The importance of promoting brands and products on digital platforms has continued to grow as advertisers are learning how to use social media to reach out to specific populations by harnessing the power and goodwill of the people on these platforms that are popular with and influence particular niche groups of interest. These so-called “influencers” can have thousands, or even millions and tens of millions of followers, and be popular both broadly and within a segment such as C++ software engineers. These influencers might organically discuss a product or brand if they like it, but advertisers may also seek them out to leverage their social media presence (on Facebook, Instagram, Snapchat, etc.) to endorse or promote a product for some form of consideration. Therein lies the issue: When is the influencer an objective critic, and when is she a paid spokesperson? Obviously, the consumer will weigh the credibility, objectivity and veracity of the two types of speech differently, as they would treat the distinction between any other types of commercial and editorial speech. Only here, unlike on TV, it is more difficult to tell commercial verses editorial messages apart.
‘Material Connection’ Enter the Federal Trade Commission (FTC), which has now for years consistently warned advertisers, brands and influencers about the need for adequate disclosures when there is a “material connection.” See, “Do Tell,” Los Angeles Lawyer Magazine (May 2017, p. 28). A material connection is a connection that might affect the weight or credibility that consumers give an endorsement, and can be a business or family relationship, monetary payment, or the gift of a free product. However, despite the increase in social media endorsements and clear material connections to products and brands, advertisers, brands and social media influencers have failed to strictly adhere to the FTC’s disclosure requirements and repeated warnings. Based on this lack of compliance, the FTC has recently ramped up its enforcement actions to ensure such endorsements adequately comply with FTC regulations and to warn advertisers, brands and influencers to take heed.
Even before social media became mainstream, the FTC has been concerned with the use of influencers and celebrities that promote or endorse brands on digital media such as blogs and in talk shows, or in other contexts where it is not clear the influencer was a paid spokesperson. Based on these concerns, in 2009 the FTC issued the “Guides Concerning the Use of Endorsements and Testimonials in Advertising” (E&T Guides), 16 C.F.R. Part 255. The E&T Guides, along with additional subsequent guidance and dozens of enforcement actions, provide a helpful road map for conducting legally compliant digital media advertising and promotional marketing in social media. The E&T Guides address the application of 15 U.S.C. 45 §5, the FTC’s deception and unfairness authority, “to the use of endorsements and testimonials in advertising.” Id. Under Section 5, the four core principles for compliance are: 1) advertising must be truthful and not misleading; 2) advertising must substantiate any express or implied claims; 3) advertising cannot be unfair or deceptive; and 4) any disclosures necessary to make an ad non-deceptive must be clear and conspicuous. The clear and conspicuous standard is judged by the FTC by looking at the “four Ps” of a disclosure — proximity, presentation, placement and prominence. For more information, review the FTC’s 4 P’s guidance to effective disclosures.
These E&T Guides have been further supplemented with the FTC’s release of Frequently Asked Questions (FAQs) about compliance with the E&T Guides, which discusses examples of adequate disclosure of endorsements and appropriate social media practices. See, “The FTC Endorsement Guides: What People Are Asking” (2017). These FAQs provide numerous examples of what is considered a material connection to a brand such that the connection would be considered an endorsement, the manner in which adequate disclosure is achieved based on the digital platform, and various hypotheticals based on specific questions from advertisers, brands and influencers.
FTC Takes Action Although the FTC has published the E&T Guides and the FAQs answering specific questions, and brought enforcement actions against many brands and advertisers’ noncompliance, social media influencers have continued to shun the FTC’s E&T Guides as well as the FAQs when endorsing products and brands. Many claim doing so is “not organic” and argue they would never endorse something they do not honestly support and thus compensation is irrelevant. Of course, a dishonest endorsement would itself be deceptive — for example claiming to use the product when the person does not — and the omission of a material connection disclosure is merely a different form of deception. This lack of compliance has propelled the FTC to take action against groups and individuals for violating 15 U.S.C. 45 §5 to demonstrate compliance monitoring and corrective action programs, and much of the interesting aspects of consent orders in the last few years have concerned what brands and agencies have agreed to do in this regard to settle an enforcement action. These compliance program elements and practices have also made their way in each set of FAQ updates. However, the time has finally come for the FTC to move directly against the Kardashians of the social media world. In April 2017, the FTC sent warning letters to 90 social media influencers, including Ms. Kourtney Kardashian (and others in her family), who promote products on Instagram, reminding the influencers of their obligations to effectively disclose material connections. See, Social Media Influencer FTC Warning Letter, FTC (2017). These warning letters were based on influencers endorsing products or brands without adequately informing consumers that the product endorsement was not independently promoted by the influencer (i.e., no disclosure, inadequate hashtags such as #sp, hiding the disclosure in the “more” section). See, “FTC Turns Attention to Social Media Influencers Working for Advertisers,” Alan Friel and Stephanie Lucas (2017). These warning letters served as the first time the FTC reached out directly to warn specific social media influencers themselves and marked a significant and important shift in the FTC’s regulation of social media influencer disclosures.
