Proskauer on Advertising Law
Proskauer on Advertising Law

On Notice: Disclosing Unexpected Material Connections in Advertising

In this final installment of our “On Notice” series about the FTC’s Notice of Penalty Offenses Concerning Endorsements, we discuss when and how to properly disclose the existence of a material connection between an advertiser and an endorsing party.

Per the FTC’s Notice of Penalty Offenses, “[i]t is an unfair or deceptive trade practice to fail to disclose a connection between an endorser and the seller of an advertised product or service, if such a connection might materially affect the weight or credibility of the endorsement and if the connection would not be reasonably expected by consumers.” In support, the FTC cited Cliffdale Assocs., Inc., 103 F.T.C. 110 (1984), a case where “[n]one of the testimonials used in the respondents’ advertisements and promotional materials indicate that at the time of their writing, the testimonialists personally knew the manufacturers or various marketers…or were connected with them in any way.” The FTC’s Endorsement Guides contain the same guidance. See 16 C.F.R. § 255.5.

The FTC does not require that every connection be disclosed – only connections that are material to a consumer’s perception of the endorsement, and that consumers would not reasonably expect. A “material connection” can include payment, free product, or a family or employee relationship with the advertiser.  As for whether a consumer would reasonably expect such a connection, the Endorsement Guides provide an example where an ad for an anti-snoring product features an endorsement from a physician. The FTC notes that while consumers would expect the physician to be reasonably compensated for his appearance in the ad, consumers would be unlikely to expect that the physician receives a percentage of gross product sales or that he owns part of the company – and knowing this would materially affect the weight and credibility of the endorsement. Accordingly, the FTC advises that the latter two connections should be disclosed.

Where consumers would not reasonably expect a particular material connection, the FTC’s Endorsement Guides instruct that the person making the advertisement must “clearly and conspicuously disclose” (i) either the payment or promise of compensation prior to and in exchange for the endorsement, or (ii) the fact that the endorser knew or had reason to know or believe that they would receive some benefit if they favored the advertised product. The Endorsement Guides provide an example where a college student who has earned a reputation as a video game expert receives a free gaming system from the manufacturer, in exchange for reviewing the product on his personal website or blog. Noting that because his review is disseminated via “a form of consumer-generated media in which his relationship to the advertiser is not inherently obvious,” the FTC recommends that the blogger should clearly and conspicuously disclose that he received the gaming system free of charge.

Overall, the primary question is whether knowing about the compensation or other benefit would affect the weight or credibility the audience would ascribe to the recommendation.  These requirements apply equally across different platforms and types of media, whether the endorsement appears in a television commercial, YouTube video, or Instagram post.

So what does it mean for a disclosure to be “clear and conspicuous?”  While there is no special wording that must be used, the disclosure must effectively communicate that the endorsement was provided in exchange for some benefit.  For example, if an endorser is sent free product in exchange for providing a video review, it would be appropriate to say something like “Company X gave me this product to try,” or “Company X gave me [name of product] and I think it’s great.”  For video reviews, the FTC requires an audio disclosure as well as a written disclosure in the description or caption for the video.  For sponsored social media posts, hashtags such as #sponsored, #ad, or #[Brand]_Ambassador can be used, but vague or ambiguous hashtags like “#sp,” “#spon,” “#thanks,” or the word “#ambassador” standing alone are not sufficient. As with any disclosure, the hashtags must be unambiguous and easy to find.  A hashtag that is buried in a string of other hashtags, or that is not visible unless the viewer clicks to see “more” would not be considered an adequate disclosure.

Factors the FTC considers in determining whether a particular disclosure is clear and conspicuous include:

  • The placement of the disclosure in the advertisement and its proximity to the claim it is qualifying;
  • The prominence of the disclosure;
  • Whether the disclosure is placed so prominently that a consumer will invariably see it;
  • The extent to which items in other parts of the advertisement might distract attention from the disclosure;
  • Whether the disclosure needs to be repeated several times in order to be effectively communicated, or because consumers may enter the site at different locations or travel through the site on paths that cause them to miss the disclosure;
  • Whether disclosures in audio messages are presented in an adequate volume and cadence;
  • Whether visual disclosures appear for a sufficient duration; and
  • Whether the language of the disclosure is understandable to the intended audience.

