Endorsements and Claims inSocial Media and Affiliate Marketing:

FTC Guides & Enforcement

Affiliate Summit West, Las Vegas, NVJanuary 9, 2012

Thomas A. Cohn, LeClair Ryan LLCThomas.Cohn@LeClairRyan.com

www.leclairryan.com

Bloggers [and other Affiliates] Beware: FTC Warns, Then Fires

The FTC April 2010 "closing letter" to AnnTaylor Stores was like Gunsmoke's Marshall Dillon shooting a warning at online marketers and bloggers: You'd better take revised Endorsement Guides very seriously.

They require advertisers to disclose "material connections" with endorsers. The revised Guide's “new media” examples include a manufacturer who sends a new video game to a blogger, who reviews it favorably.

 The Guides say "the blogger should clearly and conspicuously disclose that he received the gaming system free of charge.“

FTC investigated AT because it gave gifts to bloggers who attended the review of its summer 2010 collection, and some of them failed to disclose that when they blogged about it.

FTC didn't investigate the individual bloggers, but examined whether AT had taken sufficient steps to prevent or correct their failure to disclose this "material connection."

Only 31 bloggers attended the preview, and each was promised a gift card worth up to $500 if they posted coverage of the event within 24 hours.

Ann Taylor [cont’d]

FTC closed investigation in April 2010 without making AnnTaylor sign consent agreement, because: preview was the only one AnnTaylor ever held; only a few bloggers were involved, and some of them did disclose they had been given gift cards; and AnnTaylor later adopted a written policy stating that it would never again give gifts to bloggers without first telling them they were expected to disclose this in their blog.

In its closing letter, FTC said it expected that AnnTaylor "will both honor that written policy and take reasonable steps to monitor bloggers' compliance with the obligation to disclose gifts they receive." This issue arises often in affiliate marketing, where a company's affiliates endorse its products in their blogs [or reviews, articles, or other published content].

FTC's closing letter demonstrates that marketers should have a written policy governing disclosures by affiliates, and monitor those affiliates to determine whether the policy is observed or ignored.

FTC v. Reverb settlement In August 2010, FTC moved from warning to enforcement. In a settlement

with a PR agency that used its employees to blog positive "customer" reviews for the video games of the agency's client, FTC signaled that it will hold advertisers and their "hired guns" responsible for postings that do not disclose blogger's connection with company whose products are touted.

The agency did not have to pay money, but it agreed to an administrative order against endorsements promoting advertisers without disclosing material connections between endorser and advertiser.

For more on this first FTC enforcement action applying the revised Endorsement Guides, see the press release announcing the action, and the FTC's blog discussing the Guides:

http://www.ftc.gov/opa/2010/08/reverb.shtm and

http://business.ftc.gov/blog/2010/09/full-disclosure.

Reverb [cont’d] Now that FTC has followed its warning with action, there will likely

be further enforcement affecting bloggers and other affiliates. But FTC clearly is targeting advertisers and their agents, not individual bloggers, for failing to disclose compensation and other connections between endorser and advertiser.

The FTC message was clear: “Companies, including public relations firms involved in online marketing, need to abide by long-held principles of truth in advertising,” said Mary Engle, Director of FTC’s Division of Advertising Practices.

“Advertisers should not pass themselves off as ordinary consumers touting a product, and endorsers should make it clear when they have financial connections to sellers.”

FTC v. Legacy Learning Systems settlement [March 2011]: affiliate marketing and consumer testimonials

Legacy, seller of lesson DVDs, including “how to play guitar” series, represented that product reviews were endorsements reflecting opinions of ordinary consumers or independent reviewers.  Customers didn’t know that many favorable endorsements were posted by affiliate marketers who received commissions from Legacy for sales generated.  Failure to disclose that material connection allegedly violated FTC Act.

Terms of proposed consent order: $250,000 settlement, plus provisions about Legacy’s future business practices:

Legacy agreed not to misrepresent status of any product user or endorser, such as that the person is an independent user or ordinary consumer of the product.