Then, in September 2017, the FTC filed its first-ever complaint against two individual social media influencers who endorsed a video game gambling site known as Counter-Strike: Global Offensive Lotto (CSGO Lotto) without providing adequate disclosure. See, “FTC Takes Action Against Individual Social Media Influencers,” Stephanie Lucas (2017). (The FTC Complaint against CSGOLotto is available at http://bit.ly/2ACROkz.) The CSGO game uses collectible virtual items called “skins” and the CSGO Lotto website allows consumers to gamble using skins as virtual currency. Id. Importantly, the social media influencers named in the complaint were officers and owners of the company operating the CSGO Lotto website and received a portion of the revenues generated from the service. Id. The complaint alleged that Respondents Trevor Martin and Thomas Cassell posted videos of themselves using the CSGO Lotto website on their YouTube channels and Twitter with video titles and tweets such as “HOW TO WIN $13,000 IN 5 MINUTES (CS-GO Betting)” without disclosing their interest and ownership rights in the CSGO Lotto website. Id. In addition, the respondents allegedly ran an “influencer program” and paid other social media gaming influencers to promote the CSGO Lotto website without a clear disclosure, and prohibited these influencers from posting anything negative about the site. Id. The FTC and respondents reached a settlement that prohibits respondents Martin and Cassell, as well as the company operating the CSGO Lotto website, from misrepresenting that their endorsements and other paid endorsers are independent users of the CSGO Lotto site. See, FTC Settlement with CSGO Lotto, Federal Trade Commission (2017). The settlement also requires the respondents to clearly and conspicuously disclose any material connections that they have with social media influencers and to monitor those endorsers to assure they provide adequate disclosure of a material connection. Id.
This recent complaint and settlement from the FTC is a direct warning to social media influencers, advertisers and brands about the FTC’s intent to enforce regulatory action against companies and individuals for failing to adequately disclose material connections and misleading consumers with these unfair practices. More recently, in September 2017, the FTC sent additional warning letters to Instagram influencers who failed to comply with the April 2017 warning letters to demonstrate the FTCs commitment to enforcing unfair practices and inadequate disclosures. See, Social Media Influencer FTC Re-warning Letter, FTC (2017).
Conclusion Based on the 2009 FTC E&T Guidelines, the FTC’s FAQs and recent FTC enforcement actions against advertisers, brands and individual influencers, brands and influencers are strongly encouraged to follow the FTC’s best practices for disclosure.
Best practices that brands, advertisers and influencers can implement to ensure proper material connection disclosures are made include: 1) implement social media endorsement guidelines and policies for all internal and third parties marketing and promoting on behalf of the brand that reflect the FTC’s FAQ recommendations and program elements that have been agreed upon in relevant consent orders; 2) obligate employees, agencies, influencers, bloggers and others that receive consideration from the advertiser to effectively disclose material connections (consistent with the 4 Ps and FAQs), no matter how minimal (e.g., a sweepstakes entry, discounts for referrals, etc.), and to be accurate and not deceptive or misleading in either their association to the brand or what they say about it (these obligations should be explained separate and apart from the business and financial provisions of an engagement contract); 3) monitor the influencers’ conduct in connection campaigns; 4) if instances of noncompliance occur, enforce proper compliance by requiring remedial action and taking disciplinary and other corrective action; and 5) set up an incentive for compliance by holding back a material portion of compensation until compliance is confirmed.
Based on the FTC’s comprehensive published guidance on social media material connections and adequate disclosures, it is imperative brands, advertisers and influencers conduct social media endorsement campaigns in a legally compliant and transparent manner. As social media endorsements continue to evolve with rapidly changing technology, brands, advertisers and influencers should continue to adapt their adequate disclosure based on the FTC’s increasing interest in this area of law.
***** Alan Friel is a partner in Baker Hostetler and a member of the Board of Editors of our sibling LJN newsletter, Cybersecurity Law & Strategy. Stephanie Lucas is an associate at the firm. Both are residents in Los Angeles and members of the firm’s Advertising, Marketing & Digital Media and Privacy and Data Protection practices.