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The FTC cracks down on word-of-mouth marketing

Increasingly, new-media savvy companies are utilizing social media, blogs and other consumer-generated content to reach their target audience.

These advertisers often provide free products, coupons, discounts or other fairly nominal compensation to individuals in exchange for favorable reviews or postings on blogs or message boards. Concerned that consumers may not understand the connections between advertisers and these compensated bloggers and posters, the Federal Trade Commission has released new guidance for companies using word-of-mouth marketing, particularly in new media settings.

According to the FTC's "Guidelines Concerning the Use of Endorsements and Testimonials in Advertising," released this month, individual bloggers and reviewers must disclose any compensation from companies whose product or service they review, even if the compensation is limited to a discount on services or a free product.

 Under the guidelines, failure to disclose this compensation constitutes deceptive advertising, since, in the FTC's judgment, consumers would not necessarily expect that an individual product reviewer or blogger with no corporate affiliation is actually a paid spokesperson.

For example, assume that skincare Company X provides a free sample of Brand X hand cream to Cathy Consumer, a mommy blogger with a readership of 5,000. Fortunately for Company X, Cathy approves of the cream, and tweets "Love my new Brand X hand cream" to her Twitter followers with a link to her full blog posting, which also extols the virtues of the cream.

In this scenario, even though the only compensation Cathy received was a $15 tube of hand cream, she is required to disclose, both in her tweet and her blog posting, that "Company X was kind enough to provide me with a free tube of Brand X hand cream." The same rule applies to Cathy's Facebook page and her postings to her friends' Facebook walls.

In addition to this disclosure requirement, the new FTC guidelines clarify that companies that provide free products to consumers in exchange for favorable reviews can be liable for false advertising if the compensated bloggers, posters, or tweeters make false or misleading comments about the sponsored product.

For example, if Cathy Consumer tweets and blogs "I'm switching to Brand X hand cream, because it cures eczema," she is liable for false advertising if there is no scientific substantiation for this claim. But the liability doesn't stop with Cathy.

Under the new FTC guidance, Company X is also liable for false advertising, even though it had no control over Cathy's postings or prior knowledge that she would make this inaccurate claim.

In response to the new FTC guidelines, advertisers should consider developing a comprehensive word-of-mouth marketing policy. As a part of the policy, advertisers should explain in writing to compensated bloggers and posters that they are obligated to disclose all compensation to their readers, including free products and discounts.

This written notice should also advise consumer reviewers not to make false or unsubstantiated claims about the advertiser's product or services. Even after sending this notice, advertisers should monitor compensated consumer reviews to ensure that they contain no inaccuracies.

If the blogger does post inaccurate information, the advertiser should follow up to ensure that the misstatement is corrected. If the advertiser works with a new media advertising agency that matches its products with bloggers, it should ensure that the agency provides proper training to bloggers and posters with whom it works.

In addition to guidelines for consumer-generated content, the new FTC guidelines also contain important new guidance for the use of celebrity endorsers. The new guidelines have not yet been published in the Federal Register, but they are available here.

For more information concerning the new FTC guidance on word of mouth marketing, please contact Andrea Anderson.

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Andrea Anderson

Andrea Anderson is a partner in Holland & Hart’s Boulder office. She provides a full complement of trademark related services with an emphasis on strategic counseling and dispute resolution. In addition, a significant portion of Ms. Anderson's practice is devoted to assisting clients with legal issues related to their advertising and marketing claims, including "green advertising" product claims. She can be reached at (303) 473-2700 or aanderson@hollandhart.com. 

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