Bloggers and Advertisers Beware: FTC Rules on Sponsored Endorsements Create Major Risks for "Word of Mouth" Advertising
New FTC Rules on Bloggers: According to the Word of Mouth Marketing Association (WOMMA), word of mouth advertising is "the most honest form of marketing, building upon people's natural desire to share their experiences with family, friends, and colleagues." But here comes the rub. When marketers pay for "word of mouth" messages, haven't the messages ceased to be the result of "people's natural desire to share" -- and instead become the result of people's natural desire to make money?
This certainly is the view of the FTC, which on October 5, 2009 finalized a new revision of its rules governing the use of testimonials and endorsements in advertising (to be codified at 16 C.F.R. §255). These revisions make it clear that the FTC intends to extend the reach of its advertising regulation and enforcement to bloggers who make sponsored endorsements of products and services.
The rules affect both advertisers and bloggers who cooperate on sponsored endorsements. For example, the new rules state that the FTC intends to hold both advertisers and bloggers liable for false and misleading statements made by either party in the course of an endorsement. This means that an advertiser who provides free products to a blogger can be liable if the blogger makes false statements about the products in her blog. And the blogger can be liable if she repeats false statements from the advertiser. Both parties can also be liable if the blogger fails to disclose her connection with the advertiser.
Word of mouth advertising in the age of Web 2.0
Word of mouth advertising was once naively thought to refer to a spontaneous and uncompensated testimonial communicated from one consumer who was excited about a product he had just tried to another customer. Word of mouth marketing has long been thought to be more effective than print advertising because the message comes from a peer that the customer trusts. When a customer hears a peer rave about a product, she assumes that the endorser is speaking out of his genuine experience with the product.
Now that we have moved into the world of Web 2.0, which has put the megaphone of the Internet into the hands of consumers, word of mouth has morphed into planned, compensated advertising that is piped through consumers via social media, such as blogs. This once spontaneous activity now has its own trade association -- WOMMA -- which boasts over 400 marketers as members.
WOMMA's website lists about a dozen different types of word of mouth marketing campaigns, by which an advertiser can "harness, amplify, and improve" on this "pre-existing phenomenon." Some of these methods include old-fashioned P.R., such as using high-profile entertainment events or news to create "buzz." Others include creating social networks or affinity groups of users that have a special interest in a product.
However, several categories involve providing products or compensation to "influential" consumers, who "volunteer" to tell others about the product. In "product seeding," the marketer provides samples of product to "influential" individuals, such as bloggers or persons with large social networks, who then write posts about the product on their sites. In "evangelist" and "influencer" marketing, the marketing "cultivates evangelists, advocates, or volunteers who are encouraged to take a leadership role in actively spreading the word on [the marketer's] behalf" -- in other words, the marketer pays the blogger to write about the product.
Social media posts covered by the FTC rules
The new FTC rules don't constitute a new extension of the FTC regulations on deceptive advertising to blogs. The prior FTC rules already arguably covered any form of media, including social media, such as blogs. Rather, the new rules and the FTC's statements in its Notice of Adoption simply make it clear that the FTC intends enforce these rules on new media sites, including, specifically, blogs.
According to the FTC, the rules will be applied to consumer-generated endorsements, such as blogs, only if they are sponsored by an advertiser. Notice of Adoption at 8. An "endorsement" includes "any advertising message . . . that consumers are likely to believe reflects the opinions, beliefs, findings, or experiences of a party other than the sponsoring advertiser. . . ." 16 C.F.R. § 255.0(b). In other words, to be an endorsement, a blog post must appear to be reflect the opinion of the author of the post -- whether or not that opinion reflects the advertiser's point of view.
To determine whether an endorsement has been sponsored, the FTC will look at such things as whether the author was: "(1) acting solely independently, in which case there is no endorsement, or (2) acting on behalf of the advertiser or its agent, such that the speaker's statement is an "endorsement" that is part of an overall marketing campaign." Notice of Adoption at 8. According to the FTC, even if an advertiser lacked control over a specific statement made by a blogger, this would not disqualify the statement from being deemed a sponsored endorsement under the rules. Rather, to determine if an endorsement is sponsored, the FTC plans to look at the level and consistency of compensation received by the blogger.
