Federal Trade Commission: April 2011

Don't "Endorse" Deception

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We have previously posted about some of the often overlooked requirements of the FTC Endorsement Guidelines. Recent actions show that the FTC and other regulatory authorities are getting serious about enforcement.

In March 2011, a company selling a popular series of guitar-lesson DVDs agreed to $250,000 to settle Federal Trade Commission charges that it deceptively advertised its products through online affiliate marketers who falsely posed as ordinary consumers or independent reviewers. According to the FTC release:

The Learn and Master Guitar program promoted by Legacy Learning and Smith is sold as a way to learn the guitar at home using DVDs and written materials.  According to the FTC's complaint, Legacy Learning advertised using an online affiliate program, through which it recruited "Review Ad" affiliates to promote its courses through endorsements in articles, blog posts, and other online editorial material, with the endorsements appearing close to hyperlinks to Legacy's website.  Affiliates received in exchange for substantial commissions on the sale of each product resulting from referrals.  According to the FTC, such endorsements generated more than $5 million in sales of Legacy's courses.

The FTC's revised guidelines on endorsements and testimonials, issued in 2009, explain in general terms when the agency may find endorsements or testimonials unfair or deceptive.  Under the guidelines, a positive review by a person connected to the seller - or someone who receives cash or in-kind payment to review a product or service - should disclose the material connection between the reviewer and the seller of the product or service.

"Whether they advertise directly or through affiliates, companies have an obligation to ensure that the advertising for their products is not deceptive," said David Vladeck, Director of the FTC's Bureau of Consumer Protection.  "Advertisers using affiliate marketers to promote their products would be wise to put in place a reasonable monitoring program to verify that those affiliates follow the principles of truth in advertising."

In August 2010, a public relations agency hired by video game developers agreed to pay $250,000 to settle Federal Trade Commission charges that it engaged in deceptive advertising by having employees pose as ordinary consumers posting game reviews at the online iTunes store, and not disclosing that the reviews came from paid employees working on behalf of the developers. The company also agreed to set up a monitoring program to ensure compliance going forward.

Other regulators have taken similar actions. In 2009 Lifestyle Lift, a cosmetic surgery company, paid $300,000 to settle with the State of New York over its attempts to fake positive consumer reviews on the Web regarding the results of face-lift procedures. .
Many aspects of social media provide great business opportunities, but it is important to ensure that your use, and your employee's use, of social media is done in way that does not create legal liability.  


Gamification Everywhere?

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Some say Gamification has become the buzz word du jour. Others believe it is a powerful business tool that cannot be overlooked. A recent Gartner report will undoubtedly fuel the fires in that debate. The Gartner report states that by 2015, more than 50 percent of companies that manage innovation processes will gamify those processes. Additionally, it states that a gamified service for consumer goods marketing and customer retention will become as important as Facebook, eBay or Amazon, and more than 70 percent of Global 2000 organizations will have at least one gamified application.


game.jpegRecent books such as Game-based Marketing by Gabe Zichermann and Reality is Broken by Jane McGonigal have highlighted why and how gamification can be a powerful tool if used right.reality.jpeg

Gabe also hosted the first Gamification Summit in San Francisco earlier this year and is hosting a series of Gamification Workshops for those interested in learning more about Gamification.

Many major companies (e.g., NBC Universal and CBS Interactive) are embracing gamification with great success.

As always, along with the great business opportunities come some legal issues of which companies need to be aware. One of the issues, which relates to issuing points or other things of value to reward consumers for creating product reviews or recommendations, was addressed in one of our prior posts relating to the FTC Endorsement Guidelines. A more recent post addresses some recent enforcement actions by the FTC and NY State for violations of these principles.

A number of other legal issues can arise. Additionally, we are seeing a rapid uptick in the number of patent applications being filed for gamification technology and business methods. For example, there are a number of companies offering gamification platforms. One that has an interesting business model is Big Door Media. Big Door offers free APIs and widgets to enable you to easily and cost effectively get started. Bunchball and Badgeville also offer gamification platforms and tools.

Like other cutting edge business models, gamification requires a well thought out business strategy and an understanding of the relevant legal principles!



