Baer Business Law – Greater Philadelphia Area – Intellectual Property Law – Business Law – E Commerce – Contracts – Trademarks – Copyrights

New rules from the Federal Trade Commission (FTC) that apply to the use of blogs and other consumer-generated new media content in marketing have raised significant liability and compliance concerns for marketers and bloggers alike. Companies that make payments or give free products to bloggers and other online commenters in order to generate positive buzz or favorable reviews for their products will now have to monitor closely the statements and claims made about the products and ensure that these relationships, if material, are clearly and conspicuously disclosed. Otherwise, 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 non-disclosure of material connections. Marketers are also responsible for advising bloggers of their responsibilities.

On October 5, the FTC issued its final revised Guides Concerning the Use of Endorsements and Testimonials in Advertising (available for download here), the first rewrite of the Guides since 1980. While their title is not particularly noteworthy, these new rules broadly extend the concept of endorsements and testimonials to include as sponsored advertising all sorts of loose new media relationships that are increasingly used by marketers in place of traditional radio and television advertising and paid endorsements. (They also include changes in other areas, such as disclosures that must be made when advertising the results of using a product.) The Guides do not purport to be binding law, but are rather administrative interpretations of the law, issued to provide guidance on what the FTC considers to be deceptive behavior. However, violations are punishable by civil penalties of up to $11,000 per violation. The revised Guides will become effective on December 1, 2009.

For example, a marketer may provide unsolicited samples of its products to members of a blogger network who sign up for the network so that they can review the products on their sites. Or a marketer may supply a product, such as a video game, to one particularly well-read blogger known as an expert or authority in his area in the hope of gaining a positive review. Or the marketer may institute a word-of-mouth or viral marketing scheme where participants receive something of value (such as a payment or an entry in a sweepstakes) to e-mail their friends or send out tweets about the marketer’s product. All of these 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 and 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 threshold question is obviously what level of incentive turns blogger commentary about a marketer’s product into an “endorsement,” thereby rendering both the blogger and the marketer 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.”

As an example, the Guides posit a consumer who purchases a new brand of dog food and reviews its favorably on her personal blog. 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 gets the dog food as a result of joining a network marketing program under which she periodically receives various products about which she can write reviews if she wants to, her positive review will be considered an endorsement. As another example, 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. He tests it out and gives it a favorable review. This is also an endorsement, and the FTC comments that because the review is disseminated via a form of consumer-generated media in which his relationship to the advertiser is not inherently obvious, and given the value of the gaming system, the blogger should clearly and conspicuously disclose that he received it free of charge. Furthermore, “[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.” (Presumably, the Guides’ additional rules on the use of expert endorsements in advertising would also apply here.)

In yet another example given by the FTC, a skin care product manufacturer participates in a blog advertising service that matches up advertisers with reviewers. The marketer requests that the blogger try out its new body lotion and write a review. The blogger, totally 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 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 new media in the same manner as traditional journalistic and advertising outlets. However, as a practical matter, many businesses treat these channels differently and will have to scramble to implement the necessary monitoring and enforcement mechanisms. For example, it is not uncommon for a business to buy a sponsorship from a non-profit organization where one of the benefits of the sponsorship is a favorable mention on the organization’s blog. In many cases, the sponsorship agreement is spotty and does not include detailed restrictions on what the organization can and cannot say about the sponsor’s products, and it is doubtful that anyone at the sponsor is giving the non-profit organization’s Web 2.0 chatter a compliance review. Indeed, the whole point of marketing to bloggers and through social media is to support a spontaneous and unforced style of commentary that has greater authenticity for cynical, tech-savvy consumers. Of course, in response to such comments 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 ….”

Design a Compliance Program

Unfortunately, corporate legal departments will now have to extend the long arm of compliance over a whole host of Web 2.0 marketing activities that until now may have been loosely policed, if at all. “In employing this means of marketing,” the FTC dryly observes, “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.” However, it also states that in the exercise of prosecutorial discretion it will consider “the advertiser’s efforts to advise these endorsers of their responsibilities and to monitor their online behavior ….”

The first step for companies, then, is to get a handle on what their marketing departments are doing to curry favor with bloggers and create buzz through viral online marketing. It is especially important to get a firm handle on the activities of advertising and PR agencies, since the FTC will hold companies responsible for the actions of these third-party agents. If compensation, free products or other valuable incentives (such as sponsorships) are being offered in the hope of stimulating positive reviews, then the company should institute and document a process of advising bloggers and other new media commenters about their duty to disclose material connections and the limits on the factual claims they can make about a products and its beneficial effects. There should also be periodic monitoring of the resulting posts, with documented follow-up action if necessary, to make sure they comply with the FTC’s endorsement guidelines.

If blogger relationships are managed through an advertising agency or other third party, the written contract with that third party should specifically address each party’s rights and obligations with respect to monitoring and compliance. At the very least, a company should reserve the right to audit and pre-approve an advertising agency’s solicitation of bloggers so that the company knows which bloggers the agency is dealing with and whether the relationships are of a type that could lead to advertiser-endorser liability and can monitor the bloggers’ posts about the company’s products.

If all this sounds like overkill (and no doubt it will meet with fierce resistance in some online marketing departments), it is critical to remember that incentivized blogger buzz is now treated the same as any paid endorsement: according to the FTC, both are advertising subject to disclosure requirements and prohibitions on misleading or unsubstantiated claims. The compliance burden may, in fact, prove too onerous for some companies. In this case, their best bet is to implement policies that prohibit the payment of compensation or giving away of valuable products in the hope of generating positive online buzz. Favorable reviews are not “endorsements” within the meaning of the Guides unless they have been incentivized in some way.

Implement a Social Media and Blogging Policy

Promoting compliance within organizations also it makes it essential, now more than ever, to have a social media and blogging policy that covers both references to the company and its products in employees’ personal posts as well as the use of social media and blogs for marketing and other business purposes. Not only is it a best practice to treat company-initiated social media and blog posts as official corporate communications that require consideration of regulatory, securities, litigation and reputational risk issues, and possibly prior legal or regulatory review; the possibility that third-party posts may now be deemed company-initiated endorsements makes it vital to bring all Web 2.0 activities under one comprehensive policy. Furthermore, according the Guides, a company employee who posts messages on an online message board promoting the company’s product (a common practice) must clearly and conspicuously disclose his or her relationship to the company. This requirement should be specifically spelled out in the company’s social media and blogging policy.

Tips for Bloggers

As for bloggers and other online commenters, they should be sure to disclose any compensation or benefits they receive to comment on products and, if they do have such a connection to a marketer, should be very careful to follow the guidelines furnished by the marketer (which the marketer is required to provide) and not make general or sweeping factual claims about the product or any claim that can’t be easily substantiated. If a blogger chafes at submitting to this degree of oversight and control, he always has the option of buying the product himself, for example, rather than receiving it as a freebie. The FTC has indicated that advertisers and not bloggers will be its main enforcement target. However, a blogger who runs a “substantial operation” that violates the rules and who receives a warning will still be at risk. Moreover, the FTC can adopt a more aggressive enforcement stance at any time.

The FTC’s rulemaking will heavily influence the way marketers generate buzz on the Internet and warrants close scrutiny of participation in blogger and viral incentive programs by all parties involved.