FTC Warns Industry about Fake Reviews and Endorsements

The Federal Trade Commission announced that it sent Notices of Penalty Offenses to more than 700 companies, warning them that if they use endorsements to deceive consumers, the FTC "will be ready to hold them responsible with every tool at its disposal." 

What is a "Notice of Penalty Offense"?  

Under the FTC's Section 5 authority, the FTC can send companies a "Notice of Penalty Offenses."  This Notice lists certain types of conduct that the FTC has determined, in prior administrative orders, violates the FTC Act.  Once a company receives the Notice, if it then engages in the prohibited conduct, it can be subject to civil penalties of up to $43,792 per violation.  This is significant since, ordinarily, when an advertiser engages in unfair or deceptive acts or practices, the FTC doesn't have the authority to obtain penalties.  

Just last week, the FTC announced that it was going to start relying on its long ignored authority to issue Notices of Penalty Offenses in order to beef up its ability to aggressively pursue marketers for false advertising. 

What Does Today's Announcement Mean? 

Perhaps most significantly, today's FTC announcement sends a strong signal to industry that fake consumer reviews and misleading endorsements are still a top enforcement priority at the FTC.  

By sending out the Notice of Penalty Offenses, the FTC is also saying that, if the agency determines that a company that received one of the Notices has used fake consumer reviews or misleading endorsements, it's going to expect the company to pay substantial civil penalties.  In the past, the FTC has usually just expected companies to enter into a consent order where they agree not to engage in the conduct again.  

In announcing the action, Samuel Levine, the Director of the FTC's Bureau of Consumer Protection, said, "Fake reviews and other forms of deceptive endorsements cheat consumers and undercut honest businesses.  Advertisers will pay a price if they engage in these deceptive practices.” 

What is the FTC Concerned About? 

The FTC said that the rise of social media has blurred the line between authentic content and advertising, "leading to an explosion in deceptive endorsements across the marketplace."  In addition, the FTC said that, "Fake online reviews and other deceptive endorsements often tout products throughout the online world." 

In the Notice of Penalty Offenses, the FTC identified the following specific practices that it says violate the law: 

• It is an unfair or deceptive trade practice to make claims which represent, expressly or by implication, that a third party has endorsed a product or its performance when such third party has not in fact endorsed such product or its performance.
• It is an unfair or deceptive trade practice for an advertiser to misrepresent that an endorsement represents the experience, views, or opinions of users or purported users of the product.
• It is an unfair or deceptive trade practice to misrepresent an endorser as an actual user, a current user, or a recent user of a product or service. 
• It is an unfair or deceptive trade practice for an advertiser to continue to advertise an endorsement unless the advertiser has good reason to believe that the endorser continues to subscribe to the views presented in the endorsement.
• It is an unfair or deceptive trade practice for an advertiser to use testimonials to make unsubstantiated or otherwise deceptive performance claims even if such testimonials are genuine.
• It is an unfair or deceptive trade practice to fail to disclose a connection between an endorser and the seller of an advertised product or service, if such a connection might materially affect the weight or credibility of the endorsement and if the connection would not be reasonably expected by consumers.
• It is an unfair or deceptive trade practice to misrepresent explicitly or implicitly through the use of testimonials that the experience described by endorsers of a product or service represents the typical or ordinary experience of users of the product or service.

In the Notice, the FTC warns companies to "take any steps necessary to ensure that your company's practices do not violate the law."  

Who Did the FTC Send Notices To?  And What Does It Mean For The Recipients? 

The FTC sent the Notice of Penalty Offenses to more than 700 companies, which the FTC described as "large companies, top advertisers, leading retailers, top consumer protect companies, and major advertising agencies."  

Importantly, the fact that a company received a letter from the FTC does not mean that the FTC has made any determination that the company has violated the law -- or even that the FTC has any concerns that the company may be violating the law.  The FTC said that it is not intending to single out any company, and the fact that the company got a letter, "does not in any way suggest that it has engaged in deceptive or unfair conduct."  The FTC explained that it is sending out the Notices of Penalty Offenses "to ensure that companies understand the law -- and that they are deterred from breaking it." 

While receiving a letter from the FTC doesn't mean that the agency has made any determination that the company has violated the law, it does mean, however, that the FTC will now take the position that, since the company has now received the Notice of Penalty Offense, the FTC is entitled to civil penalties if the company is found to have violated the law.  With the FTC clearly indicating that it wants to be more aggressive in its enforcement, for the many companies who received the Notices, this certainly raises a legitimate concern that they are more likely to be targeted by the FTC.  

The FTC's use of Notices of Penalty Offenses certainly raises some questions about the extent of the FTC's authority, and whether the agency is properly exercising its authority here.  Can it really be that the FTC is going to try to rely on cases from before the days of personal computers to address complicated and unresolved questions about the use of endorsements and consumer reviews in social media?  Can it also be that the FTC is now arbitrarily creating a highly unlevel playing field for marketers, by putting some on the "list" and leaving others off?  It's going to be some time before these, and many other, issues get resolved.  

In the meantime, however, it's a good time for those on the list, and others, to take a fresh look at how you're handling your endorsements and consumer reviews.  The FTC couldn't be making itself any clearer that winter is coming.