Endorsements Testimonials and the FTC

By: Justin Prochnow

Beverage companies need to be careful. Endorsements and testimonials are very powerful and influential forms of advertising. Consumer testimonials and celebrity endorsements often provide the final assurance to consumers that their purchase is warranted. Due to their success, these popular forms of advertising are utilized by all types and sizes of companies.

Whether it is a well-established company trying to keep its share of the marketplace or a young company trying to entice new consumers, endorsements can be and are a vital part of many marketing and advertising strategies.

Endorsements are not a new phenomenon. For centuries, “snake-oil” salesmen have touted their products from carts in the Greek marketplaces, covered wagons in the Old West, or the backs of trucks in the early 20th century.  What has changed significantly is the reach of those messages. With the ever-increasing number of companies conducting online marketing and advertising, the expansive range and sheer volume of potential customers has exponentially increased. In an effort to rein in companies trying to “one-up” each other with bolder and more outlandish claims, the Federal Trade Commission (FTC) has significantly intensified its regulatory focus regarding the use of endorsements and testimonials.  Recent actions taken by the FTC are a clear message that the agency is not making idle threats and is going to closely scrutinize endorsements and testimonials moving forward.

UPDATING THE GUIDES

In 1980, the FTC created the Guides Concerning the Use of Endorsements and Testimonials in Advertising to provide guidance to companies on the proper use of endorsements and testimonials in advertising. In an attempt to keep up with changing times and new technology, the FTC published a revised version of the Endorsement Guides in December 2009. The revisions to the Endorsement Guides clarify some of the previous guidance topics, highlighting the need to disclose material connections between an endorser and the company marketing the products. The revisions also cover some new issues that were not previously addressed, such as the conveyance of endorsements and testimonials through different social media outlets like blogs, Twitter and Facebook.

Most people are likely familiar with the basic principles governing the use of testimonials and endorsements in advertising. Companies that use endorsements in their advertising are essentially adopting the statements and claims made in the endorsements as their own. Therefore, companies using endorsements in advertising cannot use endorsements that make claims that the company could not legally express on its own.

However, in a situation that is becoming increasingly important in the age of the “functional beverage,” the endorsements of products that are made outside of the immediate control of the company are the issue. Multi-level or affiliate marketers and distributors, celebrity endorsers, and bloggers, to name a few, are often utilized to promote products. Those third-party endorsers must comply with applicable laws and regulations but perhaps less clear is the duty of a company to ensure that endorsements made by these third parties that promote the company’s products are legally permissible. In fact, recent regulatory cases involving actions brought by the FTC have underscored that companies sponsoring products now have the burden of responsibility to monitor those endorsements and ensure that they are compliant with applicable laws and regulations

MARKETING & DISTRIBUTING NETWORKS

Two recent actions by the FTC involving affiliate marketers show, better than any guidance document, how the FTC is likely to enforce the obligations of companies to monitor third parties. In March 2011, the FTC announced the settlement of an action filed against Legacy Learning Systems, the makers of a series of guitar-lesson DVDs. The crux of the FTC’s case against Legacy was that Legacy disseminated deceptive advertisements by representing that online endorsements reflected the views of ordinary consumers or independent reviewers when, in fact, they were written by affiliates of Legacy.

This reflected a clear violation of the duty to disclose any material connections relevant to endorsements. Pursuant to the Endorsement Guides, a material connection is a connection that might substantially affect the weight or credibility of an endorsement or testimonial and can be a financial, personal or another similar connection that consumers would not reasonably expect to be present without disclosure. The FTC asserts that endorsements coming from people that have a financial connection to the product, such as the affiliates in the Legacy case, might influence the credibility of the endorsements and, therefore, must be disclosed.

Another newsworthy consequence of the Legacy case was the requirement imposed upon Legacy that it set up and maintain an affiliate monitoring program. The FTC has indicated, through the Legacy case and other guidance documents, that companies must monitor and review affiliate and distribution networks. Effective programs usually consist of three steps to properly monitor endorsements and other statements made by network members. First, a company must educate distributors, marketers and other advertisers as to what can and can’t be said about the company’s products. Next, the company must periodically review endorsements and other statements made by the third parties. Legacy, in the consent order, agreed to monitor and review the websites of its top fifty revenue-generating affiliates on a monthly basis, as well as another fifty affiliates on a random basis. Finally, a company must be prepared to take action against a third-party endorser if the company discovers that deceptive statements have been made or disclosures have not been properly made.

While companies sponsoring products certainly have a duty to monitor affiliates marketing products, it doesn’t mean that affiliates are absolved from responsibility themselves. The FTC made a big splash in April 2011 by simultaneously filing suits against ten different affiliate marketing operations that allegedly committed fraud in the marketing of acai berry supplements for weight loss. In those suits, the FTC alleged that the defendants operated web sites that purported to belong to legitimate news-gathering organizations when, in reality, the sites were simply advertisements aimed at deceptively enticing consumers to buy the weight-loss products. The sites included the names and logos of major media outlets and falsely represented that the reports on the web sites had been seen on the major networks. The sites purported to document a reporter’s first-hand experience with acai berry supplements, reporting that the investigative reporter had lost 25 pounds in 4 weeks. The reports detailing the success of the weight-loss products were designed to drive traffic to the sites where certain merchants sold the products. In addition to alleging that the defendants committed egregious fraud by creating the fictitious websites and reports, the FTC also alleged that the advertisements were misleading and deceptive in that the defendants failed to disclose their financial relationships to the merchants selling the products. David Vladeck, Director of the FTC’s Bureau of Consumer Protection, made the FTC’s position very clear when the lawsuits were announced. “Almost everything about these sites is fake. The weight loss results, the so-called investigations, the reporters, the consumer testimonials, and the attempt to portray an objective, journalistic endeavor.” Rest assured, resolution of these cases is likely to result in substantial penalties for the defendants.

