by Ann M. Begley, Lawrence C. Lanpher and Carolina M. Heavner
The Federal Trade Commission’s (“FTC”) recent action against a company and its owner in connection with the allegedly deceptive promotion of music teaching tools signals FTC’s continued intention to keep social media promotional activity as an enforcement priority. In its third public investigation and second enforcement action since issuing its revised Guides Concerning the Use of Endorsements and Testimonials in Advertising (hereafter, FTC Endorsement/Testimonial Guides) in December 2009, FTC continues to expand advertisers’ responsibility to monitor third party interactive media communications containing endorsements of advertisers’ products.
In finding the advertiser and its owner, an individual, responsible for assuring that endorsers adequately disclose any material connections with the advertiser, FTC states that an advertiser agreement that requires endorsers to comply with FTC guidelines and disclosures is insufficient in the absence of an advertiser monitoring program that ensures clear and prominent disclosure of the relationship with the advertiser.
Thus, in addition to a $250,000 penalty against the company and its owner, FTC has required a far-reaching monitoring program – a potentially expensive and burdensome commitment for the future.
The first public FTC investigation in this area concerned a division of the popular fashion company Ann Taylor Stores Corp., LOFT. The FTC investigation of LOFT was prompted by an exclusive event held by the company in January 2010 where it invited bloggers to preview the store’s 2010 summer collection.FTC focused on LOFT’s provision of gifts to bloggers with the expectation that they would blog about the event. FTC was concerned that bloggers failed to disclose that they received gifts for posting blog content.
While deciding not to take enforcement action in this case due to mitigating factors, in the closing letter issued to the company, FTC noted that “[d]epending on the circumstances, an advertiser’s provision of a gift to a blogger for posting blog content about an event could constitute a material connection that is not reasonably expected by readers of the blog.”
FTC’s statements concerning the need for disclosures of a “material connection” in Ann Taylor Stores are not unlike its statements in section 255.5, example 7, of the FTC Endorsement/Testimonial Guides describing a company that gave a free game system to a video game expert blogger for review. In the example, readers of the blog frequently sought advice from the blogger regarding video game hardware and software. FTC stated that this particular blogging forum created an environment in which readers are unlikely to know that the blogger received a free game in exchange for the review, and that the value of the game could materially affect the credibility they attach to the endorsement. The FTC Endorsement/Testimonial Guides state that under such circumstances, the connection must be fully disclosed.
Clear and Prominent Disclosure
A second investigation (and the first enforcement action) pursuant to the FTC Endorsement/Testimonial Guides held the endorser liable for failure to clearly and prominently disclose the endorser’s material connection to the product developer.
According to FTC, employees of Reverb Communications, Inc. (“Reverb Communications”), a public relations agency, posted public reviews about its clients’ gaming applications in the iTunes Store “using account names that would give the readers of these activities the impression [that] they had been submitted by disinterested consumers.” The reviews endorsed the products by giving them high ratings (four or five stars) and posting positive comments about the gaming applications in iTunes.
FTC found that Reverb Communications had engaged in deceptive advertising by posing as “ordinary consumers,” and failing to disclose both that the reviews were submitted by paid employees working on behalf of the developers of the gaming applications and that the company was often paid a percentage of the applications’ sales. FTC concluded that these facts would have been “material” to consumers when making a decision to purchase a particular gaming application.
In addition to requiring Reverb Communications to “take reasonable steps” to remove any previously posted endorsement that misrepresented the authors as independent reviewers or endorsers, the Reverb Communications Final Order also prohibited the company from making any representation about a product or service “unless they disclose, clearly and prominently, a material connection,” when one exists. FTC elaborated on the meaning of “clear and prominent” for purposes of satisfying the FTC Endorsement/Testimonial Guides requirement to disclose material connections:
Text Communications: (e.g., printed publications or words displayed on the screen of a computer) the required disclosure must be of a type, size and location “sufficiently noticeable” for an “ordinary consumer” to read and comprehend.
Audio Communications: (e.g., radio or streaming audio) the required disclosure must be delivered in a “volume and cadence” sufficient for an “ordinary consumer” to hear and comprehend.
Video Communications: (e.g., television or streaming video) the required disclosures must be consistent with the requirement for textual communications and appear on the screen for a sufficient period of time to allow an “ordinary consumer” to read and comprehend.
Interactive Media Communications: (e.g., internet, online services, software) the required disclosures must be “unavoidable” and presented in a manner consistent with the requirements for textual communications, as well as audio and video, if applicable.
FTC stated that all such disclosures must be presented in an understandable language/syntax and in the same language as the predominant language used in the communication, and with no language that is in conflict with or mitigates the disclosure.
In FTC’s most recent enforcement action, it further expands on concepts set forth in the FTC Endorsement/Testimonial Guides by describing expectations related to advertiser monitoring of endorser activities. In Legacy, the advertiser used an online program through which it recruited “Review Ad Affiliates” to promote its musical instrument courses through endorsements in articles, blog posts, and other online material. The endorsements were required to include a hyperlink to the Legacy website in close proximity to the review. Below are examples of some of the endorsements:
“www.bestguitarsoftware.com: Features . . . . (5 Stars out of
5 stars) The undisputed No. 1 training product for someone wanting to learn how to play the guitar.”
