Tiffany Ferris, Joe Lawlor and Abbey Gauger, Attorneys at law firm Haynes Boone, look at the tough new stance on improper endorsements and testimonials and explain how to stay on the right side of the law. 

A highly motivated FTC (Federal Trade Commission), not dissuaded by a recent setback at the Supreme Court, is intent on re-asserting its authority to regulate unfair trade practices and to seek significant monetary penalties from companies that deceive consumers through improper endorsements and testimonials.

Tow weeks ago, the FTC sent Notices of Penalty Offenses to more than 700 advertisers, from Adidas to Zillow and everyone in between.  Apparel companies, manufacturers of consumer packaged goods and personal care products, entertainment and telecommunications companies, hospitality players and more all received the Notices, which set the stage for the imposition of civil penalties up to $43,280 (£31,371) per violation should any of these companies continue advertising in the ways deemed deceptive in the Notices. 

Advertisers are now contending with an FTC that is re-orienting itself away from a view that market forces can correct deceptive practices and toward taking a more active role in policing and deterring wrongdoing. The FTC is showing that it will use all tools at its disposal to do this, including reviving a long-dormant authority to seek financial penalties, even from first-time offenders. Advertisers will be wise to take this opportunity to review their advertising guidelines and programs to ensure compliance before the FTC begins doling out fines. 

The FTC’s Penalty Offense Authority
In April 2021, the Supreme Court strictly curtailed the FTC’s ability to use Section 13(b) of the FTC Act – its then-primary enforcement mechanism – to obtain restitution and disgorgement from companies that engage in unfair or deceptive advertising practices. Anticipating this move by the Court, and a potential incoming Democratic administration, several FTC Commissioners had already begun brainstorming potential alternatives to Section 13(b). 

In 2020, Rohit Chopra, then a Democratic commissioner on the FTC and now Director of the Consumer Financial Protection Bureau, and Samuel A.A. Levine, now Director of the Bureau of Consumer Protection, published a law review article setting forth a framework and rationale for re-energizing the FTC’s Penalty Offense Authority.[1] Chopra and Levine describe the Supreme Court action as an “existential threat to the FTC’s mission of promoting fair markets.”[2]  To combat Section 13(b)’s loss of effectiveness, Chopra argued that the “largely abandoned” Penalty Offense Authority “can be used to systematically eradicate unfair or deceptive practices through administrative adjudication and market participant notification.” 

In an October 6, 2021 Tweet, FTC Chair Lina Khan declared the FTC’s intent to utilize the long-ignored Penalty Offense Authority:

The Penalty Offense Authority is unique in that it allows the FTC to seek civil penalties – a predetermined monetary amount currently set at $43,280 – for first-time offenses involving unfair or deceptive behavior.  By sending out “Notices of Penalty Offenses,” the FTC is able to satisfy the requirements for civil penalties that any recipient of a Notice knew that its conduct was unfair or deceptive. These Notices detail conduct that the FTC has already determined to be unfair or deceptive in its various administrative orders. They are, essentially, a reminder to advertisers about prohibited conduct and a clear signal of the FTC’s unwillingness to tolerate violations. 

The FTC puts advertisers on Notice of Deceptive Endorsement and Testimonial Practices
The Notices of Penalty Offenses delivered this week[3] detail seven acts[4] that the FTC has found unfair or deceptive with respect to endorsements or testimonials:

• Falsely representing that a third party has endorsed a product
• Misrepresenting that an endorsement represents the experiences, views, or opinions of users
• Misrepresenting an endorser as an actual, current, or recent product/service user
• Continuing to advertise an endorsement without good reason to believe the endorser continues to hold the views expressed in the endorsement
• Using testimonials to make unsubstantiated or deceptive claims, even if the testimonials are genuine
• Failing to disclose a material connection between an endorser and a seller of a product or service that is not reasonably expected by consumers
• Using testimonials to misrepresent that a described experience represents the typical or ordinary experience of users of the product or service.

None of the prohibited actions should come as a shock to advertisers. The administrative orders detailing the deceptive and misleading character of these practices have been in place for decades and far predate the age of internet marketing. What might be surprising is that in only the second Notice of Penalty Offenses delivered in nearly 40 years, the FTC is choosing to target issues around endorsements and testimonials. This is in keeping with various commissioners’ opinions that deceptive practices in this area are harmful to both competitors and consumers, and therefore should be policed. It seems, however, that this Commission may not be satisfied with simple warning letters and may instead seek to penalize the pocketbook of those who violate the law.

Next steps for advertisers  
As a practical matter, any of the more than 700 entities who received the Notice of Penalty Offenses may find themselves liable for monetary penalties should their advertising continue to include any of the prohibited practices detailed in the Notice. All advertisers who use endorsements or testimonials should be on alert and take steps to ensure their advertising is compliant. It is also critical to remember that endorsements and testimonials include more than simply celebrity endorsers or individuals in infomercials. “Endorsements” and “testimonials” encompass product reviews, influencer marketing, and even statements delivered via Tweet. 

Given the FTC’s more assertive approach and the scrutiny that will be given to endorsements and testimonials over the coming months, advertisers would be well served to use this as an opportunity to audit their practices and confirm they are not committing violations. Here are 3 gotchas to be on the lookout for:

Don’t use fake reviews – It should be obvious that advertisers must not create programs to generate fake reviews for their products. This can easily lead to both FTC action and consumer and media backlash, like the firestorm faced by cosmetic brand Sunday Riley after posting fake reviews on the Sephora website.[5] Advertisers should ensure that any reviews they are using, circulating, interacting with, or retransmitting are genuine. 

Audit influencer program requirements –  If an advertiser provides compensation and/or free product to an influencer, the influencer must disclose that “material connection.” Advertisers should ensure that their influencer program requirements specify that influencers must adequately make such disclosures and that any failure to do so must be remedied promptly.

Don’t get stale – Just because a review, testimonial, or endorsement was given in the past does not mean that it is still accurate. Tastes change, and maybe an influencer no longer uses your product. Perhaps someone has revised her opinion given in an initial review after using a product for a longer time. In either instance, an advertiser’s continued use of that content would be deceptive.

The FTC has sent a clear signal: the time for compliance is now, and it will not hesitate to use all tools at its disposal to protect consumers. Advertisers would do well to heed the warning.

Footnotes:
[1] 15 U.S.C. § 45(m)(1)(B).

[2] Rohit Chopra & Samuel A.A. Levine, The Case for Resurrecting the FTC Act’s Penalty Offense Authority, U. PA. L. REV. (forthcoming 2021) (manuscript at 26–31), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3721256.

[3] https://www.ftc.gov/system/files/attachments/penalty-offenses-concerning-endorsements/npo_endorsement_template_letter.pdf

[4] https://www.ftc.gov/system/files/attachments/penalty-offenses-concerning-endorsements/notice-penalty_offenses-endorsements.pdf

[5] https://www.buzzfeednews.com/article/stephaniemcneal/sunday-riley-fake-sephora-reviews-ftc