Truth or Consequences: FTC Revised Endorsement Guides & Class Action Risk

By Douglas A. Thompson and Sarah Richards¹

Testimonials and endorsements, especially those by high-profile celebrities, sports figures, and influencers, can shine a significant spotlight on a company’s products and services. Advertisers and retailers can see significant market share and sales volume growth. However, there can also be risks associated with such endorsements and testimonials. In the past year, we have seen a number of securities and consumer class action lawsuits filed challenging endorsements and testimonials, including in the retail and fintech/cryptocurrency sectors. Earlier this summer, the Federal Trade Commission (FTC) provided new guidance that may help advertisers and retailers mitigate potential unfair and deceptive trade practices (UDAP) and false advertising class action risk, as well as avoid FTC or State Attorneys General investigation scrutiny. The FTC’s message is clear: be truthful and credible, substantiate claims, and conspicuously disclose material factors.

The FTC has updated its guidance on endorsement and testimonial advertising in an effort to more effectively deter deceptive advertising practices in the current market of ubiquitous social media and digital marketing. The Guides Concerning the Use of Endorsements and Testimonials in Advertising require endorsements to be truthful, based on substantiated claims, and to include clear and conspicuous disclosures of connections between advertisers and their endorsers that, if known by the consumer, would affect the weight or credibility of the endorsement. The updates apply and expand the existing principles of reliable and upfront advertising to reflect the nuances of social media and testimonial marketing. The FTC paired the new guidance with announcements of a proposed new Rule on the Use of Consumer Reviews and Testimonials and an update to a key staff guidance publication for businesses, endorsers, and members of the advertising industry.² See: 16 CFR 255 FTC Endorsements Guides – Federal Register, July 2023 (effective date July 26, 2023). 16 CFR 465 FTC Trade Regs – Federal Register, July 2023 (Comments due by September 29, 2023).
 
These developments indicate a possibility of higher scrutiny by the FTC and, in the class action context, may draw attention from the plaintiffs’ bar scrutinizing FTC compliance and representing consumers who may claim harm. Businesses engaged in marketing practices including incentivized testimonials, product ratings, social media endorsements, or sponsorships may want to keep abreast of these developments and refine their advertising practices and governance, if applicable.

The FTC’s guidance communicates an overarching key message to advertisers: advertisers bear responsibility to ensure their endorsements and consumer reviews do not make deceptive or misrepresentative representations to consumers. Principles and examples explore how modern advertising tactics introduce new risks of consumer deception. The FTC concludes that case-by-case analysis is likely required to discern whether consumers can trust the advertiser’s claims and recognize the nature of the claims.

Key FTC Focus & Changes:

• Distorted Reviews. The FTC articulated a new principle regarding not procuring, suppressing, organizing, upvoting, downvoting, or editing consumer reviews in ways that likely distort what consumers really think of a product.
• Incentives & Material Information. The FTC addressed incentivized reviews, reviews by employees, and fake negative reviews by competitors.
• Clear & Conspicuous. The FTC added a definition of “clear and conspicuous” and a warning that a platform’s built in disclosure tool might not be adequate.
• Tags & Virtual Endorsements. The FTC updated the definition of “endorsements” to clarify that it can include fake reviews, virtual influencers, and social media tags.
• Advertiser Responsibility. The FTC provided a clearer explanation of the potential liability that advertisers, endorsers, and intermediaries face for violating the law.
• Children. The FTC emphasized special concerns with child-directed advertising and will continue to work to protect them with additional future rules.

Below are additional details and key takeaways regarding each of these topics. Certain FTC Examples from the Guide are highlighted.

1) Updated Definition of “Endorsement” and “Endorser”

The Guides define an “Endorsement” as any “advertising, marketing, or promotional message” used “for a product that consumers are likely to believe reflects the opinions, beliefs, findings, or experiences of a party other than the sponsoring advertiser, even if the views expressed by that party are identical to those of the sponsoring advertiser.” The definition then describes various forms endorsements can take, now including “tags in social media posts” among “verbal statements, demonstrations, depictions of the name, signature, likeness or other identifying personal characteristics of an individual, and the name or seal of an organization.”

The Guides define an “endorser” as “the party whose opinions, beliefs, findings, or experience the message appears to reflect”, which “could be or appear to be an individual, group, or institution.” The updated Guides added to the definition that an “endorser” “could be or appear to be an individual, group, or institution,” so that the definition now expressly includes “writers of fake reviews and non-existent entities that purport to give endorsements.”

