The Coming FTC Crackdown on Misleading Influencer Marketing
In February 2020, the Federal Trade Commission’s Rohit Chopra issued a public statement sounding an alarm about fake social media accounts, fake likes, fake followers, and fake reviews and proclaiming that “bold steps” are needed “to safeguard our digital economy from lies, distortions, and disinformation.”
Criticizing the FTC’s existing regulations and enforcement strategy as toothless in deterring misleading influencer marketing, Commissioner Chopra called for stricter laws and harsher penalties. “When companies launder advertising by paying an influencer to pretend that their endorsement or review is untainted by a financial relationship, this is illegal payola,” Chopra stated, continuing that the “FTC will need to determine whether to create new requirements for social media platforms and advertisers and whether to activate civil penalty liability.”
As more and more companies turn to influencer marketing to engage with target audiences quarantined due to the COVID-19 crisis and spending more time in front of screens, companies should be aware of the changing regulatory landscape and the increasingly serious risk of non-compliance.
FTC’s Regulation of Influencer Marketing
Influencer marketing is a variety of endorsement advertising which, like all advertising, is subject to the FTC Act’s prohibition of unfair and deceptive trade practices. The obvious concern with endorsement advertising is that it is not understood as advertising at all, but instead misperceived as unsolicited praise. Accordingly, under the FTC’s long-standing Endorsement Guidelines, any “material connection” between an endorser and the marketer of a product—in other words, a connection that might affect the weight or credibility that consumers give the endorsement—needs to be clearly and conspicuously disclosed, unless the connection is already clear from the context. Material connections may consist of business or family relationships, monetary payments, or the provision of free product to the endorser.
The FTC’s official Endorsement Guidelines were last updated over a decade ago, but the FTC has made clear that they apply to social media influencer marketing, having published specific guidance for brands and, more recently, for influencers themselves to guide compliance. In short, creators need to note their post is part of an “ad,” “sponsored” content or “paid partnership.” In 2017, the FTC sent letters to over 90 celebrities, athletes, and other influencers reminding them to clearly and conspicuously disclose their relationships to brands when promoting or endorsing products through social media. The letters specifically advised that when making endorsements on Instagram, influencers should disclose any material connection above the “more” button, since consumers viewing Instagram posts on mobile devices typically see only the first three lines of a longer post unless they click “more,” which many may not do.
The FTC’s Enforcement Activity
The FTC has indicated that all parties—brands, agencies, influencers, and technology suppliers—have responsibility to adhere to the FTC Endorsement Guidelines, but in practice the FTC’s formal enforcement activity has been directed at retailers and brands.
In 2016, the FTC filed suit against Lord & Taylor, charging the retailer with, among other things, deceiving consumers by paying fifty influencers to post Instagram pictures of themselves wearing the same Lord & Taylor dress, without disclosing they had given each influencer the dress, as well as thousands of dollars, in exchange for their endorsement. Lord & Taylor ultimately settled with the FTC and agreed to cease the offending conduct and was able to avoid any monetary penalty.
In 2019, the FTC settled claims against Sunday Riley Modern Skincare, whose CEO allegedly instructed its employees to create fake profiles and post fake positive reviews of its products on Sephora.com without appropriate disclosures, including that the reviewers were Sunday Riley employees. Here too, the FTC did not impose any monetary penalty. Notably, however, Commissioner Chopra and another FTC commissioner publicly criticized the settlement as too lenient because it includes “no redress, no disgorgement of ill-gotten gains, no notice to consumers, and no admission of wrongdoing.”
It is against this background, that Commissioner Chopra—frustrated that these no-penalty settlements have failed to deter companies from presenting influencer opinions as unbiased and unprompted posts by true consumers—announced in February 2020 that he wants the FTC to consider making its Endorsement Guidelines rules official by codifying elements of them into formal rules “so that violators can be liable for civil penalties under Section 5(m)(1)(A) and liable for damages under Section 19.” Together with this announcement, the FTC has approved a Federal Register notice calling for public comments on whether the Endorsement Guides need to be updated.
The FTC’s shift in enforcement strategy is already visible. In March 2020, the FTC announced an agreement with Teami, LLC, a marketer of teas and skincare products, to settle the FTC’s lawsuit charging the company with making deceptive health claims about its tea products and promoting those claims using paid influencers who failed to appropriately disclose their connections to Teami. Under the settlement, Teami not only agreed to halt its practice, but also agreed to return $1,000,000 to customers.
Conclusion
With enhanced FTC scrutiny of social media marketing, there is a great risk of civil penalties and damages, as well as the likelihood of follow-on private lawsuits under state consumer protection laws and the Lanham Act. The potential cost of failing to ensure compliance with the FTC guides is therefore considerable. A business can minimize the risk by taking these steps:
- Companies should publish clear rules for their paid influencer partners to ensure compliance with the FTC Endorsement Guides and other published guidance. Companies should make clear that violation of the rules may result in the termination of the partnership.
- Companies should ensure employees receive proper training on social media practices and understand that their company affiliation needs to be disclosed in any post about the company’s or a competitor’s product.
- Companies also should require that paid influencers confirm they do not pay for followers or likes and ensure their social media managers build company social media accounts organically.
Adam Michaels is a partner of the firm and head of its litigation practice, with 20 years of sophisticated litigation experience covering the full range of business disputes, including breaches of contract, business torts, class actions, consumer protection, government investigations, intellectual property, non-competition, and products liability.