The FTC has been particularly active in monitoring this space in recent years as partnerships between advertisers and social media “influencers” have become increasingly common.  The FTC has issued warning letters to and brought enforcement actions against both advertisers and influencers for their alleged failures to comply with FTC regulations concerning undisclosed material .

In one recent example, the FTC brought an enforcement action against Teami, LLC, the maker of various diet and detox tea products, and issued warning letters to several of Teami’s influencers. We referenced this action in a previous “On Notice” post. In addition to allegations of unsubstantiated testimonials, the FTC’s complaint cited a failure to disclose that Teami paid well-known Instagram influencers to promote its products.  Though Teami implemented a social media policy in May 2018 that specifically instructed its paid influencers to make clear and conspicuous disclosures, the FTC found that subsequent sponsored Instagram posts clearly flouted these directives.  This case underscores that simply instructing influencers to comply with disclosure requirements is not enough; an advertiser should actively monitor its influencers’ advertisements, and take proactive steps to take down any advertisements that do not comply.

Following FTC guidance, NAD and ERSP, too, have made failure to disclose material connections a priority. For example, in one case, ERSP was concerned social media influencer advertising for athletic apparel did not contain sufficiently clear or conspicuous disclosures. Alo, LLC (Alo Yoga), ERSP Case #429 (2019). In particular, ERSP identified certain posts where the disclosure was not visible until viewers hit the “more” button, where the disclosure was couched between several hashtags, and where the disclosure was made in a different language from the original post. Although Alo provided its influencers with “Ambassador Program Guidelines,” which instructed influencers to comply with the FTC’s disclosure requirements, ERSP found this to be insufficient because the company did not follow up with social media influencers engaging in questionable practices.

Additionally, NAD recently rolled out its Fast-Track “SWIFT” process, expediting the process for singe-issue disputes that do not require complex evidence or argument. NAD’s SWIFT process can only be used for three types of cases – one of which is cases involving the prominence or sufficiency of disclosures, including disclosure issues in influencer marketing, native advertising, and incentivized reviews. We will monitor if and how the NAD uses the SWIFT program to consider issues of influencer advertising.

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Want to talk advertising? We welcome your questions, ideas, and thoughts on our posts. Email or call us at bvinti@proskauer.com /212-969-3249

On Notice: Unsubstantiated or Unrepresentative Testimonials

Continuing our “On Notice” series about the FTC’s Notice of Penalty Offenses Concerning Endorsements, we address the FTC’s prohibition against using testimonials to (1) make or imply unsubstantiated or otherwise deceptive performance claims even if such testimonials genuinely reflect the endorser’s own experience, and (2) misrepresent explicitly or implicitly that the experience described by endorsers of a product or service “represents the typical or ordinary experience of users.”

The FTC cited several prior decisions in support of its Notice, including:

  • Cliffdale Assocs., Inc., 103 F.T.C. 110 (1984). The advertiser used testimonials to make performance claims for a device that supposedly improved fuel economy for automobiles. The testimonials included statements by users about their fuel saving experiences. The FTC found that by printing the testimonials the advertiser “implicitly made performance claims” that the Commission had found to be false and deceptive.  Therefore, “irrespective of the veracity of the individual consumer testimonials,” the testimonials themselves were deceptive.
  • Macmillan, Inc., 96 F.T.C. 208 (1980). The advertiser, LaSalle University, relied on endorsements by successful graduates in its ads. The FTC noted that “[t]hese testimonials created the impression that such success was ordinary and typical of LaSalle graduates.” Because the typical graduate did not experience the type of success represented in the testimonials, the FTC required the advertiser provide a disclaimer stating that “this testimonial does not reflect the typical or ordinary experience of [the student]” and required it be displayed “in print as large as that of the testimonial itself, adjacent to or integrated with the testimonial.”
  • Porter & Dietsch, Inc., 90 F.T.C. 770 (1977), aff’d, 605 F.2d 294 (7th Cir. 1979). An advertiser of weight loss tablets touted testimonials “reciting great weight losses achieved by users.” However, the advertiser could not substantiate that the results represented the ordinary experience of people using the tablets. The Commission therefore prohibited the advertiser from “[u]sing any testimonial…which reports a result unless the testimonial or a related disclosure in close conjunction therewith reveals clearly and conspicuously the typical or ordinary experience of members of the public with such product.”

