By: Linda Goldstein, Amy Mudge, Randy Shaheen, Jack Ferry and Matt Renick
The Federal Trade Commission (FTC or Commission) announced on Oct. 13 a widespread enforcement action against deceptive endorsement practices. The Commission sent a Notice of Penalty Offenses to more than 700 companies, notifying them that conduct related to fake or misleading endorsements and reviews could subject them to significant civil penalties. Deceptive reviews and endorsements have been a focus of recent FTC cases and guidance, but these letters reflect its largest action to date and serve as a warning to industry that the Commission intends to actively enforce this area of the law.
The FTC notes in the press release and template letter that its Endorsement Guides and recent enforcement actions in this space best illustrate violations of the law. It cites the following examples of misleading conduct:
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; and misrepresenting that the experience of endorsers represents consumers’ typical or ordinary experience.
When the FTC refers to an “endorser,” it defines that term as anyone with a material connection to the company. Typically, this means a person who is paid, but it could also mean a person who is sent a free product or receives some other form of compensation. Companies should review their marketing materials to make sure that their endorsers are not making any deceptive claims. If you cannot make a claim in your own advertising, then you cannot pay or otherwise compensate someone to make it for you. This includes third-party endorsers who are incorporated into traditional advertising such as a commercial, as well as influencers who are compensated to post about a product or service on social media.
It’s also important to note that the FTC specifically mentions reviews, which can be a kind of endorsement if there is a material connection between the reviewer and the company. The FTC has previously taken enforcement action against fake reviews. This affects more than companies fraudulently posting fake reviews, however, because if a company compensates a reviewer, for example, by offering a small gift to everyone who posts a review, technically, it must disclose that material connection.
As a reminder, the FTC usually enforces this type of conduct through Section 5 of the FTC Act, which broadly prohibits deceptive practices in advertising. The FTC’s ability to obtain equitable relief under Section 5 was stymied by a recent Supreme Court ruling, as explained in our previous blog post on the subject. Here, the Commission is working around that limitation by sending notice letters of conduct that has been found unlawful in previous FTC administrative orders. This gives companies the actual knowledge required to create liability under 15 U.S.C. § 45(m)(1)(B) that an act or practice is unlawful. The civil penalty is up to $43,973 per violation.
Notably, the FTC expressly states both in the list of companies receiving a letter and in the sample letter template that “FTC staff is not singling out your company or suggesting that you have engaged in deceptive or unfair conduct.” Instead, the Commission sent these letters to the largest companies in different areas. This gives it the ability to take action against these companies under 15 U.S.C. § 45(m)(1)(B) and also notifies the marketplace at large that these practices will not be tolerated.
Whether or not they received a letter, companies should be reviewing how they treat endorsements and reviews. We advise clients on these issues every day. If you have any questions about best practices in these areas, please reach out.