“www.reviewmspy.com: Learn and Master Guitar. 4.9/5 Stars, The best home study DVD course for guitar I have ever seen.”
“www.reviewsnest.com: Review Nest, The Independent Reviews Site.”
Affiliates received substantial commissions (20%-45%) on sales of each product resulting from a referral.
Since the release of the revised FTC Endorsement/Testimonial Guides, Legacy has required its Affiliates to sign a contract requiring them to comply with FTC’s guidelines and disclosures. However, FTC concluded that the contract without advertiser monitoring was insufficient. Legacy “failed to implement a reasonable monitoring program to ensure that the [Affiliates] clearly and prominently disclos[ed] their relationship to Legacy.”
FTC stated in the Legacy Complaint that many Affiliates either failed to provide any disclosure of a Legacy relationship, or provided disclosures through inconspicuous hyperlinks located at the bottom of the Affiliates’ websites. As a result of these findings, FTC stated that the Affiliates’ reviews were false and misleading, that the failure to disclose the financial relationship was a deceptive practice, and that these acts and practices constituted unfair or deceptive acts or trade practices in violation of Section 5(a) of the FTC Act. Legacy and its owner, Lester Gabriel Smith, have agreed to an administrative settlement which includes a proposed consent order. Following public comment, FTC will make a final determination as to the proposed order.
The Legacy 20-year proposed consent order contains several familiar requirements, including a civil penalty ($250,000) and employee notification requirements. In addition, it adopts the detailed description of “clearly and prominently” found in Reverb Communications, signifying an FTC standard for this term. However, this case is of particular interest in that it sets forth an advertiser monitoring program that contains elements that also may become standard.
In Legacy, the company and its owner have agreed to establish a time-intensive monitoring program that includes the following elements:
Monthly monitoring and review of the activities of its top 50 revenue-generating Affiliates to ensure that the Affiliates do not misrepresent the status of their relationship with Legacy, and that the Affiliates’ material connection to Legacy is adequately disclosed. The monitoring activity must occur in a “manner reasonably calculated not to disclose the source of the monitoring  at the time it is being conducted.”
Similar monthly monitoring and review activities in connection with Legacy’s remaining Affiliates, using a random sampling approach that includes at least 50 Affiliates.
Procedures to terminate and stop payment to any Affiliate where Legacy determines that the Affiliate either misrepresented its status (e.g., an independent user or ordinary consumer), or failed to clearly and prominently disclose the material connection between the Affiliate and Legacy.
Creation and maintenance of reports sufficient to show the results of its monitoring.
According to the FTC press release, Legacy must submit these reports to FTC on a monthly basis, with such submissions to last for 20 years.
Needless to say, the monitoring program with monthly reports to FTC for the next 20 years may present a significant compliance burden for Legacy. This likely comes after a period of informal litigation where the company was required to respond to FTC data requests, followed by a need to negotiate the proposed consent order. The company had the opportunity to reject the proposed order and to take its chances in litigation with the FTC. However, no one can predict with certainty how such litigation might turn out, other than that it would be very expensive. Obviously, Legacy decided against this route.
Nonetheless, with FTC taking seemingly ever-more-aggressive positions, companies should carefully consider whether settlement is the best course of action. A well-prepared company might prevail in cases where the company chooses to litigate. Thus, in addition to the development and implementation of a sound compliance program, a company should always consider its litigation posture depending on the facts.
Legacy, along with Ann Taylor Stores and Reverb Communications, demonstrates FTC’s ongoing intent to enforce the FTC Endorsement/Testimonial Guides in the social media space. Controlling the message in these new consumer-generated media venues clearly raises logistical complications not encountered in the traditional advertising forums, but FTC will expect companies across all industries to take active steps to maintain control where there is a material connection.
It is not enough for an advertiser to obtain compliance pledges from its endorsers. Rather, the advertiser bears responsibility according to FTC to make sure the commitments are carried out. Thus, endorser agreements, advertiser monitoring, endorser education, and procedures to halt deceptive representations when they are discovered should all be considered as the advertiser develops a compliance program.
Please contact us if you have any questions or would like assistance in developing or reviewing a compliance program.
 16 C.F.R. Part 255; http://ftc.gov/os/2009/10/091005revisedendorsementguides.pdf.
 See In the Matter of Legacy Learning Systems Inc., FTC File No. 1023055 (hereafter Legacy), March 15, 2011. Available at http://ftc.gov/os/caselist/1023055/110315llsagree.pdf.
 See Closing Letter Issued to AnnTaylor [sic] Stores Corp., FTC File No. 102-3147 (hereafter Ann Taylor Stores), April 2010. Available at http://www.ftc.gov/os/closings/100420anntaylorclosingletter.pdf.
 See In the Matter of Reverb Communications, Inc., FTC Docket No. C-4310 (hereafter Reverb Communications), November 22, 2010. Available at http://www.ftc.gov/os/caselist/0923199/index.shtm.