.[4] This is not to suggest that bloggers should ignore the new rules or that it will be business as usual, but bloggers are not the real focus of the updated Guidance.

The most significant and practical issue raised by the updated Guidance is the liability risk corporate advertisers now face when relying on or working through social media, such as blogs in word of mouth marketing campaigns.[5] This is an important potential concern: the Word of Mouth Marketing Association believes that spending on social media marketing will reach $3.7 billion by next year, up from $1.35 billion in 2007.[6]

This column discusses the key changes to the Guidance relating to blogging and social media marketing and a variety of steps corporations should consider taking to meet the FTC’s requirements.

The FTC’s Guidance, updated for the first time since 1980, addresses the application of Section 5 of the FTC Act to the use of endorsements and testimonials in advertising. The Guidance sets forth the general principles that the FTC uses in evaluating endorsements and testimonials, together with examples illustrating the application of these principles.

The Guidance defines an endorsement as any advertising message that consumers are likely to believe reflects the opinions, beliefs, findings, or experiences of a party other than the sponsoring advertiser, even if the views expressed by that party are identical to those of the sponsoring advertiser. The Guidance defines “endorsements” by focusing on the message consumers take from the speech at issue. The party whose opinions, beliefs, findings or experience the message appears to reflect is known as the “endorser.”[7]

One question that is complicated by social media applications is how to distinguish between communications that are considered endorsements within the meaning of the Guidance and those that are not. Certainly, not everyone who reviews or comments about a product, even expressing an opinion via Twitter or on a blog is an endorser under the Guidance. Rather, in analyzing statements made via these new media, the fundamental question is whether, viewed objectively, the relationship between the advertiser and the speaker is such that the speaker’s statement can be considered “sponsored” by the advertiser and therefore an “advertising message.” In other words, 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?

The facts and circumstances that will determine the answer to this question are extremely varied, but include: 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 length of the relationship; the previous receipt of products or services from the same or similar advertisers, or the likelihood of future receipt of such products or services; and the value of the items or services received.

‘Endorsement’

An 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 Guidance. Simply put, the issue is whether the statement can be considered “sponsored.”

Thus, a consumer who purchases a product with her own money and praises it on a personal blog or on an message board will not be deemed to be providing an endorsement. In contrast, postings by a blogger who is paid to speak about an advertiser’s product will be covered by the Guidance regardless of whether the blogger is paid directly by the marketer itself or by a third party on behalf of the marketer.

According to the FTC, a blogger could receive merchandise from a marketer with a request to review it, but with no compensation paid other than the value of the product itself. In this situation, whether or not any positive statement the blogger posts would be deemed an “endorsement” within the meaning of the Guidance would depend on, among other things, the value of that product, and on whether the blogger routinely receives such requests.

If that blogger frequently receives products from manufacturers because he is known to have wide readership within a particular demographic group that is the manufacturers’ target market, the blogger’s statements are likely to be deemed to be “endorsements,” as are postings by participants in network marketing programs.

Similarly, consumers who join word of mouth marketing programs that periodically provide them products to review publicly (as opposed to simply giving feedback to the advertiser) also will likely be viewed as giving sponsored messages.

An example provided by the FTC supposes that a consumer, who regularly purchases a particular brand of dog food, decides one day to purchase a new, more expensive brand made by the same manufacturer. The consumer writes in her personal blog that the change in diet has made her dog’s fur noticeably softer and shinier, and that in her opinion, the new food definitely is worth the extra money. According to the FTC, this posting would not be deemed an endorsement under the Guidance because of the lack of any relationship between the speaker and the manufacturer.

The FTC also says that the consumer’s blog posting would not be deemed an endorsement even if the consumer got the dog food for free because the store routinely tracked her purchases and its computer generated a coupon for a free trial bag of this new brand. The FTC reaches this conclusion given the absence of a relationship between the speaker and the manufacturer or other factors supporting the conclusion that the consumer is acting on behalf of the manufacturer (i.e., that her statement is “sponsored”).

However, now assume the consumer joins a network marketing program under which she periodically receives various products about which she can write reviews if she wants to. If she receives a free bag of the dog food through this program, her positive review would be considered an endorsement. That is because, in this fact pattern, there is an ongoing relationship between the consumer and a network marketing program, and economic gain by the consumer based on the stream of products, which makes the blog posting an endorsement within the meaning of the Guidance.

Honest Opinions

Endorsements must reflect the honest opinions, findings, beliefs or experience of the endorser. Moreover, advertisers are subject to liability for false or unsubstantiated statements made through endorsements, or for failing to disclose material connections between themselves and their endorsers.

So, for example, imagine that a skin care products advertiser participates in a blog advertising service that matches up advertisers with bloggers who will promote the advertiser’s products on their personal blogs. The advertiser requests that a blogger try a new body lotion and write a review of the product on her blog. 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 who suffer from this condition. According to the updated Guidance, the advertiser is subject to liability for misleading or unsubstantiated representations made through the blogger’s endorsement.

