The Federal Trade Commission (FTC) is regulating the use of blogs and other consumer-generated new media content in marketing. Revised advertising rules issued by the agency broadly extend the concept of endorsements and testimonials. Under the new guidance, the FTC will treat the loose new social media marketing relationships that are increasingly used in place of traditional radio, television advertising and paid endorsements as sponsored advertising. These rules fundamentally change the legal and regulatory landscape for Web 2.0 marketing and should be studied carefully by enterprises that use these channels.
On Oct. 5, the FTC issued its final revised Guides Concerning the Use of Endorsements and Testimonials in Advertising, the first rewrite of the Guides since 1980. The revised rules will go into effect Dec. 1. Under the new guidance, companies that make payments or give free products to bloggers or others to generate positive buzz or favorable reviews for their products will now have to monitor the statements and claims made about the products closely and ensure that these relationships, if material, are clearly and conspicuously disclosed. If companies fail to do so, they will face liability for unfair or deceptive advertising practices under Section 5 of the FTC Act, even if they do not control what the bloggers say (or, indeed, whether they say anything). The bloggers themselves will face similar liability for false or misleading statements and nondisclosure of material connections. Marketers are also responsible for advising bloggers of their responsibilities.
While the Guides are not actually binding law, they serve as administrative interpretations of the law, issued to provide guidance on what the FTC considers deceptive behavior. This does not, however, mean compliance with the new social media marketing guidelines is optional. Civil penalties of up to $11,000 per violation are possible. (In addition to the regulation of online marketing, which is the focus of this article, the Guides also include other significant changes, such as a new requirement that testimonials that do not describe typical consumer experiences must include clear and conspicuous disclosures of the results consumers can generally expect to achieve by using an advertised product.)
By its nature, online marketing encompasses a variety of informal and fuzzy relationships that fall within the purview of the FTC's new rules, even though they are qualitatively different from traditional uses of endorsements in advertising. Consider the following examples:
- An online marketer might provide unsolicited samples of its products to members of a blogging network who sign up so they can review those products on their sites.
- An online marketer might supply a product, such as a video game, to a particularly well-read blogger who is regarded as an expert or authority in his area in the hope of gaining a positive review.
- An online marketer might institute a word-of-mouth or viral marketing campaign where participants receive something of value (such as a payment or an entry in a sweepstakes) to email friends and followers or send out tweets about the marketer's product.
All of these social media marketing relationships may now be characterized by the FTC "as endorser-advertiser relationships," wherein both the "endorser" (i.e., the person generating the content about the product) and the "advertiser" (the marketer) must ensure the absence of false or misleading statements. Even more critical is the "clear and conspicuous" disclosure of connections that are not reasonably expected by the target audience and are likely to influence purchasers' assessment of the credibility of the statements.
When is a favorable post an "endorsement?"
The Guides define an "endorsement" as an advertising message that consumers will likely believe reflects the opinions, beliefs, findings or experience of a party other than the sponsoring advertiser. This is true whether the endorser's statements are the same as or different from the sponsoring advertiser's.
FTC compliance, then, requires a determination of the level of incentive that turns blogger commentary into a compensated "endorsement," thereby rendering both the blogger and the advertiser potentially liable for failure to disclose material connections and for deceptive statements. The FTC notes:
[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 Guides 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 or she 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) will also likely be viewed as giving sponsored messages.
Three scenarios where online marketing is now subject to regulation:
Example No. 1: The Guides posit a consumer who purchases a new brand of dog food and reviews it favorably on her personal blog as an example. If she purchases the dog food with her own money or gets it for free because the store routinely tracks her purchases and generates a coupon for a free trial bag of the new dog food, there is no endorsement. However, if the consumer obtained the dog food as a result of joining a network marketing program under which she periodically receives various products to review if she wants, her positive review will be considered an endorsement.
Example No. 2: A college student who has earned a reputation as a video game expert receives, as he has in the past, a copy of a newly released video gaming system, along with a request from the manufacturer to write about it on his blog. The student plays the game and gives it a favorable review. This review is also an endorsement. The FTC notes, however, that in this scenario the review is disseminated using a form of consumer-generated media in which his relationship to the advertiser is not inherently obvious. Given the value of the gaming system, the blogger should clearly and conspicuously disclose that he received it free of charge. Furthermore, states the revised rules, "[t]he manufacturer should advise him 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 Guides' additional rules on the use of expert endorsements in advertising would also apply here.)
Example No. 3: A skin care product manufacturer participates in a blog advertising service that matches up advertisers with reviewers. An online marketer, working on behalf of the manufacturer, requests that a blogger try out its new body lotion and write a review. Subsequently, the blogger, on her own initiative and without any direction from the manufacturer, makes an unsubstantiated recommendation that the product cures eczema. Both the manufacturer and the blogger will be liable both for the unsubstantiated claim and any failure to disclose that the blogger is being paid.
The FTC has explained that the purpose of the new rules is to treat social media marketing in the same manner as traditional journalistic and advertising outlets. As a practical matter, however, many businesses treat these channels differently and will have to move quickly to implement the necessary monitoring and enforcement mechanisms.
For example, it is not uncommon for a business to buy a sponsorship from a nonprofit organization where one of the benefits of the sponsorship is a favorable mention on the organization's blog. In many cases, that sponsorship agreement is spotty and does not include detailed restrictions on what the organization can and cannot say about the sponsor's products. Under current oversight regimes, it's doubtful that anyone at the sponsoring organization is giving the nonprofit organization's Web 2.0 chatter a compliance review.
Online marketing that engages bloggers and leverages the potential of social media can support a spontaneous and unforced style of commentary that has greater authenticity for cynical, tech-savvy consumers. In response to such comments, however, the FTC has countered that its rules are designed precisely to protect consumers' ability to rely on this quality of the blogosphere in making purchasing decisions. Liability depends, then, not on the existence of direct control over bloggers, but on whether "the advertiser initiated the process that led to [the] endorsements being made -- e.g., by providing products to well-known bloggers or to endorsers enrolled in word-of-mouth marketing programs …."
In part 2, learn how to design an effective social media marketing policy for FTC compliance with the new rules.
Andrew M. Baer is an attorney and founder of Baer Business Law LLC, a Philadelphia firm focused on providing clients with cost-efficient business counseling and transactional assistance, particularly in the areas of technology and intellectual property law. Baer can be contacted at firstname.lastname@example.org or @BaerBizLaw on Twitter.