FTC Cracks Down on Use of Endorsements in Advertising

According to a proposed Federal Trade Commission (“FTC”) consent order, a Nashville-based company selling guitar-lesson DVDs would pay a $250,000 civil penalty and would be required to disclose its relationship with online affiliate marketers who falsely posed as ordinary consumers or independent reviewers.  The action is one of only a small few that the FTC has pursued under its updated rules regarding the use of endorsements in online advertising.  Apparently,  the company failed to monitor affiliate marketers’ online disclosure practices.  In announcing the settlement, the FTC issues cautionary words, that regardless of whether a company advertises directly or via affiliates, it must ensure that the ads are not deceptive.  The draft complaint alleged that the company (and its owner), deceptively advertised to consumers about ways to “master” the guitar at home by using DVDs and written materials. The FTC challenged the advertisements because they contained online endorsements written by affiliates, but which looked like they were posted by ordinary consumers or “independent” reviewers. The draft complaint also alleged that the company failed to clearly and conspicuously disclose that the affiliates were paid for every sale generated by them,constituting a deceptive practice. The proposed consent order would require the company to pay a $250,000 civil penalty and would bar the company  from misrepresenting the status of any user or endorser of a product or service while advertising that product or service.  It would also require endorsers to clearly and prominently disclose material connections, and make the company responsible for ensuring those disclosures are made.  Another section of the proposed settlement would require the company to take immediate steps to ensure compliance with the other provisions—including maintaining a system to review and monitor their affiliate representations and disclosures and to terminate any affiliate who engages in conduct inconsistent with the provisions of the proposed order.

Richard B. Newman, Internet Lawyer and Business Litigation Attorney – Hinch Newman LLP