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On May 20, the FTC announced that it and the Utah Division of Consumer Protection amended their complaint against a Utah-based company and its affiliates (collectively, “defendants”) for allegedly using deceptive marketing to persuade consumers to attend real estate events costing thousands of dollars. The amended complaint adds additional defendants and new charges asserting the defendants violated the Telemarketing Sales Rule (TSR). As previously covered by InfoBytes, the U.S. District Court for the District of Utah issued a temporary restraining order against the defendants after the FTC and the Utah Division of Consumer Protection accused the defendants of violating the FTC Act, the Consumer Review Fairness Act (CRFA), and Utah state law, by marketing real estate events with false claims and celebrity endorsements. Among other things, the defendants allegedly told consumers they would (i) earn thousands of dollars in profits from real estate investment “flips” by using the defendants’ products; (ii) receive 100 percent funding for their real estate investments, regardless of credit history; and (iii) receive a full refund if they do not make “‘a minimum of three times’” the price of the workshop within six months. The amended complaint alleges that, in addition to the claims made at the real estate events, the defendants reiterated the false or misleading statements in the course of their telemarketing activities in violation of the TSR.
On March 5, the FTC announced settlements with four groups of affiliate marketers that, among other things, allegedly violated the FTC Act by using deceptive marketing tactics and earnings claims to persuade consumers to pay thousands of dollars each for business coaching and investment “mentoring” services. The FTC alleged in the first complaint that certain defendants sold membership packages for an online business coaching scheme, and then, when the business coaching scheme went out of business, created their own branded programs and systems that claimed consumers would be able to start their own online marketing businesses and earn substantial income. The defendants also allegedly encouraged consumers to open multiple credit lines to finance the purchases of these programs. The FTC claimed that the defendants “used straw signers and shell companies and provided banks and payment processors with ‘dummy’ websites to evade scrutiny by bank underwriters and obtain multiple merchant accounts to process credit card payments from consumers.” According to the FTC’s second complaint, the other defendants made deceptive earnings claims in order to recruit consumers into the now-defunct business coaching scheme and earned millions of dollars as a reward. In both complaints, the FTC claimed that most consumers who purchased the products suffered large losses and mounting debts.
Under the terms of the settlements, each of the defendants is permanently banned from selling or marketing any business coaching programs or money-making methods, and must pay judgments of (i) $3.35 million to be paid in full for potential consumer redress (order here); and (ii) monetary judgments totaling $38.1 million, which will be partially suspended due to the defendants’ inability to pay (orders here, here, and here).
On February 19, the FDIC issued a notice and request for comment regarding modernizing “its signage and advertising requirements to better reflect how banks and savings associations currently operate and how consumers use banking services.” The Request for Information (RFI) solicits input on how the agency “can revise and clarify its sign and advertising rules related to FDIC deposit insurance.” Major changes to these rules have not been made since 2006, and the agency states that “the rules do not reflect evolving banking channels and operation.” Accordingly, the RFI also requests suggestions about how the FDIC can use technology or other solutions to help consumers distinguish FDIC-insured entities from nonbanks, and to prevent consumers from being harmed by non-insured entities’ potentially misleading or fraudulent representations. The RFI lists 21 questions to focus the public input. Comments must be received by March 19.
On November 5, the FTC released advertising disclosure guidance for online influencers, titled “Disclosures 101 for Social Media Influencers,” which outlines the FTC’s rules for disclosure of sponsored endorsements and provides influencers with tips and guidance covering effective and ineffective disclosures. The guidance reminds influencers that (i) they should disclose any financial, employment, personnel, or family relationship with the brand; (ii) disclosures should be “hard to miss,” by being placed on pictures, stated in the videos, and repeated throughout livestreams; and (iii) language in disclosures should be simple and clear, and in the same language as the endorsement itself.
For more information on the FTC’s activity covering testimonials and social media influencers, review the recent Buckley Insight, which summarizes several FTC enforcement actions involving online reviews and social media and provides key takeaways for companies considering online advertising and social media campaigns.
The FTC has stepped up its advertising related enforcement activity in recent months, particularly focusing on companies that fail to clearly and conspicuously disclose underlying connections between testimonial providers and product sellers. Summarized below are several recent FTC enforcement actions involving online reviews and social media, as well as some key takeaways for companies considering online advertising and social media campaigns.
