United States: FTC Proposes No-Money, No-Fault Settlement With Cosmetics Company Over False Customer Reviews

Seyfarth Synopsis: FTC publishes proposed consent order with cosmetic company that posted fake customer reviews but some FTC commissioners place doubt on its effectiveness because there is no financial penalty.

Earlier this year, we reported that fake news consumer reviews was on the federal regulators' radar, especially with the passage of the Consumer Review Fairness Act in late 2017. We identified a cosmetic company that faced negative media after a former employee leaked an internal, company email that insisted employees post positive reviews of a new product and even provided detailed instructions on what to say about the product as well as how to avoid tracing a review back to the company's IP address. As a result of that activity, on October 21, 2019, the FTC brought a complaint for two violations under the Federal Trade Commission Act: (1) making false or misleading claims that the fake review reflected the opinions of ordinary users of the products and (2) deceptively failing to disclose that the views were written by the company's CEO and her employees.

In the press release announcing a proposed settlement of the complaint, Andrew Smith, Director of the FTC's Bureau of Consumer Protection states: "Dishonesty in the online marketplace harms shoppers, as well as firms that play fair and square." Consistent with the press coverage last year, the FTC's investigation revealed that the cosmetic company's CEO, managers, and other employees posted reviews of their products under fake accounts on a third-party retailer's website. Pursuant to the proposed settlement agreement, the company consented to (i) not make any misrepresentations about the status of any endorser or person providing a review of the product, (ii) that any of the company's officers, agents, employees, and attorneys and all other persons who participate with any of them who make a representation about a product must disclose their connection; and (iii) notify each employee, agent, and representative with clear disclosure responsibilities for endorsements. In addition, the company is subject to compliance reporting and monitoring requirements. Noticeable absent from the settlement agreement is any monetary fine or penalty, which Commissioner Rohit Chopra raised in a separate statement and Commissioner Rebecca Kelly Slaughter joined.

In dissenting the proposed order, Commissioner Chopra pointed out it "includes no redress, no disgorgement of ill-gotten gains, no notice to consumers, and no admission of wrongdoing." Commissioner Chopra voices that because there is no financial penalty, the proposed settlement is unlikely to deter other potential wrongdoers. To this point, she explains that for companies, the potential benefits of posting false reviews, including, "higher ratings, more buzz, better positioning relative to competitors, and higher sales," can outweigh the potential cost of getting caught. Review fraud, however, goes largely undetected, unless, as in this particular case, there is some whistleblower action. By the proposed resolution, Commissioner Chopra believes it suggests that even the narrow subset of wrongdoers who are caught will face minimal sanctions from law enforcement. This, of course, sends the wrong message to the marketplace. Commissioner Chopra insists that while monetary relief can be difficult to calculate, it should not deter form the FTC from seeking it.

This matter raises two critical take-aways:

(1) As Commissioner Chopra identifies, review fraud is permeating the online marketplace on popular websites, demanding FTC action, including analyzing the problem and determining whether e-commerce firms have the right incentives to police their platforms.

(2) Deterrence is a key factor in an enforcement action, but it is undermined when wrongdoers are merely asked to not break the law again. This case was an instance in which the company and even its CEO were strategically involved with review fraud and are getting by with nothing more than a "stern talking to" not to do it again. This type of conduct goes beyond strict liability in that the parties were aware of the implications of their reviews, raising product rankings, and by imposter means, hiding their IP address and making multiple posts under different identities.

At this time, the proposed consent order has been placed on the public record for 30 days for receipt of comments by interested persons. After 30 days, the Commission will review the order again along with the comments received to decide whether it should withdraw the order or make it final.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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