October 2021 - The FTC Sends 700 Penalty Notice Letters

Periodically, there are routine developments regarding FTC initiatives. This one isn't routine.
On October 13, 2021, the FTC issued Penalty Notice Letters to more than 700 companies regarding the FTC's plans to hold companies responsible for engaging in untrue or deceptive endorsements and testimonials. The FTC targeted companies consisting of large companies, advertisers, retailers, consumer product companies, and major advertising agencies.
The FTC intends to seek civil penalties (fines) of up to $43,792 per violation for Notice recipients that engage in any of the deceptive practices described in the Notice. Businesses that did not receive a Penalty Notice Letter should understand the FTC is targeting specific violations, regardless of whether the business received a Penalty Notice Letter or the size of the business.
This is the FTC's check of specific offenses which the FTC is now targeting as unlawful regarding endorsements and testimonials under Section 5 of the FTC Act:

• Falsely claiming, expressly or by implication, that a third party has endorsed a product or its performance;
• Misrepresenting that an endorsement represents the experience, views, or opinions of an actual user or purported users of the product;
• Misrepresenting an endorser as an actual user, a current user, or a recent user of a product or service;
• Continued use of an endorsement without good reason to believe that the endorser continues to subscribe to the views presented in the endorsement;
• Use of testimonials to make unsubstantiated or otherwise deceptive performance claims, even if such testimonials are genuine;
• Failure 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; and
• Misrepresenting that the experiences described by endorsers of a product or service represents the typical or ordinary experience of users of the product or service.

Why Did the FTC Send the Penalty Notice Letters?

Back in April, 2021, the Supreme Court held that the FTC Act does not monetary restitution. Undeterred, the FTC reacted by relying on Section 5(m)(1)(B) of the FTC Act in order to seek civil penalties.
Under Section 5(m)(1)(B) of the FTC Act, the FTC may seek civil penalties (fines) under two conditions (both of which occur).

1. The FTC has already issued a final cease and desist order in an administrative proceeding based on a specific conduct that the FTC has determined to be either unfair or deceptive.
2. The target company had actual knowledge that the conduct was unfair or deceptive.

The FTC's strategy is clear: provide the Penalty Notice Letters to ensure that the recipient companies have actual knowledge of conduct that the FTC previously viewed as unfair or deceptive, thereby setting them up for enforcement actions that will enable the FTC to seek civil penalties (fines).

FTC Press Release and Blog Post

In its Press Release that accompanied the Penalty Notice Letters, the FTC quoted Samuel Levine, Director of the FTC's Bureau of Consumer Protection: “Fake reviews and other forms of deceptive endorsements cheat consumers and undercut honest businesses. Advertisers will pay a price if they engage in these deceptive practices.”
In its Blog Post, the FTC acknowledged that consumers rely heavily on endorsements and testimonials. Further, the FTC indicated that advertisers encourage consumers to check out what others are saying about their products and services, thereby acknowledging the value of positive endorsements or testimonials.

FTC Challenge/The Key to Liability

Big question: how close should the fit be between the specific conduct previously found to be unfair or deceptive in the FTC's administrative proceeding, on the one hand, and the specific conduct by the company which is the recipient of the Penalty Notice Letter, on the other?
If the specific conduct of both is a close match, then the FTC's strategy discussed above is likely to be successful. If there is not a close match, then it's questionable that the strategy will be successful.
So, specific conduct is the key to the success of FTC's strategy with the Penalty Notice Letters. Likewise, liability for fines that may be levied on eCommerce companies and digital marketing advertisers will also be based on the same specific conduct and how close it relates to specific conduct previously found to be unfair or deceptive.

Two Takeaways Regarding Penalty Notice Letters

1. There is nothing new about the FTC's concern that endorsements be truthful and substantiated. Earlier, the FTC's Endorsement Guides state 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).

   In addition, the Endorsement Guides also provide: “[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.”

   If an advertiser cannot provide the required level of substantiation, the advertiser must “clearly and conspicuously” disclose generally expected results to be achieved regarding the claim. Back in 2009, the FTC made it clear that “Results not typical” and “Your mileage may vary” alone are not sufficient.

2. Even if your company did not receive one of the 700 Penalty Notice Letters, you should be careful to avoid any of the specific conduct listed above as unlawful by the Penalty Notice Letters due to the fact that the FTC is now clearly looking to target them.

June 2023 Update - FTC's Updated Endorsement Guides: 10 Key Takeaways

The FTC investigates and initiates cases involving Section 5 of the FTC Act, which generally prohibits deceptive advertising.

The Guides provide insight into how the FTC views various marketing activities involving endorsements and how Section 5 might apply to those activities.

Although the Guides themselves do not carry the force of law, practices inconsistent with the Guides may result in Section 5-related law enforcement actions.