The FTC’s Endorsement Guides echo those decisions and the recent Notice letter, stating that: “the advertiser must possess and rely upon adequate substantiation, including, when appropriate, competent and reliable scientific evidence, to support [] claims made through endorsements in the same manner the advertiser would be required to do if it had made the representation directly.” 16 CFR § 255.2(a). The Endorsement Guides provide the following example: if an advertisement for a cholesterol-lowering product features an individual who claims that his serum cholesterol went down by 120 points, the advertisement would be deceptive if the advertiser cannot adequately substantiate that the product can produce that result. Consistent with the general principle that a disclaimer cannot contradict the main claim, the FTC explains a disclaimer that “well-conducted clinical study shows that the product reduces the cholesterol levels of individuals with elevated cholesterol by an average of 15%” would not cure that deceptive message.  16 CFR § 255.2(a).

The Endorsement Guides also state that “[a]n advertiser should possess and rely upon adequate substantiation” for claims that “the endorser’s experience is representative of what consumers will generally achieve with the product or service in actual, albeit variable, conditions of use.” Absent such substantiation, advertisers must “clearly and conspicuously disclose the generally expected performance in the depicted circumstances.” 16 CFR § 255.2(b) The FTC has specified that statements like “Results not typical” or “Individual results may vary” are not enough to insulate advertisers from these obligations.

Issues of unsubstantiated or inflated performance claims in testimonials have come into the limelight in recent years, with the rise of influencer and social media marketing. For example, in 2020, the FTC reached a $1M settlement with Teami LLC, the maker of “detox” teas promoted by celebrities and well-known Instagram influencers. The FTC alleged that Teami’s influencers made a number of unsubstantiated health claims that do not represent the typical experience of the ordinary user. These include claims that Teami’s teas can help consumers lose weight, treat or fight cancer, clear clogged arteries, relieve migraines, and prevent common colds and the flu.

These portions of the FTC’s Notice of Penalty Offenses remind advertisers that it is not enough for an endorser’s opinion to accurately represent the endorser’s own experience. Advertisers should be careful to ensure that endorsers’ statements are substantiated, and are representative of what a typical or ordinary user can expect to experience.

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Want to talk advertising? We welcome your questions, ideas, and thoughts on our posts. Email or call us at bvinti@proskauer.com /212-969-3249

Court Cuts Short Challenge to Zicam’s “Clinically Proven to Shorten Colds” Claims

In Yamasaki v. Zicam, LLC, Case No. 21-cv-2596 (N.D. Cal. 2021), Plaintiff alleged certain Zicam® cold remedy products were falsely advertised as “clinically proven to shorten colds.”  On this basis, Plaintiff sought to represent a putative class of California consumers for seven different Zicam products.  Zicam, represented by Proskauer, moved to dismiss Plaintiff’s amended complaint in its entirety.  Judge Gilliam granted the motion, agreeing with Zicam that Plaintiff failed to state a claim for relief.

Under California law, a private litigant may not challenge advertising claims on the ground that the advertiser allegedly lacks substantiation for its claims.  A private litigant must affirmatively allege that the defendant’s advertising is false.  For example, in the Ninth Circuit’s precedential decision in Kwan v. Sanmedica Int’l, 854 F.3d 1088 (9th Cir. 2017), the Court expressly rejected the argument that “clinically tested,” “clinically proven,” or similar statements referring to the existence of studies to support an advertising statement should be subject to a different standard than other advertising statements.

In Yamasaki, the Court found that Plaintiff’s amended complaint lacked any factual allegations supporting a reasonable inference that Zicam’s “clinically proven” statements were false.  While Plaintiff cited a variety of studies relating to zinc in her amended complaint, none tested a Zicam product, let alone found a Zicam product ineffective at shortening colds.

Plaintiff tried to overcome California’s bar on lack-of-substantiation claims with two arguments, both of which the Court rejected.  First, Plaintiff argued that reasonable consumers would interpret “clinically proven” to mean there is a scientific consensus about the efficacy of the challenged Zicam products.  Plaintiff alleged no such consensus existed because Zicam has not published its clinical studies (which are proprietary to Zicam) in a peer-reviewed journal.  However, the Court found that Plaintiff failed to plausibly allege reasonable consumers would construe “clinically proven” to mean “scientific consensus.”

Second, Plaintiff argued that homeopathic products can never be clinically proven.  The Court rejected this argument too, noting that Plaintiff did not actually plead this theory in her amended complaint.  As a result, the Court found that Plaintiff failed to state a claim for relief and dismissed the amended complaint in its entirety. Plaintiff did not seek to amend her complaint and the Court subsequently dismissed her claims with prejudice.