Recent FTC Enforcement Actions
First, in its complaint against a skincare company, the FTC alleged that the company misled consumers by posting reviews written by company employees. Specifically, the FTC’s allegations included assertions that (i) product reviews posted on a retailer’s website were not “independent experiences or opinions of impartial ordinary users of the products” and therefore, were false or misleading under Section 5 of the FTC Act; and (ii) the failure to disclose the reviews were written by the owner or employees constitutes a deceptive act or practice under Section 5 of the FTC Act, because the information would “be material to consumers in evaluating the reviews of [the company] brand products in connection with a purchase or use decision.”
In a 3-2 vote the Commission approved an administrative consent order, which notably does not include any monetary relief for consumers. The order prohibits the company from misrepresenting the status of an endorser, which includes misrepresentations that the endorser or reviewer is an “independent or ordinary user of the product.” requires the company and owner to “clearly and conspicuously, and in close proximity to that representation, any unexpected material connection between such endorser and (1) any Respondent; or (2) any other individual or entity affiliated with the product.”
In dissent, two Commissioners objected to the lack of monetary relief, stating, “[t]hat monetary relief can be difficult to calculate should not deter the FTC from seeking it. When the agency’s estimates are uncertain, the Commission sometimes demands no monetary relief whatsoever, which leads to under-deterrence of blatant fraud and dishonesty. This needs to change.”
Second, the FTC also charged a now-defunct company and its owner with selling social media followers and subscribers to motivational speakers, law firm partners, investment professionals, and others who wanted to boost their credibility to potential clients, as well as to actors, athletes, and others who wanted to increase their social media appeal. According to the FTC, the company “provided such users of social media platforms with the means and instrumentalities for the commission of deceptive acts or practices,” in violation of Section 5(a) of the FTC Act.
The Commission unanimously voted to file the proposed court order, which bans the company from selling or assisting others in selling “social media influence.” The order, which was later approved by a federal district court, imposes a $2.5 million monetary judgment against the company owner, but suspends the majority upon the payment of $250,000.
In a business-focused blog post released in conjunction with the enforcement actions noted above, the FTC:
- Reminds marketers that when “people at the helm” are “calling the illegal shots,” the FTC will name them in their individual capacities in actions;
- Emphasizes that companies must instruct their employees and agents to clearly disclose in reviews any material connection to the product; and
- States that the truth-in-advertising provisions of the FTC Act apply to companies that claim to be “strictly B2B,” if they are providing others with the means and instrumentalities for deception.
Relatedly, in February 2019, the FTC approved final consent orders with two marketing companies for, among other things, misrepresenting paid endorsements as independent consumer opinions. The companies allegedly hired Olympic athletes to endorse a mosquito repellent on social media and formatted advertisements to appear as independent statements of impartial publications. The FTC argued that the company failed to disclose, or disclose adequately, that (i) the Olympians were paid to endorse the mosquito repellent; and (ii) the online consumer reviews were by individuals who were reimbursed for buying the product and included statements by the owner and employees of the public relations firm hired to promote the product.
The final consent orders (here and here) require that each company to cease the misrepresentations and notify future endorsers of their responsibility “to disclose clearly and conspicuously, and in close proximity to the endorsement, in any print, radio, television, online, or digital advertisement or communication, the endorser’s unexpected material connection to any Respondent or any other individual or entity affiliated with the product or service.”
Key Takeaways for Online Advertising and Social Media Campaigns:
- These complaints and consent orders incorporate the basic concepts of the FTC’s Endorsement Guides, which address how the prohibition against deceptive practices in section 5 of the FTC Act applies to endorsements and testimonials in advertising. As an FTC blog post puts it:
Suppose you meet someone who tells you about a great new product. She tells you it performs wonderfully and offers fantastic new features that nobody else has. Would that recommendation factor into your decision to buy the product? Probably.
Now suppose the person works for the company that sells the product – or has been paid by the company to tout the product. Would you want to know that when you’re evaluating the endorser’s glowing recommendation? You bet. That common-sense premise is at the heart of the Federal Trade Commission’s (FTC) Endorsement Guides.
- The dissenting commissioners in the skincare product case suggested that the FTC should have obtained “monetary relief” for consumers rather than simply order the company to comply with the law in the future, implying that the company should have been required to make refunds to consumers. The FTC doesn’t have the power to obtain civil penalties for deceptive practices unless the practice violates a specific regulation or order, but many states do have that power.
- The FTC Endorsement Guides don’t have the force of law of a formal regulation but they influence enforcement decision of not only the FTC, but also other federal and state and local agencies. Some of the principles in the Guides have very wide application. For example:
- An endorsement “relating the experience” of one or more people is considered to be a representation that their experience is typical of what most people can achieve with a product or service.
