The Federal Trade Commission (FTC) recently announced a settlement with Legacy Learning Systems, Inc. (Legacy), maker of instructional guitar DVDs, and its sole owner, Lester Gabriel Smith (Smith), resolving claims that the company's online affiliate marketers posted misleading endorsements.

Specifically, the FTC claimed that Legacy's online affiliate marketers falsely posed as ordinary consumers and failed to disclose their financial compensation from the sale of Legacy's products when promoting the products. This settlement represents another action by the FTC against online endorsements that it believes violate its Guides Concerning the Use of Endorsements and Testimonials (Guides), which were revised in late 2009 to address endorsements in blogs and social media.

THE COMPLAINT

According to the complaint, Legacy recruited marketers for its "Review Ad" affiliate program, which encouraged affiliates to promote Legacy's courses by posting positive endorsements in articles, blog posts and other online editorial copy. Members of Legacy's affiliate program could generate commissions ranging from 20% to 45% of the cost of each instructional course sold. The FTC claimed that the affiliates gave consumers the false impression that the endorsements were posted by ordinary consumers and failed to adequately disclose that the affiliates had a paid relationship with Legacy.

Although Legacy's contracts with its affiliates stated that the affiliates should "comply with the FTC guidelines on disclosures," according to the FTC , Legacy failed to implement a reasonable monitoring program to ensure affiliates clearly and prominently disclosed their relationship to Legacy. The FTC complained that certain affiliates provided no disclosure at all, while others buried the disclosure in inconspicuous hyperlinks located at the bottom of the affiliates' web sites.

THE SETTLEMENT

Under the proposed settlement, Legacy and Smith agreed to pay $250,000 so that the FTC could provide adequate relief (including payment of damages and public notification) and for administration costs. Legacy and Smith further agreed to implement a monitoring program for their affiliate marketers. Under this program, Legacy and Smith must monitor their 50 top-earning affiliates to ensure that they are making appropriate disclosures and not misrepresenting their status as independent or ordinary consumers of Legacy's products. Legacy and Smith are also required to monitor a random sampling of another 50 affiliates on a monthly basis. If any affiliates are found to be misrepresenting their status as ordinary consumers or failing to disclose their connection to Legacy, Legacy and Smith must immediately terminate them from the program. In addition, Smith (in his individual capacity) agreed to notify the FTC of his current business or employment status for a period of five years after the settlement date.

WHY THIS ACTION IS IMPORANT

Since the revised Guides, it is the:

  • first FTC action against a company for endorsements made by a company's affiliate marketers
  • first FTC action to provide a monetary settlement ($250,000)
  • second FTC action that charged an owner of a company personally liable for the misleading endorsements

According to the FTC , although Legacy and Smith contractually required their affiliates to make FTC -compliant disclosures in the course of their services, they had a further obligation to monitor their affiliates' disclosures and to act on their non-compliance.

The Bottom Line

Companies are encouraged to be proactive in establishing reasonable monitoring programs for their online affiliate marketers to verify that they are making appropriate disclosures when endorsing the company's products or services.

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