Advertisers faced with a California consumer class action related to “clinically proven” claims should keep in mind the lack of substantiation bar.

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Want to talk advertising? We welcome your questions, ideas, and thoughts on our posts. Email or call us at bvinti@proskauer.com /212-969-3249.

 

On Notice: Continued Use of Endorsements

Continuing our series on the FTC’s Notice of Penalty Offenses Concerning Endorsements, this post considers the FTC’s statement that it is unlawful under Section 5 of the FTC Act “for an advertiser to continue to advertise an endorsement unless the advertiser has good reason to believe that the endorser continues to subscribe to the views presented in the endorsement.”

In support, the FTC cited Nat’l Dynamics Corp., 82 F.T.C. 488 (1973), an almost 40 year old case in which the FTC found that by publicizing undated testimonial letters written 5 to 10 years in the past, the advertiser “created the impression, contrary to fact, that they were recent statements of persons contemporaneously using [the advertiser’s product] and that the statements represented the contemporaneous opinions of the authors.”  The FTC rejected the advertiser’s defense that it had no notice that the endorsers were no longer using the product and no longer endorsed it until relatively recently, finding that it was the advertiser’s “duty to ensure that the testimonials they publish reflect facts and opinions existent at the time of publication and circulation.”  The FTC thus ordered the advertiser to cease and desist from using, publishing, or referring to any testimonial or endorsement unless it had “good reason to believe that at the time of such use, publication, or reference, the person or organization named subscribes to the facts and opinions therein contained.”

The language of the FTC’s recent notice mirrors that of the Endorsement Guides, which state that: “An advertiser may use an endorsement of an expert or celebrity only so long as it has good reason to believe that the endorser continues to subscribe to the views presented.”  16 C.F.R. § 255.1(b).  However, the notice appears to go a step further in applying this requiring to any endorsement, not just those by experts or celebrities.

The Endorsement Guides clarify that advertisers can satisfy this requirement by “securing the endorser’s views at reasonable intervals.”  16 C.F.R. § 255.1(b).  Reasonableness in this context is determined by factors like:

  • New information on the performance or effectiveness of the product,
  • A material alteration in the product,
  • Changes in the performance of competitors’ products, and
  • The advertiser’s contract commitments.

Id.  For example, if a building contractor states that he uses the advertiser’s paint because of its quick drying properties and durability, but the advertiser subsequently reformulates its paint, the advertiser must contact the contractor to determine whether he or she would continue to subscribe to the views presented previously before continuing to use that contractor’s endorsement.  See 16 C.F.R. § 255.1, Example 1.

NAD has applied this principle to advertisers’ touting of ratings and reviews from independent third-party organizations. For example, in American Dental Supply, LLC (White Brilliance Tooth Whitening System), NAD Case #4183 (May 2004), Good Housekeeping Magazine challenged the advertiser’s use of the claim “Good Housekeeping Magazine – ‘Best Results Overall’”.  Four years prior, in 2000, Good Housekeeping had in fact evaluated the advertiser’s product together with other tooth whitening products, and concluded that the advertiser’s product offered the “best results overall.”  However, in bringing this challenge, Good Housekeeping made clear it no longer subscribed to its evaluation that was conducted back in 2000.  Citing the Endorsement Guides and the fact that the marketplace of tooth whitening products had significantly changed since that time, and the use instructions on the product had also changed in the interim, NAD recommended the advertiser discontinue this claim attributed to Good Housekeeping.

Advertisers who use or reference endorsements and testimonials from individuals or third-party organizations, whether they are affiliated with the advertiser or independent, should periodically contact their endorsers to ensure they continue to subscribe to the advertised views.  In particular, they should do so any time there is a material change in the advertised product or, where the endorsement concerns competitive products, where there is a change in those competitive products or the competitive market.