Relevant Examples:

FTC Example 5 was added to illustrate how “tags in social media posts” and, interestingly, even non-tagged paid social media posts may be endorsements. In this example, a brand pays a well-recognized athlete to post a video using their product. Without any verbal statement from the endorser, “[t]he paid post is an endorsement if viewers can readily identify the [product] brand, either because it is apparent from the video or because it is tagged or otherwise mentioned in the post.”

FTC Example 12 directly addresses fake reviews, stating that “[f]ake positive reviews that are used to promote a product are ‘endorsements’”, and fake negative reviews by competitors can be deceptive. Therefore, advertisers should note that according to the revised Guides, fake reviews attributed to non-existent entities or individuals can still amount to endorsements subject to truth-in-advertising laws.

2) Newly Provided Definition of “Clear and Conspicuous”

The FTC added a definition of “clear and conspicuous,” which clarifies how to make effective disclosures. A disclosure is clear and conspicuous and therefore effective if it is “difficult to miss (i.e., easily noticeable) and easily understandable by ordinary consumers” (with ordinary consumers referring to members of the targeted audience—like speakers of a particular language).

The new definition also specifies the characteristics and formats required to make a disclosure “clear and conspicuous.” For one, a representation and its corresponding disclosure must be made through the same means of communication (e.g., video or audio format). Therefore, a representation made visually will require a visual disclosure, and an audible representation will require an audible disclosure. A representation made in both video and audio formats requires disclosure through both those means. The definition also encourages that a disclosure presented simultaneously by visual and audible means is most likely to be clear and conspicuous.

The characteristics of a disclosure (e.g., its size, contrast, location, and length of time it appears, or its volume, speed, and cadence) should sufficiently stand out to be easily seen, heard, and understood by ordinary consumers. In line with the overall theme of reliable advertising, disclosures must not be “contradicted or mitigated by, or inconsistent with anything else in the communication.”

Disclosures made online must be “unavoidable” to be considered clear and conspicuous. FTC Example 9 illustrates a disclosure would not be unavoidable where a social media influencer makes a disclosure on their profile page but not on the actual post containing the endorsement, or where a consumer can only view the disclosure by clicking a link labeled “more.” According to the Example, an influencer’s reliance solely on a social media platform’s built in disclosure tool likely will not suffice as a clear, conspicuous, and unavoidable disclosure.

3) Expanded Guidance on Potential Liability of Advertisers, Endorsers, and Intermediaries

The FTC expanded its guidance on advertiser, endorser, and intermediary liability, stressing that while each bears its own responsibility and liability for endorsements, the Commission expects “advertisers to be responsible for and monitor the actions of their endorsers.”

The FTC Guide maintains that advertisers “are subject to liability for misleading or unsubstantiated statements made through endorsements or for failing to disclose unexpected material connections between themselves and their endorsers.” Importantly, the FTC Guide comments that such liability may arise “for a deceptive endorsement even when the endorser is not liable.” Advertiser liability without endorser liability, for instance, could arise where an advertiser takes an endorser’s truthful statement and presents it deceptively to consumers—like including a “truthful statement [in an ad] that reflects atypical results.” FTC Example 3 highlights a scenario in which only the advertiser may be liable where the advertiser provided a study to an expert endorser but secretly withheld major flaws in the study, resulting in a misrepresentative endorsement attributable only to the advertiser.

The FTC recommends that in order to mitigate potential liability, advertisers implement practices including “good faith and effective guidance, monitoring, and remedial action.” FTC Example 5 illustrates the extent of the Commission’s expectation for advertisers to ensure endorser compliance. Even where an advertiser does not provide the endorser with a script or instructions on what claims to make, according to the FTC, the advertiser may be liable for the endorsers unsubstantiated claim. Advertisers should note the FTC’s new emphasis that advertisers are responsible to guide their endorser’s on compliance, monitor their endorsements, and take steps to remedy any violations. Such practices will only minimize the potential risk, as the FTC creates no safe harbor from potential deceptive endorsement liability.

4) Added Principle on Consumer Review Practices

The FTC has expressly prohibited manipulation or distortion of consumer reviews. “In procuring, suppressing, boosting, organizing, publishing, upvoting, downvoting, reporting, or editing consumer reviews of their products, advertisers should not take actions that have the effect of distorting or otherwise misrepresenting what consumers think of their products, regardless of whether the reviews are considered endorsements under the Guides.”

Relevant Examples:

FTC Example 11 presents a scenario where a business solicits feedback from all recent customers, after which it invites the customers who gave positive feedback to post reviews but does not request a review from unhappy customers. Interestingly, “that deception or unfairness occurs not in the selective asking of customers for reviews.” Rather, the Commission advises that this practice would only be deceptive if the reviews that resulted from the selective requests caused a substantial increase in the overall number of positive posted reviews for the product.

