Online False Advertising

Vol. 28 No. 2

By

Scott J. Slavick is a shareholder in Brinks Hofer Gilson & Lione’s Chicago office.

Employee blogs and social networking websites create myriad thorny issues for employers. Recently issued Federal Trade Commission (FTC) guidelines regarding product endorsements reveal a new risk: employer liability for false or misleading advertising stemming from employees’ online postings about their employer’s products or services—even when the employer has not authorized or affirmed the postings.

According to a recent study, only 36 percent of the 500 fastest-growing companies maintain a formal social media policy for employees. The potential liability for employers under the FTC’s new guidelines is far too high for the other two-thirds of these companies to ignore any longer.

Understanding the new FTC guidelines. Judging by recent statistics, consumers trust blogs far more than they trust traditional advertisements. Perhaps because of consumers’ overwhelming trust in blogs, the FTC has now decided to attempt to ensure that blogs and social networking posts are accurate and truthful.

The guidelines make it clear that employees endorsing their employer’s products or services have a duty to disclose to their audience their relationship to an employer at the time they give the endorsement or testimonial, wherever the posting may appear.

The FTC plans to utilize a “net impression” approach to evaluate whether companies using new media to advertise their products or services should be subject to liability for false or unsubstantiated statements made through endorsements, or for failing to disclose material connections between themselves and their endorsers, or for failing to properly explain atypical results. The FTC’s net impression approach begins with an analysis of each advertisement or promotional commentary on a case-by-case basis.

Apparently, the key to compliance is to focus on the consumer’s overall impression of the advertisement, rather than on its specific details. The first question is whether the endorser is making a personal recommendation in the post at issue. A second question is what kind of compensation the endorser received for posting the recommendation. A third question is what were the consumers’ expectations about the endorser’s compensation in this particular context.

Much ado has been made about whether the FTC’s new guidelines hold new media to a higher standard than traditional print media, parts of which have long followed the “quid pro quo” publishing model without explicit disclosures of this practice. Rather than focusing on the medium, however, employers should first and foremost make sure that their employees are transparent and truthful in their public communications, wherever those statements are published.

“Material connections” between companies and online endorsers, such as bloggers, should be disclosed. These “material connections” typically arise in the form of in-kind or cash payments from advertisers to bloggers to review a particular product but also could arise in the form of an employee posting a comment on a third-party blog or participating in a non-company online forum without stating his or her company affiliation.

Employees endorsing their employer’s products or services have a “duty to disclose” to their audience their relationship to the employer at the time they give the endorsement or testimonial. This duty would even apply when the employee’s endorsement is posted on a site that is not maintained by the employer, such as a popular bulletin board or chat site.

Advertisements that convey a consumer’s experience with a product as “typical” when that is not the case should clearly disclose the results that a consumer should typically expect to receive from the product at issue. The previously allowed “results not typical” disclaimer is no longer sufficient.

New interpretations, new questions. New guidelines inevitably create issues of first impression that companies will need to address. One is the level and severity of potential FTC enforcement of its new guidelines. Advertisers could face FTC enforcement actions if their advertisements are deemed false. Because postings on blogs and social networking pages can reach wide audiences, false advertisers may also be vulnerable to large-scale class-action lawsuits if consumers are injured and could even face legal action taken by state prosecutors.

What about the company that is trying hard to portray its products honestly and control its online presence but that employs one “rogue” employee who strays off message and deceptively endorses the company’s product? Would the FTC pursue an enforcement action against a company because of the actions of one employee?

Ultimately, the FTC’s decision to pursue enforcement against a company because of the postings of one employee may depend on how much actual damage or injury was caused to consumers. If there was significant injury to consumers, the company with the one rogue employee may still face FTC enforcement, regardless of the company’s social networking policy. Still, instituting strong social networking policies for employees could go a long way toward helping shield a company from liability based on the actions of one employee.

Another open issue is the employer’s liability for online comments posted by an employee while at work versus those posted from the employee’s own home. Clearly, businesses should assume that, if the misleading online posts occur while the employee is at the office, the FTC could more easily argue that the employer was or should have been on notice of the conduct. If these same posts were to occur while the employee was at home, the link to the company is more tenuous. Having a good social media policy addressing at-home comments could further strengthen the company’s defense.

When to use or not use a disclaimer is another interesting issue. Whether an online endorsement or testimonial should carry a disclaimer depends on several factors, including (1) whether the speaker is compensated by the advertiser; (2) whether the product or service in question was provided gratis by the advertiser; (3) the terms of any agreement between the speaker and the advertiser; (4) the length of the relationship between the speaker and the advertiser; (5) the previous receipt of products or services from the same advertiser to the speaker; (6) the likelihood of future receipt of such products or services from the same advertiser to the speaker; and (7) the value of the items or services received from the advertiser to the speaker.

Staying on the right side of the new guidelines. In comments published with the revised guidelines on endorsements, the FTC suggested that it would consider an employer’s policies and procedures governing employee postings in determining whether the employer should be held liable for misleading employee endorsements. To reduce the potential for liability for employee statements, companies should heed the FTC’s advice and adopt strong social networking policies immediately. Such policies should be in writing, consistently implemented throughout the company, and effectively monitored. If the company is not working directly with the blogger and instead is working through an intermediary (e.g., a blog advertising service), the company may want to perform an additional level of due diligence by verifying that the advertising service is providing guidance and training to its bloggers. When using expert endorsers, companies should make sure these experts review products they are endorsing to a degree that is at least equal to what most other experts in their field would deem adequate.


FOR MORE INFORMATION ABOUT THE BUSINESS LAW SECTION

- This article is an abridged and edited version of one that originally appeared in the online magazine Business Law Today, October 2010.
- For more information about Business Law Today and to see an archive, go to www.businesslawtoday.org.
- Website: www.ababusinesslaw.org.
- Periodicals: Business Law Today, online resource; The Business Lawyer, quarterly business law journal.
- Books and Other Recent Publications: The Role of Independent Directors in Corporate Governance; Model Stock Purchase Agreement with Commentary, 2d ed.; Portable Bankruptcy Code and Rules, 2011 ed.; Fundamentals of Corporate Governance, 2d ed.; Handbook for the Conduct of Shareholders’ Meetings, 2d ed.; A Manual of Style for Contract Drafting, 2d ed.; Intellectual Property Deskbook for the Business Lawyer, 2d ed.; Guide to Representing Religious Organizations; Commercial Lending Law: A State by State Guide; The Law of Cooperatives; Public Company Organizational Documents.

 

 

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