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Want to talk advertising? We welcome your questions, ideas, and thoughts on our posts. Email or call us at bvinti@proskauer.com /212-969-3249

On Notice: Misattributed, False, or Mischaracterized Endorsements

Continuing our series on the FTC’s Notice of Penalty Offenses Concerning Endorsements, this post considers the issues of falsely attributed, mischaracterized, and fabricated endorsements – practices that the FTC highlighted in its Notice as unfair or deceptive. In particular, the FTC stated that:

  • It is an unfair or deceptive trade practice to make claims which represent, expressly or by implication, that a third party has endorsed a product or its performance when such third party has not in fact endorsed such product or its performance.
  • It is an unfair or deceptive trade practice for an advertiser to misrepresent that an endorsement represents the experience, views, or opinions of users or purported users of the product.”
  • It is an unfair or deceptive trade practice to misrepresent an endorser as an actual user, a current user, or a recent user of a product or service.

The FTC cited several prior decisions in support of its Notice, including:

  • Ar-Ex Cosms., Inc., 48 F.T.C. 800 (1952). The advertiser, Ar-Ex, touted that its Special Formula (Non-Permanent) Lipstick was the only lipstick recommended by third party product-testing organization, Consumers’ Research, for women who suffer from cracked, sore, dry, or chapped lips.  However, Consumers’ Research had merely noted that Ar-Ex sold lipsticks free from certain compounds­—not that it recommended the products.  The FTC therefore found the advertiser’s claim to be false and misleading.
  • J. Reynolds Tobacco Co., 46 F.T.C. 706 (1950). The FTC determined it was deceptive for the makers of Camel cigarettes to advertise using testimonials that did not accurately reflect the endorsers’ opinions. Camel recruited a number of individuals to sign off on testimonials, in exchange for compensation. But some of these individuals stated that they could not read, and the testimonials they signed off on were not read to them. Other testimonials were fabricated entirely, mischaracterized, or distorted. For example, several testimonials stated or implied the endorser was an exclusive Camel smoker, when the endorser did not smoke cigarettes at all. And some of the testimonials stated the endorser preferred Camel over all other brands when, in actuality, the endorser could not tell the difference between Camels and other cigarettes.
  • Cliffdale Assocs., Inc., 103 F.T.C. 110 (1984). The FTC found the advertiser deceptively implied that testimonials came from current or recent product users of its “Ball-Matic” device. For example, the testimonials used language like “. . . now I get four miles more per gallon” and “now that I have installed your unit . . .” (emphasis added). In truth, the endorsements were written five to six years before the date of the advertisements – not by individuals who had currently or recently used the device.

The FTC’s Endorsement Guides are consistent with those decisions, stating that:

  • “Endorsements must reflect the honest opinions, findings, beliefs, or experience of the endorser.” 16 CFR § 255.1(1).  Therefore, in order to make a claim that a third party endorses your product or its performance, the third party must actually endorse the product or its performance.
  • “When the advertisement represents that the endorser uses the endorsed product, the endorser must have been a bona fide user of it at the time the endorsement was given. Additionally, the advertiser may continue to run the advertisement only so long as it has good reason to believe that the endorser remains a bona fide user of the product.” 16 CFR § 255.1(c).
  • “Advertisements presenting endorsements by what are represented, directly or by implication, to be ‘actual consumers’ should utilize actual consumers in both the audio and video, or clearly and conspicuously disclose that the persons in such advertisements are not actual consumers of the advertised product.” 16 CFR § 255.2(c).

Allegations of misattributed, false, or mischaracterized endorsements have made headlines in recent years, as brands have attempted to capitalize on the value of celebrity endorsements. This often arises when a celebrity or public figure is spotted using an advertiser’s product. For example, when then President Barack Obama was photographed wearing a Weatherproof jacket on a trip to China, Weatherproof turned this photograph into a billboard in Times Square. A White House aide publicly responded, stating “[t]his ad is clearly misleading because the company suggests the approval or endorsement of the president or the White House that it does not have.” Weatherproof voluntarily agreed to take down the billboard.

Similarly, when actress Katherine Heigl was photographed carrying Duane Reade shopping bags, the pharmacy Tweeted the image, with the caption “Love a quick #DuaneReade run? Even @KatieHeigl can’t resist shopping #NYC’s favorite drugstore.” In response, Katherine Heigl filed suit in the Southern District of New York, alleging violations of the Lanham Act, New York state unfair competition law, and the right of publicity. Heigl’s complaint sought $6 million in damages, though the parties later reached a settlement, the terms of which were not disclosed.