The updated Guides include both (i) the updated "Guides" themselves and (ii) the accompanying FAQ's ("What People Are Asking").

1. Updated and Expanded Definitions

*  “Endorsement” generally means “any advertising, marketing, or promotional message for a product 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.”  “Endorsement” is now broadened to include verbal statements and tags in social media posts and includes “fake reviews” and reviews by “non-existent entities.”

*  “Endorser” is now expanded to “encompass the writers of fake reviews and non-existent entities that purport to give endorsements.” 

*  "Material Connections" – The general rule continues that requires Endorsers to disclose material connections (financial, employment, family, etc.). There is a new clarification to the effect that a disclosure is also required “when a significant minority of the audience for an endorsement does not understand or expect the connection.”

*  “Clear and Conspicuous” – Now, internet and social media disclosures should be "unavoidable," not just “conspicuous." It is now not sufficient for a disclosure to be hidden behind a link (such as "click for more"). The disclosure must appear in at least the same location and same format as the endorsement. Example: if the endorsement is audible, the disclosure must also be made at least audibly.

2. Insufficiency of Traditional Disclosures

*  The FAQs state that there is no specific language required for disclosure, but also point out language that is not sufficient, including the following hashtags: #endorsement, #ambassador, #partner.

 *  Endorsers are now required to include the name of the brand partner in the hashtag.

 *  A platform's built-in disclosure tool may not be sufficient if such a disclosure is easy to miss and thus not clear and conspicuous.

3. Context is Now Key

* Differences in media, such as podcast vs. social media posts vs. television, require consideration between advertisers and endorsers regarding appropriate disclosures.

* Consideration must be given to the fact that disclosures that may be clear on one device may be easily missed on another device.

* Posts with short lives (e.g., Instagram stories or Snapchat) that are paid should require advertiser approval before publication.

4. Advertiser Liability

* Advertisers continue to be liable for misleading or unsubstantiated statements made through endorsements and for failing to disclose unexpected material connections between themselves and their endorsers.

* Now, advertisers may be liable for a deceptive or unsubstantiated endorsement “even when the endorser is not liable.”

* Advertisers are encouraged to provide guidance to their endorsers, monitor compliance, and take action to remedy non-compliance; however, this is not a “safe harbor”.

5. Endorser Liability

Endorsers may be liable for the following statements made in the course of their endorsements:

* representations that the endorser knows or should know to be deceptive,

* false representations that the endorser personally used a product,

* endorsements that exceed the endorser's personal experience with the product, and

* failure to disclose material connections with the advertiser.

6. Intermediary Liability

* Intermediaries include advertising agencies, public relations firms, review brokers, and reputation management companies.

* Intermediaries may be liable for “creating” ads “they know or should know” are deceptive.

7. Affiliate Links

* Affiliate links require clear and conspicuous disclosure.

* “Commission link” disclosure is not clear enough.

* "Paid Link" disclosure is sufficient if placed next to the affiliate link.

8. No Distortion of Consumer Reviews

* The May 2022 proposed updates included prohibitions for procuring, suppressing, boosting, organizing, or editing consumer reviews of their products or services in a way that distorts or otherwise misrepresents what consumers think of their products (e.g., deleting or suppressing unfavorable reviews, bribing consumers in exchange for positive reviews, falsely flagging negative reviews as “fake” on third-party platforms without substantiation).

* The updated Guides expanded prohibitions to include publishing, upvoting, downvoting, and reporting reviews (upvoting or downvoting a review is casting a vote in support of or in disapproval of it by clicking on an arrow or other icon, usually affecting the review's rank or position on a website or platform).

9. “Pay to Play” Review Sites

* "Pay to play" review sites are deceptive "even if the site discloses that rankings are impacted by payment.”

* However, if the review site is not paid for rankings but instead receives commissions (such as affiliate referral fees); the site would not be deceptive provided there is a clear and conspicuous disclosure of the payment.

10. Results Not Typical

* When an endorsement conveys a result not typically experienced by users of the product, a "results not typical" disclaimer alone is ineffective to avoid deceiving consumers.

* Instead, a disclosure is required that communicates generally expected results.

How to Get Started

A good place to start is a review of policies and procedures for collection, moderation, and publication of endorsements, testimonials, and reviews.
So-called “success story” testimonials that specify a specific result are effective marketing tools; however, they are treated by the FTC as ad claims, thereby requiring appropriate substantiation. A review should consider strategies and tactics for managing risk with the claim itself, and with the required disclosure of “generally expected results.

Author Bio

Chip Cooper is an eCommerce Attorney and Digital Marketing Compliance Attorney practicing as Of Counsel to the Atlanta, Georgia law firm of Jones & Haley, PC. For more information, visit eCommerceAttorney.io
©2023 Chip Cooper. All rights reserved.