October 19, 2010

Online False Advertising Risks

Scott J. Slavick

Recently issued Federal Trade Commission guidelines reveal a new risk: employer liability for false or misleading advertising stemming from employees' online postings.

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.

A few startling statistics will put into perspective how essential blogging and social networking have become to today's successful businesses. According to a 2009 study by the Center for Marketing Research (CMR), 91 percent of the 500 fastest-growing U.S. companies used at least one social media tool in 2009. An estimated 200 million blogs are published worldwide, according to a study by social media consultant Erik Qualman. Qualman's study also reports that 55 percent of bloggers post content daily and 34 percent of that content contains opinions about various products and services. In addition, his research shows that 78 percent of consumers trust peer recommendations, while only 14 percent of consumers trust commercial advertisements.

Judging by these 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 get involved in trying to ensure that blogs and social networking posts are accurate and truthful. The FTC's revised Guides Concerning the Use of Endorsements and Testimonials in Advertising, published in the Federal Register at 16 C.F.R. Part 255, address the application of Section 5 of the FTC Act to the use of endorsements and testimonials in online advertising. Section 5 prohibits unfair or deceptive acts or practices and unfair competition in or affecting commerce.

According to the CMR study, only 36 percent of those 500 fastest-growing companies maintained a formal social media policy for employees. However, the potential liability for employers under the FTC's new guidelines is far too high for the other two-thirds of the 500 fast-growing companies to ignore any longer.

Understanding the New FTC Guidelines

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 following explanation of these key terms will provide a better understanding of what is and is not prohibited under the FTC's new guidelines.

Net Impression. According to the new guidelines, 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.

The key to compliance appears to be 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 the kind of compensation, if any, the endorser received for posting the recommendation; obviously, an endorser who is a company employee is receiving a wage or salary from the company. Third, the company should try to determine what consumers' expectations were about the endorser's compensation in this particular context, if any. Taking this three-step approach may help employers better determine whether a particular post is problematic.

New Media. "New media" refers primarily to blogs and social-networking sites, as opposed to traditional print media such as newspapers and magazines. Much ado has been made about whether the FTC's new guidelines hold new media to a higher standard than traditional print media, since some print media—even well-known media brands—have long followed the "quid pro quo" publishing model without explicit disclosures of this practice. More important than the medium is that employers should make sure their employees are transparent and truthful in their public communications, wherever those statements are published.

Material Connections. "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. Such relationships should be disclosed, even if the employee's statements are truthful. A good rule of thumb is that, if in doubt, disclose it.

Endorsement. "Endorsements" or "testimonials" subject to these guidelines are messages "that consumers are likely to believe reflect the opinions, beliefs, findings or experiences of a party other than the sponsoring advertiser, even if the views expressed by that party are identical to those of the sponsoring advertiser." 16 C.F.R. Part 255.01(b).

Duty to Disclose. 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.

Atypical Results. 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 now no longer sufficient. Instead, the new guidelines suggest that endorsements that reference specific positive results should either 1) discuss the typical results that a consumer also could expect; or 2) be accompanied by a disclosure of the typical results. The guidelines do not, however, require general testimonials such as "It smells terrific" or "This is my favorite cereal" to be accompanied by a typical results disclaimer.

New Interpretations, New Questions

New guidelines inevitably create issues of first impression that companies will need to address. The following are some of the far-reaching issues in which businesses should be most interested.

One is the level and severity of potential FTC enforcement of its new guidelines. It appears that advertisers violating the FTC's new guidelines have a great deal to fear. Even though the guidelines technically are administrative interpretations of the law and are not binding law themselves, advertisers could face FTC enforcement actions if their advertisements are deemed false. Additionally, 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.

The bottom line is that any type of enforcement action is terrible public relations and also can be financial damaging for a company. If the FTC simply announces that a company is a particularly bad actor, the action can be devastating to a company's bottom line.

The "Rogue" Employee. If a company routinely has numerous employees blogging falsely about its products, it can reasonably expect an FTC enforcement action. But what about the company that is trying hard to honestly portray its products and control its online presence, but 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?

The FTC has suggested that it would be unlikely to take action against a company for the conduct of a single employee. However, the FTC has pursued enforcement actions against companies that failed to establish or maintain appropriate internal procedures and whose employee actions resulted in consumer injury. Ultimately, the FTC's decision to pursue enforcement against a company because of the postings of one employee may depend upon 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. Nonetheless, 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.

At Work vs. At Home. 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 those 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. In addition, monitoring references to the company's brand online could also help catch deceptive employee endorsements posted while off site.

Disclaimers. 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. In the end, the more these factors support a strong advertiser-speaker connection, the more likely the FTC will expect an endorsement to contain a disclaimer.

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 on blogs and social-networking sites in determining whether the employer should be held liable for misleading employee endorsements on such sites.

Therefore, to reduce the potential for liability for employee statements, companies should heed the FTC's advice and adopt strong social networking policies immediately. The social networking policy should be in writing, consistently implemented throughout the company and effectively monitored. It should also:

  • Adopt standards of conduct for employees' online communications regarding intellectual property, defamation, and privacy issues.
  • Notify employees that the company will take an interest in employees who blog about company products and services.
  • Require all employee comments to be reviewed by the company's marketing department or legal department before being posted online.
  • Explicitly notify employees that the company will take action when an employee acts in violation of its policy. Doing so could enhance the company's credibility if the violation is later reviewed by the FTC.
  • Explain that all endorsements should be limited to truthful and verifiable statements.
  • Clarify that all endorsements should be accompanied by an employee's written disclosure of the employment relationship so that consumers can fairly weigh the testimonial. For example, a company could instruct its employees posting online to include the following explanation "I am an employee of Company A. These comments represent my own opinions and not those of Company A. I am not a Company A spokesperson."

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. If free products or services are being provided, the company should make sure bloggers are disclosing their commercial relationships.

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. Marketers can best avoid issues in this area by selecting quality experts to review their products; requesting experts to conduct thorough examinations; guaranteeing that experts provide their unbiased opinions; and selecting experts that have expertise in areas relevant to the reviewed product.


New federal guidelines created to protect consumers from deceptive endorsements and false advertising pose liability risks for companies whose employees utilize social media such as blogs and other social networking sites to promote their employer's products or services, even if the comments are not authorized by or sponsored by the company. If your company provides services or sells products and your employees are blogging about them or talking about them on their Facebook accounts, the presumption may be that they are doing so with the company's blessing and for the company's benefit.

Such online posts can reach thousands of consumers at a time, increasing an employer's exposure to liability under the FTC's new guidelines. If consumers later claim they were misled into purchasing falsely advertised products by the employee's comments, the company could be liable. To best avoid liability, a company should take the time upfront to train employees on proper online social media usage and draft a strong social media policy. Doing so may be the best protection a company can get from an FTC enforcement action or worse.

Scott J. Slavick

Shareholder, Brinks Hofer Gilson & Lione

Slavick is a shareholder in Brinks Hofer Gilson & Lione's Chicago office.