In more extreme cases, brands have faced allegations that they fabricated celebrity endorsements out of whole cloth. For example, in early 2020, Tom Hanks spoke out against an ad for CBD products that featured a photo of the actor, alongside a quote he said was falsely attributed to him. Calling it a “false and intentional hoax,” Hanks stated “I’ve never said this and would never make such an endorsement.” Celebrity doctor Dr. Oz was featured in the same ads, and re-Tweeted Hanks’s message, adding “[t]his is a fake and misleading advertisement intended to take advantage of consumers using false claims and our likenesses illegally.”

With the rise of influencer marketing, endorsements from celebrities and other public figures are more valuable than ever before. Advertisers should be careful to convey any celebrity or influencer endorsements in a way that is faithful to the endorser’s opinion and message – particularly now that the FTC’s Notice of Penalty Offenses has identified this as an area of focus for the FTC.

These portions of the Notice of Penalty Offenses are also of particular importance for advertisers who use consumer endorsements or reviews in their advertising. For example, if a television commercial depicts paid actors rather than actual product users, this should be clearly and conspicuously disclosed. See 16 CFR § 255.2, Example 6. And if a consumer appearing in an advertisement says something or is portrayed in a manner that suggests the consumer is a current or recent product user, the advertiser should periodically verify that remains true, or else discontinue its use of that endorsement after a reasonable amount of time. Advertisers who quote consumer reviews in their advertising should also take steps to confirm that each such consumer actually bought and used the product, and should keep records to that effect. See, e.g., Function Inc. (Shampoo and Conditioner), NAD SWIFT Case #6938 (February 2021) (cautioning that “advertisers using consumer reviews in their advertising should maintain a record of reviews to demonstrate that each review represents a person that has used the product”).

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Want to talk advertising? We welcome your questions, ideas, and thoughts on our posts. Email or call us at bvinti@proskauer.com /212-969-3249.

 

On Notice: Procedural Overview of the FTC’s Section 5 Penalty Offense Authority

As discussed in our earlier post, on October 13, 2021, the FTC issued “Notice of Penalty Offenses” letters to more than 700 companies, placing them on notice of civil penalties up to $43,792 per violation if they use endorsements or testimonials in an unfair or deceptive manner. These letters are the first step for the FTC to obtain civil penalties in administrative adjudication proceedings under Section 5 of the FTC Act. In this post, we explain the process for the FTC to obtain such penalties under Section 5. Future posts in our “On Notice” series will cover the substantive aspects of the Notice of Penalty Offenses concerning endorsements and testimonials, and will offer tips to comply with the FTC’s precedent and guidelines.

The FTC may enforce the FTC Act’s prohibition on unfair or deceptive acts or practices either by commencing administrative adjudication proceedings under Section 5 of the Act or by suing a party in court under Section 13(b). As noted in our previous post, the Supreme Court’s decision this past April in AMG Capital Mgmt., LLC v. FTC has significantly curtailed the FTC’s ability to pursue civil penalties under Section 13(b). Thus, the FTC seems to be looking to increase its utilization of Section 5, which explicitly allows for civil penalties.

Under Section 5 of the FTC Act, the Commission can obtain civil penalties against a company that acted unfairly or deceptively through the Penalty Offense Authority. The FTC can seek civil penalties if it proves that (1) the company knew the conduct was unfair or deceptive in violation of the FTC Act and (2) the FTC had already issued a written decision that such conduct is unfair or deceptive. 15 U.S.C. § 45(m)(1)(B). The Notice of Penalty Offenses letters provide a non-exhaustive list of conduct relating to endorsements and testimonials that the FTC has determined to be unfair or deceptive, including:

  • Falsely claiming an endorsement by a third party;
  • Misrepresenting whether an endorser is an actual, current, or recent user;
  • Using an endorsement to make deceptive performance claims;
  • Failing to disclose an unexpected material connection with an endorser;
  • Misrepresenting that an endorsement represents the experience, views, or opinions of users or purported users;
  • Misrepresenting that the experience of endorsers represents consumers’ typical or ordinary experience; and
  • Continuing to use an endorsement without good reason to believe that the endorser continues to subscribe to the views presented.

Future posts in our “On Notice” series will explore these types of conduct in further detail.

The letters make clear they are not an indication the recipients have engaged in any unfair or deceptive practices. However, the letters put the recipients on notice of the prohibited conduct and may enable the FTC to seek civil penalties if a company is found to be engaged in such activity.