CELEBRITY ENDORSEMENTS

While testimonials from consumers can be helpful to sell products, celebrity endorsements are often even more influential in promoting products. Celebrities are frequently perceived as trusted and reliable sources of information. Many fans want to emulate their idols and drink the same beverages that their favorite stars drink or drive the same type of car they drive. According to the FTC, celebrity endorsements, just like other testimonials and endorsements, must also be truthful and not misleading and must be accompanied by disclosures if material connections exist which would require such disclosures. While companies have a duty to take steps to ensure that celebrity endorsements made about their products are legal, companies often have less control over statements made by celebrities due to the varying forums in which such endorsements can be made and the lack of final authority over the finished product conveying the endorsements.

The convergence of celebrities and social media has proven to be another challenge when it comes to companies’ compliance with the laws and regulations regarding endorsements. Whether statements are made on Facebook or tweeted through Twitter, endorsements made through social media outlets are subject to the same requirements regarding material disclosures as the requirements for traditional advertising. In a March 2011 speech to the Connecticut Bar Association, FTC Commissioner Julie Brill discussed a “tweeting” situation involving rapper 50 Cent. 50 Cent mentioned a penny stock in a series of tweets and the stock price skyrocketed 240 percent.  It turns out that the company mentioned by 50 Cent has an interest in a line of high-end headphones called “Sleek by 50 Cent.” While 50 Cent later tweeted in two follow-up messages that he actually owned stock in the company, no one knew that 50 Cent stood to benefit when it was first mentioned. The FTC has indicated that an endorser must identify connections, even when there are only 130 characters to work with. The FTC has recommended that endorsers mark tweets with something like #endorser, #paid, #ad, or #promo to indicate such connections.

BLOGGERS

A third method used with increasing frequency by companies to endorse products is the enlistment of bloggers to promote products. While the Endorsement Guides did not previously address issues surrounding blogging, the current Endorsement Guides now address topics like blogging and other social media outlets. Companies must be cognizant of the fact that endorsements made through bloggers are also subject to the same constraints as other endorsements.

In determining whether connections must be disclosed, the fundamental question is whether, when viewed objectively, the relationship between the advertiser and the speaker is such that the speaker’s statement can be considered “sponsored” by the advertiser and therefore an “advertising message.” Thus, a consumer who purchases a product on his or her own, without special compensation from the manufacturer, and praises it on a personal blog is not providing an endorsement that is subject to the guidance contained in the Endorsement Guides. However, a blogger who is compensated by a company to promote its products is required to comply with the requirements for properly disclosing material connections. Considerations for determining whether a blogger has been compensated such that a disclosure is necessary include monetary payments, the provision of products or services to the blogger by the sponsoring company for free, the value of items received, and the existence of a written agreement between the parties.

The FTC action against Reverb Communications provides further insight into the FTC’s direction in this area. In August 2010, the FTC filed a complaint against Reverb, a California public relations company. In the complaint, the FTC alleged that Reverb employees posted reviews about the gaming applications of clients of Reverb on iTunes. The reviews were posted using account names that would give readers the impression that they were submitted by disinterested consumers. At no time did Reverb or the companies sponsoring the gaming systems disclose that the reviews were written by employees of Reverb. Shortly thereafter, the FTC announced a settlement with
Reverb in which Reverb agreed that it will not misrepresent reviews as coming from independent users and will make proper material disclosures.

While the FTC only brought the action against Reverb and its owner, both bloggers and the companies sponsoring the products endorsed by the bloggers may be held responsible for misleading endorsement that fail to disclose material connections. The responsibility of companies for statements made by bloggers is similar to that which exists for companies using other types of third party endorsers. The FTC will look at efforts by a company to advise the bloggers of their responsibilities and to monitor their statements in determining whether action is warranted against the blogger and the sponsoring company. Accordingly, it is prudent for companies to employ monitoring programs similar to those recommended for marketing and distribution networks in order to effectively supervise bloggers promoting products on behalf of the company.

FUTURE PROMOTIONS

Whether they are being used in direct advertising by a company, tweeted by a celebrity, or posted by a blogger, one thing is certain: the chances of an endorsement being reviewed by the FTC are greater than ever been before. This doesn’t have to mean the end of a highly persuasive and successful form of advertising for companies, but it does mean that companies must carefully monitor those who help them sell their products and make proper disclosures to avoid unwanted action from the FTC. The big winners from this increased focus on endorsements and testimonials are the consumers. This emphasis on transparency should give consumers greater confidence that they are getting the complete story when making that next important purchase.

 

Justin J. Prochnow is an attorney and Shareholder in the Denver office of the international law firm of Greenberg Traurig LLP. His practice concentrates on legal issues affecting the beverage, supplement and conventional food industries. He can be reached at (303) 572-6562 or prochnowjj@gtlaw.com.