United States: Innovative Social Media Marketing Cannot Overlook Old-Fashioned Compliance

Social media is all about innovation, so it is no surprise that social media marketers are always looking for innovative ways—such as courting social media "influencers" and using native advertising—to promote products and services to customers and potential customers. But, as the retailer Lord & Taylor recently learned, the legal rules that govern traditional marketing also apply to social media marketing.

Earlier this year, the Federal Trade Commission (FTC) reached a settlement with Lord & Taylor in a dispute involving its online advertising practices. According to the FTC's Complaint, Lord & Taylor allegedly:

  • gifted a dress to 50 "fashion influencers" and paid them to post on their Instagram accounts photos of themselves in the dress during a specified timeframe; and
  • paid for, reviewed and preapproved Instagram posts and an article in an online magazine, Nylon.

In neither case, according to the FTC, was Lord & Taylor's role in the promotional effort appropriately disclosed.

On these alleged facts, the FTC brought three counts alleging the following violations of Section 5 of the FTC Act's prohibition on deceptive practices:

  • the failure to disclose that the influencers' Instagram posts did not reflect their independent and impartial statements, but rather were specifically created as part of an advertising campaign;
  • the failure to disclose or adequately disclose that the influencers were paid endorsers; and
  • the failure to disclose that the Nylon materials were not independent statements and opinions of the magazine, but rather "paid commercial advertising."

As has been widely remarked, this is not the first time the FTC has brought a case relating to social media advertising. The settlement, however, is noteworthy because it brings together issues relating to both native advertisements and endorsements. The FTC has been focusing on these issues since late 2014; its activities have included:

  • Settling with the advertising firm Deutsch LA, Inc. in late 2014 in connection with its allegedly deceptive activities relating to the promotion, on behalf of its client Sony, of the PlayStation Vita handheld gaming console through Twitter (we wrote about the Deutsch LA case on Socially Aware).
  • Settling in September 2015 with Machinima, Inc., an online entertainment network that allegedly paid video bloggers to promote the Microsoft Xbox One system (we also wrote about the Xbox One settlement on Socially Aware).
  • Issuing a closing letter, at the same time as the Machinima settlement, indicating that the FTC had investigated Microsoft and Microsoft's advertising agency, Starcom, in relation to the influencer videos at issue in Machinima. The closing letter was significant because it suggested that the FTC was primed to take the position that a company whose products are promoted bears responsibility for the actions of its ad agencies—as well as the actions of those engaged by its ad agencies.
  • Releasing a policy statement and guidance on native advertising in late 2015, which warned companies—again—that it is deceptive, in violation of Section 5, if reasonable consumers are misled as to the true nature or source of an advertisement. (Our Client Alert on these materials can be read here.)

The compliance issue with native advertising is that content that does not appear to be advertising—such as an advertisement or promotional article in an online or print publication formatted to look like the non-advertising materials in the same publication—must be clearly and conspicuously disclosed as advertising. The relevant compliance issue with endorsements is that any payment or other compensation received by the endorser from the promoter must be appropriately disclosed.

The concept underlying native advertisements and endorsements is the same: Consumers must be aware that they are reviewing promotional material, not "native" or "organic" content, whether it is on a social media platform, a website or in a print publication.

The Lord & Taylor settlement is yet another clear signal that paid promotions of any kind, in any medium, must be disclosed. Given the FTC's focus on these issues and the repeated enforcement actions, especially with respect to social media endorsements, it is likely that the FTC will continue to enforce in this area until it is convinced that the market understands the disclosure rules.

In light of the risk in this area, the Lord & Taylor Consent Order is noteworthy, as it provides valuable insight into how the FTC expects companies to avoid running afoul of the endorsement and native advertising rules.

For example, the Order requires Lord & Taylor to provide any endorser "with a clear statement of his or her responsibility to disclose, clearly and conspicuously," the material connection between the retailer and the endorser in any advertisement and communication, and to obtain a signed and dated acknowledgment of receipt of this statement from the endorser. In addition, the Order requires Lord & Taylor to maintain a system to monitor and review its endorsers' representations and disclosures. Taken together, these requirements essentially lay out components of a compliance program that any company using social media for advertising should consider.

Of course, any such program requires time and resources, and no company has those in infinite supply. But, moving beyond the FTC's Complaint and Order, there are other noteworthy aspects of the social media endorsement issue that appear to have been overlooked.

According to news reports and comments from Lord & Taylor, it appears that the company (and commentators) recognized the potential FTC compliance issue right after the ad campaign launched. The company reportedly stated, after the settlement, that "it came to our attention [a year ago] that there were potential issues with how the influencers posted about a dress in this campaign, [and] we took immediate action with the social media agencies that were supporting us on it to ensure that clear disclosures were made." And, indeed, articles from the time of the advertising campaign noted, for example, that "the [endorsing] bloggers left out an important piece of information in their Instagram posts: a disclosure that they had been paid to post by Lord & Taylor." Another website commented at the time that the bloggers "failed to mention they were paid," and suggested that the company was getting away with violating the FTC Act (though it did note that many bloggers had gone back to add "#sponsored or #ad to their posts)." The immediate aftermath of the Lord & Taylor campaign that ultimately formed the FTC's case suggests that awareness of the issues is rising among the public, and that even a quick fix can be too late.

In light of this awareness, the failure to disclose obvious ties between the endorser and the promoter can undermine a campaign. And, even though the FTC does not have the authority to impose civil money penalties for these types of violations of the FTC Act, state Attorneys General appear to be getting in on the act. Machinima, Inc., for example, settled allegations with the FTC regarding its use of influencers in promoting the Xbox One (as we noted above). A few months later, however, the company entered into a settlement with the New York Attorney General that included a penalty of $50,000 for its alleged failure to disclose payments to the influencers.

These events strongly suggest that ensuring appropriate disclosures is more than just an FTC compliance issue. While the FTC is actively enforcing in this space, the margin of error is shrinking not only because of the FTC, but also because of the increasing awareness of the public, and the new risk of enforcement (including financial penalties) by state Attorneys General.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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