- For example, an ad in which a consumer says “I saved $100 a month on my mortgage by going through XYZ Mortgage” is deemed to be a claim that most consumers will experience the same result.
- A statement that “results not typical,” or even “based on the experiences of a few people—you probably won’t have similar results” usually won’t cure the deceptive impact of a claim by an endorser that he or she achieved certain results, unless the advertiser can provide empirical testing “demonstrating that the net impression of its advertisement with such a disclaimer is non-deceptive.”
- As with any advertising claim, the implied claim of typicality in an endorsement must be substantiated, i.e., the advertiser must have data showing that the results actually are typical.
If you have any questions about the enforcement actions noted above or marketing and advertising related issues, please contact a Buckley attorney with whom you have worked in the past.
On October 4, the FTC announced that the U.S. District Court for the District of Utah granted a temporary restraining order against a Utah-based company and its affiliates (collectively, “defendants”) for allegedly using deceptive marketing to persuade consumers to attend real estate events costing thousands of dollars. According to the complaint, filed by the FTC and the Utah Division of Consumer Protection, the defendants violated the FTC Act, the Consumer Review Fairness Act (CRFA), and Utah state law, by marketing real estate events with false claims, using celebrity endorsements. The defendants allegedly told consumers they will (i) earn thousands of dollars in profits from real estate investment “flips” by using the defendants’ products; (ii) receive 100 percent funding for their real estate investments, regardless of credit history; and (iii) receive a full refund if they do not make “‘a minimum of three times’” the price of the workshop within six months. The complaint argues that these statements are false or unsubstantiated, and that consumers seeking refunds from the defendants often only received a partial refund on the condition they would not speak to the FTC or other state regulators about the defendants’ products. Among other things, the temporary court order prohibits the defendants from continuing to make unsupported marketing claims and from interfering with consumers’ ability to review their products.
On February 28, the FTC announced it filed a complaint in the U.S. District Court for the District of Puerto Rico alleging a business owner and the companies he operates (defendants) violated the FTC Act and the Restore Online Shoppers’ Confidence Act (ROSCA) by allegedly offering deceptive online “free-trial” offers that mislead consumers into enrolling into negative option plans. According to the complaint, the defendants sold skin care products online between February 2016 and August 2017 and marketed a free trial for the products for the cost of around $4.99 in shipping. The complaint alleges consumers who ordered the free trial (i) were charged more than $90 and then subsequently enrolled into a monthly auto-ship program; (ii) were charged for additional products without their consent; and (iii) had a difficult time canceling their enrollment in the auto-ship plan. Moreover, the FTC argues that the defendants avoided detection by using shell companies to obtain merchant processing accounts and fake and real websites in order to avoid detection by credit card companies and law enforcement. The FTC is seeking monetary and injunctive relief against the defendants.
On September 26, the FCC announced that it fined a telemarketer and associated companies more than $82 million for using allegedly illegal caller ID spoofing to market and generate leads for health insurance sales in violation of the Truth in Caller ID Act (the Act). The Act prohibits telemarketers from purposefully falsifying caller ID information with the intent to harm, defraud consumers, or wrongfully obtain anything of value. The FCC alleges that the telemarketer made more than 21 million robocalls with spoofed caller ID information, which makes it difficult for consumers to register complaints and for law enforcement to track and stop the illegal calls. According to the related Forfeiture Order (FCC 18-134), the FCC rejected the telemarketer’s argument that the value he received from the calls was not “wrongfully obtained,” concluding that the calls were placed without prior consent, including contacting consumers on the Do Not Call registry, and that the telemarketer knew the tactics he used to obtain the insurance leads were unlawful. The FCC also rejected the telemarketer’s request to reduce the penalty, stating “the proposed forfeiture of $82,106,000 properly reflects the seriousness, duration, and scope of [the telemarketer]’s violations.”
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- Matthew P. Previn and Walter E. Zalenski to discuss "Is valid when made ... valid?" at the Women in Housing & Finance Partner Series webinar
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- Daniel R. Alonso to discuss "Transnational corruption: A chat with former U.S. federal prosecutors in New York" at Marval Live Talks
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- Thomas A. Sporkin to discuss "Managing internal investigations and advanced government defense" at the Securities Enforcement Forum
- Daniel R. Alonso to discuss "Independent monitoring in the United States" at the World Compliance Association Peru Chapter IV International Conference on Compliance and the Fight Against Corruption
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