The explosion of social media has revealed the power of social media marketing. This includes customer reviews on sites such as Amazon.com or individual blogs, video reviews on YouTube, buzz spread through Twitter, and individual posts and other product-related links on Facebook or MySpace. While product manufacturers are racing to take advantage of social media marketing, their lawyers need to keep an eye on new litigation risks, especially now that the Federal Trade Commission (FTC) has warned that limits on deceptive advertising apply equally in cyberspace.

Social media marketing enables product manufacturers to tap into and even shape the most effective form of marketing: word-of-mouth reviews of product users. An entire viral marketing industry has emerged to help product manufacturers market their products on the web. In this new-media blitz, consumers or bloggers often receive free products to help facilitate online reviews, and some companies have enlisted celebrity support.

HBO’s hit television show “Entourage” recently illustrated the phenomenon when one of its lead characters, movie star Vinnie Chase, tweeted about how much he loved his pal Turtle’s tequila Avion, and demand skyrocketed overnight. Did Chase disclose in his positive tweet that he recently agreed to appear in advertisements for the manufacturer? No. Does that matter? Isn’t it enough that Chase sincerely believed the tequila was terrific after drinking it? Aren’t we just talking about a subjective opinion here? And what about caveat emptor? On the other hand, isn’t it plausible that at least some would give less credence to the endorsement and have made different purchasing decisions if they knew the speaker was paid or received the reviewed product for free?

The FTC has chimed in, and its views may influence the course of social media marketing and related litigation for years to come. In December 2009, the FTC updated its “Guides Concerning the Use of Endorsements and Testimonials in Advertising” to address social media marketing in the context of whether endorsements by consumers or celebrities constitute deceptive advertising in violation of the FTC Act, 45 U.S.C. §45.

The FTC intended its guides, which do not have the force and effect of law, to provide guidance to marketers about what sort of conduct the agency thinks constitutes deceptive advertising. According to the FTC guides, social media marketing is deceptive if it contains “false or unsubstantiated statements” or fails “to disclose material connections” between the reviewer and manufacturer.

To avoid liability, the FTC guides direct speakers to disclose clearly and conspicuously any material connection in the context of the product review itself. Specifically, they direct bloggers, celebrities and other reviewers to disclose not only whether they were paid to provide the review but also whether they received the product for free to facilitate the review.

“Knowing about the connection is important information for anyone evaluating the endorsement,” the FTC has explained, “so the ad is misleading unless the connection is made clear.” Under the guides, the reviewer and manufacturer can be liable for deception if the reviewer does not disclose sufficiently any material connections to potential consumers.

The Risk

Although the FTC lacks the resources to bring enforcement actions against all who violate the guides’ terms, companies across the country have begun to assess the potential risk of private class action litigation because the plaintiffs bar may try to fill the gap as private attorneys general under “little FTC acts,” i.e., state consumer fraud law. But how serious is the risk, especially for companies doing business nationally or just in Texas?

Outside the social media context, plaintiffs counsel in some states, such as California, have had increasingsuccess in getting courts to certify certain consumer-fraud class actions in deceptive advertising cases based on material omissions, exploiting the comparatively relaxed reliance standards in these states’ consumer-protection laws. Some plaintiffs lawyers have argued that the nondisclosure of material information in product advertising — i.e., information that would be important to a reasonable consumer — should give rise to a classwide inference of reliance, which they say counters the argument that judges should not certify any class when individualized issues of reliance predominate.

Given the FTC’s rationale that nondisclosure of material connections in social media marketing can be deceptive because it involves information that would be important to any reasonable consumer in evaluating the endorsement, the guides may be music to the ears of the plaintiffs class action bar, who may be encouraged to file consumer class actions in the new social media marketing context.

Under Texas law, however, there is little genuine class action risk. To be sure, plaintiffs could claim that the same failure to disclose in the social media context that the FTC identifies as deceptive under the FTC Act is likewise “deceptive” under Texas’ Deceptive Trade Practices Act (DTPA).

But any effort to secure class certification seems foreclosed by decisions rejecting certification of DTPA claims due to the predominating individualized issue of “reliance,” under the Texas Supreme Court’s reasoning in 2003′s Henry Schein Inc., et al. v. Stromboe, et al.

In its 2005 decision in Fidelity & Guaranty Life Insurance Co. v. Pina, et al., the 13th Court of Appeals emphasized that, under Henry Schein, class certification of DTPA claims is “a near impossibility” because classwide proof of reliance demands that there be “no differences” in whether and how individual class members actually relied on the deception.

In the social media context, whether and to what extent consumers relied on the deception is highly individualized and not amenable to classwide proof. Indeed, social media cases will have exactly the sort of vast individual variation on reliance, with many factors other than the undisclosed material connections influencing purchaser decisions, that the Texas Supreme Court identified on Feb. 19 in Southwestern Bell Telephone Co. v. Marketing On Hold Inc. as characterizing those cases in which individual reliance questions predominate and defeat class certification

But even if the class action risk is minimal for local companies whose business and marketing are limited to Texas, it remains to be seen whether the FTC guides in the social media context will spawn significant class action risks in other states for those doing business nationally.

So, what should Texas lawyers advise a client interested in jumping on the social media marketing bandwagon? After carefully reviewing the FTC guides, clients should make sure that the review or endorsement itself clearly and conspicuously discloses all material connections between the clients and any endorser or product reviewer. Otherwise, they may expose themselves to liability. If the client does business only in Texas, then the class action risk of potentially large monetary liability may be slim. If the client does business nationally, however, the client may expose itself to significant risks in states that have more plaintiff-friendly class action law than Texas.

Steven B. Weisburd is an equity partner in Dechert in Austin. His civil litigation and appellate practice includes representing corporate defendants in mass aggregated and class action cases, including consumer fraud class actions, across the country.