This e-Book Brought to You By...What Journalists/Advertisers Need to Know

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A Wall Street Journal article today touts an upcoming book by Harry Hurt III, which recounts a cross-country road trip with an impressive list of encounters with notable figures including former President Bush. But more notably, this book includes a plethora of product-placement deals and other sponsorships. This approach, while innovative, may raise issues in connection with the FTC Endorsement Guidelines. If applicable, the guidelines may create legal issues for Mr. Hurt and the sponsors. A prior post highlights some recent enforcement actions for those who have not complied. This is an issue that journalists and advertisers need to pay heed to because additional enforcements are likely.

The range of sponsorships include deals that range from companies agreeing to:  promote his book through e-mail, Twitter, Facebook and other electronic blasts in exchange for advertising within the book; supply travel gear (e.g. Coleman Co. providing sleeping bag, tent and $2500 cash) for which Mr. Hurt endorses Coleman's products saying things such as "the Coleman engineers have done a remarkable job..."; and $1,000 in monthly credits from Best Western International in exchange for filming videos showcasing the hotels' amenities. Interestingly, a hotel spokesperson called this deal "standard industry practice" for bloggers and free-lancers.

Kudos to Mr. Hurt and his sponsors for the innovative approach that enabled him to self fund and self publish this e-book. However, as the article notes, his dual role as both an ad salesman and a journalist strikes "an unholy alliance." The issue is whether an author, beholden to such sponsorships, can be objective in his or her writings. In the article, Mr. Hurt stated that the book is "mainly the truth," but recognized that it may raise questions as to his objectivity. He added that he doesn't believe his objectivity was compromised because he only struck deals with companies he already patronized and asked readers to trust his judgment and integrity.

I have no reason to doubt Mr. Hurt's judgment or integrity. However, this scenario raises some interesting legal issues. A growing number of bloggers and other journalists have come under fire for touting products for which they received some undisclosed financial benefit. While these practices are hopefully the exception rather than the norm, they caused the FTC to take action.

In 2009, the FTC implemented guidelines that addressed the use of endorsements and testimonials in advertising. The main stream press highlighted the part of these guidelines that require disclosure by bloggers of compensation received for recommending a product or service. However, the guidelines include some lesser known provisions, which apply more broadly, and may be relevant to the types of deals that Mr. Hurt struck.

The guidelines are not limited to bloggers, but cover "any advertising message" that consumers are likely to believe reflects the opinions, beliefs, findings, or experiences of the endorser (or any party other than the sponsoring advertiser). This includes testimonials endorsing a product or service on any social media site, not just blogs.

When a connection exists between the endorser and the seller of an advertised product that might materially affect the weight or credibility of the endorsement, such connection must be fully disclosed. For example, the FTC says that if a blogger gets a free video game to evaluate and review, he must clearly and conspicuously disclose that he received the game for free. Other examples refer to the dissemination of information through other "consumer-generated media." Presumably, a self-published e-book  could be a form of "consumer-generated media." For at least these reasons, self-publishers of blogs, e-books or other media should become familiar with these FTC guidelines. Failure to comply can result in liability for the endorser.

However, the burden of compliance and risk of liability do not fall just on the journalists/endorsers. Rather, the FTC guidelines impose significant obligations on the part of advertisers, too.

The FTC guidelines require advertisers to advise the "endorser" that their connection needs to be disclosed. Additionally, the guidelines state that advertisers should have procedures in place to monitor the endorsements for compliance. Advertisers are subject to liability for false or unsubstantiated statements made through endorsements, or for failing to disclose material connections between themselves and their endorsers. 

Another aspect of the guidelines relates to "expert" endorsements. Whenever an advertisement represents, directly or by implication, that the endorser is an expert with respect to the endorsement message, then the endorser's qualifications must in fact give the endorser the expertise that he or she is represented as possessing with respect to the endorsement.

The guidelines also address endorsements by organizations, especially expert ones. According to the guidelines, such endorsements are viewed as representing the judgment of a group whose collective experience exceeds that of any individual member, and whose judgments are generally free of the sort of subjective factors that vary from individual to individual. Therefore, the FTC requires that an organization's endorsement must be reached by a process sufficient to ensure that the endorsement fairly reflects the collective judgment of the organization. Moreover, if an organization is represented as being expert, then, in conjunction with a proper exercise of its expertise in evaluating the product it also must comply with various provisions regarding experts.

In order to comply with these FTC guidelines, journalists, advertisers and other organizations should seek legal counsel to become familiar with these requirements and, as many companies are doing, develop policies and procedures for complying.