Some other examples provided illustrating possible deceptive uses of consumer reviews include:

• Displaying an average or breakdown of customer reviews on a product webpage that is skewed because the advertiser suppressed or chose not to publish certain negative or lower-star reviews.
• Applying criteria to exclude certain negative reviews without applying the same uniform criteria to exclude positive reviews. For example, it would not be misleading to exclude all reviews containing profanity, but it would be misleading to block only negative reviews with profanity and include positive reviews with profanity.
• Labeling a review as “most helpful” based only on it being a positive review and not based on any indications from consumers, like upvotes, that it is in fact the most helpful.
• Paying consumers to write only positive reviews (rather than paying consumers to write reviews generally) or using threats or coercive tactics to convince consumers to take down their negative reviews.

5) More Guidance on When Endorsements Require Disclosures

Endorsements must include a disclosure of any unexpected material connections between the endorser and advertiser. An unexpected material connection exists when the connection “might materially affect the weight or credibility of the endorsement and is not reasonably expected by the audience.” The FTC revised section 255.5 to further explain what connections amount to “material” and “unexpected.”

First, note that these revisions do not provide bright-line rules defining unexpected material connections but rather highlight the nuances and ambiguities in that determination, especially addressing the blurred lines that arise in the current environment of social media endorsements. Advertisers should use these revisions as helpful points of reference while bearing in mind the Commission’s bottom-line message that whether an endorsement requires disclosure of a material connection remains a “factual question.” It might even require “empirical testing, and that testing may only be relevant to a particular endorser or to a narrow set of circumstances.”

That said, the section now provides an illustrative list of possible material connections. Material connections may include “business, family, or personal relationship[s],” or incentives to endorsers like “the provision of free discounted products,” “early access to a product,” “or the possibility of being paid, of winning prize, or of appearing on television or in other media promotions.”

Updated Section 255.5 also clarifies that an endorser’s connection to an advertiser is considered unexpected when a “significant minority of the audience” would not understand or expect it. The Commission denied the request to provide a real-world example of an influencer sponsorship so well known that enough consumers would sufficiently expect the connection for it not to require a disclosure. Again, the Commission reinforced that this requires case-by-case analysis.

Relevant Examples:

New examples provide further guidance on when endorsements require disclosures in varying formats and media, again communicating more of a sensibility than clear rules. Among other issues, the examples now address incentivized reviews, employee reviews, and the possibility that consumers may have less expectation of material connections in certain forums like personal social media posts as opposed to ads on television.

FTC Example 6 illustrates guiding principles to abide by when incentivizing consumer reviews. In the example, a marketer offers a free product and payment to consumers in exchange for posting reviews, making it clear that they are free to write negative reviews without any negative consequences. In the example, the FTC asserts: (a) the resulting reviews are likely deceptive if they do not disclose the incentives; (b) if the consumers had not been free to write negative reviews, the reviews could be deceptive even with a disclosure; and (c) if the incentivized reviews include a star rating and materially increase the product’s average star rating, the average rating will likely require its own independent disclosure.

FTC Example 8 provides guidance regarding employee endorsements, stating that employers can limit liability by appropriately training employees about disclosures and monitoring endorsements directed by the employer. The example also shows that even where employees are not directed by their employer to endorse a product, an employee’s endorsement would likely require a disclosure.

FTC Example 12 addresses nuances with podcast host endorsements. On the one hand, when a podcast host recites a scripted ad, listeners likely expect that the host was compensated, and so the host does not need to disclose that material connection. However, the ad may require disclosure if it communicates that the host is expressing their personal views on the product. In the same vein, if the host then mentions the same product on social media, the social media post may still require a disclosure, even if in the podcast it did not need one.

6) New Guidance on Child-Directed Advertising

The updated Guides establish a general principle that “[e]ndorsements directed to children” “may be of special concern.” While the FTC provides no examples or specific details, it further comments: “[p]ractices that would not ordinarily be questioned in advertisements addressed to adults might be questioned in such cases.”

For now, advertisers may want to treat this guidance as a signal to use extra caution when marketing to children. More guidance may arise regarding child-directed advertising, as the Commission noted that it is exploring next steps on the issue.

The Bottom Line:

Advertisers can access the Endorsement Guides and FAQ for further detail on FTC requirements and examples regulating endorsements. As consumers turn increasingly to social media and review platforms to guide their buying decisions in spaces where it is less readily apparent when claims are sponsored by advertisers, the FTC contends additional focus is required to avoid potentially deceptive and misleading advertising. Advertisers can mitigate potential risk by ensuring endorsements are truthful and presented with transparency. Such effective practices may also boost consumer trust and build long-term brand loyalty.