Legacy can’t make any representation about product user or endorser unless any material connection between that person and anyone else involved in promoting product is clearly and prominently disclosed.  Proposed order defines “material connection” as relationship that materially affects the weight or credibility of endorsement and wouldn’t be reasonably expected by consumers.

Legacy (cont’d) – final order, June 2011

Legacy must take steps immediately with regard to its affiliate program:  Company will set up and maintain system to monitor and review affiliates’ representations and disclosures to ensure compliance with order. Within 30 days - and semi-annually after that - company will determine its top 50 revenue-generating affiliates.

  At least once a month, Legacy will visit their sites to review their representations/disclosures, and must do this in a way designed not to disclose to the affiliates that they’re being monitored.  For the other affiliates, Legacy will monitor random sample of 50 sites at least once a month.

If affiliates misrepresent their status in any way — for example, by claiming they’re independent reviewer or ordinary person who’s used product, or by failing to disclose material connection with Legacy — then Legacy must immediately terminate them as an affiliate and stop paying them.

For Release: 04/19/2011FTC Seeks to Halt 10 Operators of Fake News Sites from Making Deceptive Claims Re: AcaiBerry Weight Loss Products Web Marketers Falsely Claim Endorsement by ABC, Fox News, CBS, CNN,

USA Today, and Consumer Reports, FTC Alleges

FTC is requesting federal courts to temporarily halt allegedly deceptive tactics of 10 operations using fake news websites to market acai berry weight-loss products. FTC seeks to permanently stop this misleading practice and has asked courts to freeze assets pending trial.

According to FTC, defendants operate websites that are meant to appear as if they belong to legitimate news-gathering organizations, but in fact the sites are simply ads aimed at deceptively enticing consumers to buy the featured acai berry weight-loss products from merchants.

FTC complaints allege that these fake news sites have titles like “News 6 News Alerts,” “Health News Health Alerts,” or “Health 5 Beat Health News.”  Sites often include names and logos of major media outlets, such as ABC, Fox News, CBS, CNN, USA Today, and Consumer Reports, and falsely represent that the reports have been seen on these networks.

For Release: 04/19/2011FTC Seeks to Halt 10 Operators of Fake News Sites from Making Deceptive Claims Re: Acai Berry Weight Loss Products

An investigative-sounding headline on one such site proclaims “Acai Berry Diet Exposed:  Miracle Diet or Scam?”  The article that follows purports to document a reporter’s first-hand experience with acai berry supplements – typically claiming to have lost 25 pounds in four weeks.

“Almost everything about these sites is fake,” said David Vladeck, Director of the FTC’s Bureau of Consumer Protection.  “The weight loss results, the so-called investigations, the reporters, the consumer testimonials, and the attempt to portray an objective, journalistic endeavor.”

FTC Actionsvs.AffiliateMarketers, Exhibit toFTCInvestigator’s Declaration

FTCActionsvs. AffiliateMarketers,Exhibit toFTCInvestigator’s Declaration

From FTC Endorsement Guides FAQs re: Affiliate Marketing I’m an affiliate marketer with links to an online retailer on my website. When people

click on those links and buy something from the retailer, I earn a commission. What do I have to disclose? Where should the disclosure be?

Let’s assume you’re endorsing product or service on your site and you have links to company that pays you commissions on sales. If you disclose the relationship clearly and conspicuously on your site, readers can decide how much weight to give your endorsement. In some instances, where link is embedded in the product review, a single disclosure may be adequate. When the product review has a clear and conspicuous disclosure of your relationship-and the reader can see both the product review and the link at the same time-readers have the information they need. If product review and link are separated, reader may lose the connection.

Where to place disclosure? Guiding principle: it must be clear and conspicuous. Putting disclosures in obscure places, like buried on an ABOUT US or GENERAL INFO page, behind a poorly labeled hyperlink or in a terms of service agreement, isn’t good enough. Average person who visits your site must be able to notice your disclosure, read it and understand it.