According to the FTC, a consumer who purchases a product with his or her own money and praises it on a personal blog or on an electronic message board will not be deemed to be providing an endorsement. Similarly, if a consumer "receives a single, unsolicited item from one manufacturer and writes positively about it on a personal blog or on a public message board, the review is not likely to be deemed an endorsement, given the absence of a course of dealing with that advertiser (or others) that would suggest that the consumer is disseminating a "sponsored" advertising message." Notice of Adoption at 8-9.
On the other hand, "postings by a blogger who is paid to speak about an advertiser's product" will be considered to be sponsored endorsements. Similarly, if a 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" or the blogger participates in a "network marketing program", the blogger's statements are likely to be deemed to be sponsored endorsements. Notice of Adoption at 9-10.
Responsibilities and liabilities for bloggers and advertisers
If a blog post constitutes a sponsored endorsement, then it must meet the FTC's rules that apply to all other forms of endorsements and testimonials. This means that the endorsement "must always reflect the honest opinions, findings, beliefs, or experience of the endorser." 16 CFR § 255.1(a). It also means that if the blogger says that he/she has used the product, then he/she "must have been a bona fide user of it at the time the endorsement was given." 16 C.F.R. § 255.1(c).
Moreover, in a new rule, both the advertiser and the endorser can be liable for statements made by a blogger. The advertiser is liable for "false or unsubstantiated statements made through endorsements, or for failing to disclose material connections between themselves and their endorsers." 16 C.F.R. § 255.1(d). Advertisers originally objected to this rule, since they don't have complete control over statements made by new media endorsers. However, the FTC rejected this argument, reasoning that, "in employing this means of advertising [i.e., word of mouth], 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." Notice of Adoption at 15. However, the FTC stated that it would consider efforts by advertisers to police bloggers when deciding whether or not to prosecute an advertiser.
Bloggers "also may be liable for statements made in the course of their endorsements." 16 C.F.R. § 255.1(d). In the example given by the FTC, an advertiser requests that a blogger try a new body lotion and write a review on her blog. The blogger then makes the unsubstantiated claim that the lotion cures eczema and recommends the lotion to readers who suffer from this condition. In this case, both the advertiser and blogger could be liable if this claim is false. 16 C.F.R. §255.1, Example 5.
However, bloggers should beware that this rule could also hold them liable for repeating false or misleading information provided to them by the advertiser. The mere fact that an endorser is simply reciting information from the advertiser does not relieve him/her of liability. The FTC has previously brought actions against persons such as celebrity endorsers or telephone solicitors in the same situation. See FTC v. Garvey, 383 F.3d 891 (9th Cir. 2004); FTC v. Publishing Clearing House, Inc., 106 F.3d 407 (9th Cir. 1997). According to the Notice of Adoption, while endorsers "are not required to become experts on the product or the industry", they "have an obligation to make reasonable inquiries of the advertiser that there is an adequate basis for assertions" they are repeating. Notice of Adoption at 20.
The rules also impose an obligation on an endorser to disclose his/her connection to the advertiser -- if such a connection would not reasonably be expected by the audience. 16 C.F.R. § 255.5. This means that a film star who advertises a food product on TV is not required to disclose the fact he has been compensated -- because TV viewers expect such celebrities to be paid. 16 C.F.R. § 255.5, Example 2.
However, a blogger making an endorsement as part of a word of mouth campaign would likely need to disclose the fact that he/she has been compensated. In an example given by the FTC, a college student who regularly receives free video games from manufacturers and then blogs about them "should clearly and conspicuously disclose that he received the gaming system[s] free of charge." According to the FTC, readers of a blog are unlikely to know that the blogger received the game system free of charge in exchange for his review of the product, and this fact likely would materially affect the credibility they attach to his endorsement. 16 CFR § 255.5, Example 7.
Final note
Given the aggressiveness of the FTC in recent years, I fully expect to see enforcement actions by the FTC against bloggers and others in the social media world who participate in sponsored endorsements. If you have any questions about these new regulations, feel free to contact me.
David D. Johnson is a business lawyer whose practice focuses on litigation and other issues relating to digital media and consumer electronics companies. David can be contacted at (310) 785-5371 or DJohnson@jmbm.com.