To begin an administrative adjudication under Section 5, the FTC issues a complaint setting forth its charges if they have “reason to believe” that a violation has occurred. § 45(b). Respondents may elect to settle with the FTC, sign a consent agreement, consent to entry of a final order, or contest the charges. If the FTC accepts a proposed settlement agreement, the corresponding order is made available for public comment for 30 days before the FTC determines whether to make the order final.

If a respondent contests the charges, the complaint is adjudicated in a trial-type proceeding governed by the FTC’s rules of practice before an administrative law judge (“ALJ”). The FTC is represented in the proceeding by an FTC “complaint counsel.” After the ALJ issues a decision setting forth findings of fact and law, and recommending a remedy or dismissal, either party may appeal the decision to the full Commission. After the Commission’s final decision, a losing respondent may file a petition for review with a US Court of Appeals. After all judicial review of the FTC’s order is completed, the FTC may seek consumer redress in federal district court for the conduct at issue in the administrative proceeding. If the district court determines that a reasonable person would have known under the circumstances that the conduct was dishonest or fraudulent, the respondent will be liable for consumer harm and subject to civil penalties. As noted, the civil penalty amount is currently $43,792 per violation. It is adjusted for inflation annually.

Watch this space for best practices on using endorsements and testimonials in advertising. We will also be on the lookout for instances of the FTC bringing an enforcement action relating to this subject matter.

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Want to talk advertising? We welcome your questions, ideas, and thoughts on our posts. Email or call us at lweinstein@proskauer.com /212-969-3240.

 

On Notice: FTC Issues Warning to Hundreds of Companies Regarding the Use of Fake Reviews and Other Misleading Endorsements in Online Marketing Campaigns

Prompted by the proliferation of social media advertising that often blurs the line between authentic content and sponsored posts, the Federal Trade Commission last week sent more than 700 companies a Notice of Penalty Offenses warning them against the use of deceptive endorsements in their online advertising.  The Notice advises recipient companies that engaging in advertising conduct the FTC has previously determined to be unfair, unlawful or deceptive under Section 5 of the FTC Act can subject them to civil liability of up to $43,792 per violation.  As we had previously predicted, these letters may reflect a shift in the FTC’s focus towards reliance on §5 of the FTC Act, following last term’s Supreme Court opinion in AMG Capital Mgmt. v. FTC which curtailed the FTC’s ability to seek monetary relief under §13(b) of the Act.

Companies receiving the Notice include large household names including leading retailers and major advertising agencies.  Recipients were also directed to distribute copies of the Notice to each of their subsidiaries engaged in the sale or marketing of products or services to consumers in the United States.  While the FTC makes clear that recipients of the Notice are not alleged to have engaged in any wrongdoing, the scope of the Notices sent out—and the Commission’s 5–0 vote to authorize the Notice and its distribution—demonstrates that the FTC is highly focused on the use of deceptive endorsements in online advertisements and is willing to aggressively pursue advertisers that flout its directives.

The Notice sent to companies provides a non-exhaustive list of practices the FTC has found to be unlawful in previous FTC administrative orders, including:

  • Falsely claiming an endorsement by a third party;
  • Misrepresenting whether an endorser is an actual, current, or recent user;
  • Using an endorsement to make deceptive performance claims;
  • Failing to disclose an unexpected material connection with an endorser;
  • Misrepresenting that an endorsement represents the experience, views, or opinions of users or purported users;
  • Misrepresenting that the experience of endorsers represents consumers’ typical or ordinary experience; and
  • Continuing to use an endorsement without good reason to believe that the endorser continues to subscribe to the views presented.

Copies of the case decisions discussed in the notice are available on the FTC’s website.  The Notice also points advertisers to additional resources, including a staff business guidance document The FTC’s Endorsement Guides: What People Are Asking¸ and the FTC’s Guides Concerning the Use of Endorsements and Testimonials in Advertising, 16 C.F.R. Part 255, for further guidance on their responsibilities under the FTC Act.

While navigating the evolving regulatory landscape regarding deceptive online advertising can present challenges for companies and their advertising partners, avoiding the practices outlined above will likely go a long way in mitigating the risk of facing an FTC enforcement action and subsequent liability.  Our team continues to monitor these changes and will apprise our readers of any FTC enforcement actions that arise as a result of the Notices issued today.  Watch this space for further developments.

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Want to talk advertising? We welcome your questions, ideas, and thoughts on our posts. Email or call us at lweinstein@proskauer.com /212-969-3240.

 

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