The FTC recognizes that because the advertiser does not disseminate the endorsements made using these new consumer-generated media, it does not have complete control over the contents of those statements. Nonetheless, if the advertiser initiated the process that led to these endorsements being made, e.g., by providing products to well-known bloggers or to endorsers enrolled in word of mouth marketing programs – it potentially is liable for misleading statements made by those consumers.

Imposing liability in these circumstances hinges on the determination that the advertiser chose to sponsor the consumer-generated content such that it has established an endorser- sponsor relationship. In the FTC’s opinion, it is foreseeable that an endorser may exaggerate the benefits of a free product or fail to disclose a material relationship where one exists. In employing this means of marketing, the FTC believes that the advertiser has assumed the risk that an endorser may fail to disclose a material connection or misrepresent a product, and the potential liability that accompanies that risk.

The FTC indicates, however, that in the exercise of its prosecutorial discretion it would consider the advertiser’s efforts to advise these endorsers of their responsibilities and to monitor their online behavior in determining what action, if any, would be warranted.

Importantly, the skin care products example does not mean that an advertiser will be held liable for any statement about its product made by any blogger, regardless of whether there is any relationship between the two. However, according to the FTC, when an advertiser hires a blog advertising agency for the purpose of promoting its products – as posited by the specific facts set forth in this example – the FTC believes it is reasonable to hold the advertiser responsible for communicating approved claims to the service (which, in turn, would be responsible for communicating those claims to the blogger).

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.

Disclosure of Connections

The Guidance provides that 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.

For example, suppose a college student who has earned a reputation as a video game expert maintains a personal blog where he posts entries about his gaming experiences, and that readers of his blog frequently seek his opinions about video game hardware and software. Suppose also that, as it has done in the past, the manufacturer of a newly released video game system sends the student a free copy of the system and asks him to write about it on his blog.

The student tests the new gaming system and writes a favorable review. Because his review is disseminated via a form of consumer-generated media in which his relationship to the advertiser is not inherently obvious, readers are unlikely to know that he has received the video game system free of charge in exchange for his review of the product, and given the value of the video game system, this fact likely would materially affect the credibility they attach to his endorsement.

Accordingly, under the Guidance, the blogger should clearly and conspicuously disclose that he received the gaming system free of charge. Toward that end, the FTC has indicated that the manufacturer should advise the blogger at the time it provides the gaming system that this connection should be disclosed, and it should have procedures in place to try to monitor his postings for compliance.

The updated Guidance also has another example of required disclosure involving social media. Suppose an online message board designated for discussions of new music download technology is frequented by MP3 player enthusiasts, and that they exchange information about new products, utilities, and the functionality of numerous playback devices. Suppose, too, that unbeknownst to the message board community, an employee of a leading playback device manufacturer has been posting messages on the discussion board promoting the manufacturer’s product.

Knowledge of this poster’s employment likely would affect the weight or credibility of her endorsement. Therefore, the FTC says, the poster should clearly and conspicuously disclose her relationship to the manufacturer to members and readers of the message board. Moreover, with respect to this hypothetical, the FTC has indicated that if the employer has instituted policies and practices concerning “social media participation” by its employees, those procedures would warrant consideration in its decision as to whether law enforcement action would be appropriate.

Conclusion

Corporations that engage in social media marketing should pay careful attention to the new Guidance. Developing policies and informing their employees and business associates of the practices that they adopt in accordance with the Guidance is the best way of limiting potential liability.

NOTES:
[1] See http://www.ftc.gov/os/2009/10/091005endorsementguidesfnnotice.pdf.
[2] 15 U.S.C. §§ 41-58.
[3] See, e.g., Declan McCullagh, “FTC Blogging Rules Draw Online Protests,” available at http://www.cbsnews.com/blogs/2009/10/08/taking_liberties/entry5372890.shtml.
[4] See, e.g., Matt Hathaway, “Where does blogging end and promotion begin?,” St. Louis Post-Dispatch (Jan. 17, 2010), available at http://www.charlotteobserver.com/business/story/1183577.html.
[5] The Word of Mouth Marketing Association defines “word of mouth marketing” as: “Giving people a reason to talk about your products and services, and making it easier for that conversation to take place. It is the art and science of building active, mutually beneficial consumer-to-consumer and consumer-to-marketer communications.” See http://womma.org/womm101.
[6] See David Gelles, “Advertisers brace for online viral marketing curbs,” available at http://www.ft.com/cms/s/0/9a58f44c-1fae-11de-a1df-00144feabdc0.html?nclick_check=1.
[7] The FTC treats endorsements and testimonials identically.

Reprinted with permission from the February 16, 2010 issue of the New York Law Journal. Copyright ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.