For Release: 05/31/2011 FTC Charges Promissory Note Pitchman With Deceiving ConsumersInfomercial Falsely Claims It’s Easy to “Find ‘Em,” “List ‘Em,” and “Make Money;” FTC Also Settles Charges Against Consumer Who Gave Misleading Testimonial

FTC charged Russell Dalbey and others with making phony claims that people could earn big $ quickly by using his system of finding and brokering seller-financed promissory notes – privately held loans often backed by real estate. Dalbey's late night infomercial, "Winning in the Cash Flow Business," attracted thousands of people who paid from $40 to $160 each for the program. But FTC alleged that most of them didn't earn a dime. Dalbey and company also pushed enrollment in other services that cost consumers hundreds or thousands of dollars more.

At the same time, the FTC and the Colorado Attorney General announced a settlement with Marsha Kellogg, a consumer who offered a glowing testimonial – but one the agencies said was deceptive – in one of Dalbey's infomercials. This was FTC's first order against a consumer charged with making misrepresentations in a testimonial.

For Release: 12/01/2011FTC Action Temporarily Halts Operation that Allegedly Used Fake News Sites to Make Deceptive Claims about Acai Berry Weight-Loss Products

Continuing crackdown on deceptive health claims, FTC and CT sued operation that allegedly used fake news websites to market products, made deceptive weight-loss claims, and told consumers they could get free trials of acai berry and "colon cleanse“ products, and only pay nominal shipping/handling costs. Alleged that many consumers ended up paying $79.99 for trial and paying for more monthly shipments of products that were hard to cancel.

At request of FTC and CT AG, court issued ex parte temporary restraining order on Nov.14. Parties agreed on Nov. 22 to preliminary injunction halting allegedly illegal conduct of defendants, including entities based in the UK; continuing asset freeze; appointing temporary receiver; and giving receiver, FTC and CT AG immediate access to business premises.

Complaint alleges that defendants hired affiliate marketers who used fake news websites to promote defendants' products that were misrepresented as objective reports and endorsements by news organizations; engaged in deceptive and unauthorized billing; made unsupported claims that consumers could lose a lot of weight quickly; and falsely stated that claims were clinically proven.

For Release: 12/01/2011FTC Action Temporarily Halts Operation that Allegedly Used Fake News Sites to Make Deceptive Claims about Acai Berry Weight-Loss Products

Stipulated PI halts defendants from selling "negative-option“ continuity plans, from making unauthorized sales charges, and from making certain deceptive claims. Order also requires defendants to cease collection efforts and extends asset freeze over defendants until final resolution of case.

FTC's 11th case involving allegedly fake news websites used to promote dietary supplements. In April 2011.

Notable case for several reasons: continues recent trend of vigorous FTC and AG enforcement, sometimes as co-plaintiffs; continues recent FTC practice of naming third parties, such as credit card processors, that FTC claims played a role in furthering alleged fraud; and continues recent FTC trend of obtaining outright bans against specified conduct (such as negative-option marketing) in the case, at the PI stage.

Also, PI differs from FTC staff guidance in February 2009, regarding online negative-option marketing. Instead of simply requiring clear/conspicuous disclosure at start and end of trial period, PI flat-out enjoins defendants from starting trial period before date consumer receives, or defendants reasonably expect consumer to receive, product.

Affiliate Marketing and the FTC:Next Steps, Best Practices

FTC likely to continue going after non-seller third parties -- affiliate marketers, payment processors, list brokers and others – who engage in deceptive practices or assist and facilitate others who do, that result in consumer injury.

Merchants and Networks need to do “reasonable monitoring” of affiliate marketers, to ensure compliance with consumer protection laws, rules and guides [remember Legacy case]

Affiliates must clearly and conspicuously disclose their “material connections” with advertisers: $ paid.

Affiliates will be held to same standards as merchants: product/service claims must be truthful and substantiated. So:

Health claims in dietary supplement affiliate marketing? Income claims re: work at home and biz opp affiliate marketing?

QUESTIONS?

Thomas A. Cohn, Partner, LeClair Ryan LLC Thomas.Cohn@LeClairRyan.com www.leclairryan.com