February 2007 - Legal File

FTC Warns Word-of-Mouth Marketers

By Jeffrey D. Knowles and Ellen T. Berge

By the mid-1990s, marketers figured out that they could post messages on bulletin board systems or pose as “real people” on web chats to pitch their products. In the age of blogging and social networking, sites like MySpace.com, YouTube and FaceBook have amplified the opportunity to create a buzz about a brand. Create an amusing video, post it on the web and let thousands of teenagers forward the link to their friends.

Today’s tech-savvy marketing strategies are rooted in the time-tested concept of viral marketing, a marketing tactic that encourages consumers to pass along marketing messages.

The Federal Trade Commission (FTC) believes that some “buzz marketing” has crossed the line. This past December, the FTC sent a clear warning to marketers: if you pay consumers to spread the word about your products, you should disclose your relationship to those consumers. The Commission has indicated that the absence of this disclosure causes other consumers to give more weight to any claims the endorsing consumers make about the products, based on the apparent independence of the endorsing consumers. The FTC describes this failure to disclose as deceptive.

The December warning came in the form of an FTC staff letter responding to an October 2005 request from an organization called Commercial Alert. Commercial Alert requested that the agency investigate companies that conduct buzz marketing and “seek to influence buying decisions, often by stealth.” The request specifically asked the FTC to require “any and all persons who are paid to engage in such practices to disclose their relationship to the corporation whose products they are pitching, including their compensation.” According to Commercial Alert, the failure to provide such disclosures constitutes an unfair and deceptive trade practice in violation of Section 5 of the FTC Act.

While the FTC declined to issue formal guidelines for word-of-mouth marketing, the staff letter pointed to existing FTC standards that cover such practices. The FTC Deception Policy Statement addresses cases involving the omission of material information, the disclosure of which is necessary to prevent a claim, practice or sale from being misleading. As explained in the December staff letter, an act or practice is deceptive under Section 5 of the FTC Act if: (1) there is a representation or omission of information that is likely to mislead consumers acting reasonably under the circumstances; and (2) that representation or omission is material to consumers. The FTC considers a representation or omission to be material if it is likely to affect consumers’ choice of, or conduct regarding, a product.

Separately, the FTC’s Guides Concerning Use of Endorsements and Testimonials in Advertising states that “[when] there exists a connection between the endorser and the seller of the advertised product which might materially affect the weight or credibility of the endorsement (i.e., the connection is not reasonably expected by the audience), such connection must be fully disclosed.” While television audiences expect that famous celebrities receive compensation when they see them promoting products in commercials, consumers are far less likely to suspect that their neighbor is getting paid to rave about a new skincare line.

Cash payment is the typical connection between marketer and endorser, but other circumstances may create a connection that biases the endorser’s views and must be disclosed. In one FTC case, the marketer of a weight-loss product used an independent distributor of the product and spouses of independent distributors to endorse the product by claiming that they had lost substantial weight by taking the supplement. The FTC found that it was deceptive for the marketer to fail to disclose his or her connection to the purported consumer endorsers.

The FTC staff letter suggests other forms of compensation-product samples, discounts, coupons, “inside” information about new products or similar incentives-may constitute payment. If the incentive could limit the endorser’s independence from the marketer, the FTC could view the failure to disclose the connection as a deceptive practice.

Not surprisingly, aiming word-of-mouth marketing at children, or using children to spread marketing messages, subjects marketers to heightened scrutiny. The FTC staff letter explains that the same general principles apply to children as with adults, such that “the relationship between [the] word-of-mouth marketer and the endorser should be disclosed if that connection would materially affect the weight or credibility of the endorsement.”

However, the letter further explains that teens and children are more vulnerable to marketing messages than adults. The FTC typically examines ads directed at children and teens from the standpoint of an ordinary child or teenager, rather than the “reasonable adult.” According to guidelines published by the Children’s Advertising Review Unit (CARU) of the Council of Better Business Bureaus Inc., advertisers should recognize the limited knowledge and experience of children, and that children “may not understand the persuasive intent of advertising, and may not even understand that they are being subject to advertising.” Addressing endorsements, CARU guidelines state that all personal endorsements should reflect the actual experiences and beliefs of the endorsers.

The Commercial Alert letter pointed to news accounts about one marketer who assembled a force of 250,000 teens compensated with coupons and product samples in exchange for buzz marketing. According to the Commission’s staff, the Commercial Alert letter shed light on the fact that parents of children who participate in buzz marketing may not be aware of their children’s marketing activities. FTC staff reminded marketers who operate websites directed to children under the age of 13, or have actual knowledge that their websites are collecting personal information from such children, that the Children’s Online Privacy Protection Act (COPPA) and FTC rules implementing COPPA govern their online activities. Among other things, COPPA requires such marketers to obtain verifiable parental consent to the collection of children’s personal information.

In its letter, FTC staff established that it would determine on a case-by-case basis whether particular word-of-mouth practices warrant law enforcement action. FTC staff did not recommend formal action against any of the specific practices cited in the Commercial Alert letter, but encouraged Commercial Alert and other members of the public to continue to report instances in which word-of-mouth marketing practices may cause consumer injury.

The message from the FTC is clear. When providing payment or incentives of any kind to consumers in exchange for their endorsements, or when some other material connection exists between the marketer and the endorsing consumer, these connections should be disclosed.

Jeffrey Knowles manages Venable LLP’s Government Division and heads the firm’s Advertising and Marketing Practice Group. Knowles is the immediate past chairman of the ERA Board. He can be reached at (202) 344-4860. Ellen T. Berge is an associate at Venable and can be reached at (202) 344-4704.


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