Regulators seek to enhance transparency in the digital feedback landscape
By: David Bland
Following its October 2022 ANPR (Advanced Notice of Proposed Rulemaking) seeking public comment on the proposal of a new rule to regulate deceptive and unfair product reviews and endorsements, the Federal Trade Commission (FTC) has released a much anticipated update to its Endorsement Guides as well as a Notice of Proposed Rulemaking (NPRM) to ban fake reviews and testimonials.
Continuing its flurry of recent rulemaking activity, the FTC is moving forward to address its growing concerns surrounding fraudulent and misleading online endorsements to safeguard consumers from deceptive marketing practices in the digital age. This action also comes on the heels of the Commission’s Notices of Penalty Offense letters on endorsements that were sent to over 700 companies in 2022. While the ANPR was an initial step to solicit preliminary public feedback on the need and general parameters for a new rule, the NPRM presents for public comment the actual proposed rule language.
Deterrence and Monetary Redress Cited As Benefits of New Rule
In its justification for the new rule, the Commission argues that, although deceptive practices involving consumer reviews and testimonials are already unlawful under Section 5 of the FTC Act, the proposed rule may deter these practices earlier and will also benefit injured consumers by providing a means for them to obtain monetary redress.
The agency has been eager to facilitate alternative means to obtain financial disgorgement in order to provide restitution to wronged consumers after the Supreme Court ruled that such monetary actions were not legal under Section 13(b).
In the NPRM, the Commission states that, of the two remaining paths to monetary redress provided by Section 19 of the FTC Act, the shorter, and thus preferable path, allows the Agency to obtain monetary redress directly through a federal court action.
However this path requires a rule violation. As an added benefit, the shorter path also accommodates the Commission’s ability to obtain civil penalties that it argues will have the benefit of punitive damages against fraudsters, adding additional deterrent.
Furthermore, the agency states that civil penalties do not require “quantifiable proof of consumer injury” that is a requirement of the long path to redress found in Section 19.
New Rule Would Prohibit Several Deceptive Practices
The FTC has identified a range of seven concerning behaviors that undermine the integrity of consumer reviews and endorsements. The NPRM outlines these deceptive practices to be banned with the proposed rule:
- Fake or False Consumer Reviews, Consumer Testimonials, or Celebrity Testimonials
The proposed rule seeks to prohibit businesses from writing, selling, or creating fake reviews or testimonials that misrepresent the reviewer’s experience or even involve nonexistent individuals.
Additionally, businesses would be barred from purchasing and disseminating fake reviews or testimonials about their products or services.
The FTC’s proposal does not apply to third-party review platforms that merely publish consumer reviews or require manual review of every review and poster’s profile.
In response to industry feedback, the FTC’s proposed rule does not restrict legitimate reviews solely from verified purchasers. Instead, it requires the reviewer to have genuine experience with the product, service, or business.
While some entities have suggested limiting the rule’s scope to review brokers and exempting buyers of
fake reviews, the FTC believes
that both parties should be held accountable for deceiving consumers.
The FTC argues that a formal enforcement action seeking monetary damages is not a substitute for a comprehensive rule that effectively addresses the issue of fake reviews and testimonials.
- Consumer Review Repurposing
Seeking to ban the practice of repurposing existing reviews, the proposed rule seeks to prohibit businesses from using or repurposing consumer reviews intended for one product in a way that makes it appear as if the reviews were written for a substantially different product.
Such deceptive actions could include merging different products to share reviews, altering product pages to feature a different item while keeping previous reviews, or copying reviews from other products and websites.
The proposed rule defines a “substantially different product” as one that differs from another product in one or more material attributes, excluding color, size, count, or flavor.
While combining reviews for products with various flavors would not violate the proposed rule, it could still be considered a deceptive practice under the FTC Act, subject to enforcement.
- Buying Positive or Negative Consumer Reviews
The Commission aims to prohibit businesses from providing compensation or incentives in exchange for consumer reviews expressing a specific sentiment, whether positive or negative, about their products or services.
However, the rule does not cover review gating, where businesses seek feedback from past purchasers and invite only those who provide positive feedback to post online reviews.
While the FTC acknowledges that review gating can be deceptive, the rule’s applicability to such practices will depend on the specific circumstances.
Additionally, the proposed rule does not address incentivized reviews, except for those that require expressing a particular sentiment.
Nevertheless, the FTC warns that other uses of incentivized reviews could still be deceptive and run afoul of the FTC Act. The deceptiveness of undisclosed incentivized reviews will also be subject to case-by-case evaluation.
- Insider Consumer Reviews and Consumer Testimonials
The new rule would target company insider consumer reviews and testimonials as well as prohibit officers or managers of businesses from writing or creating consumer reviews or testimonials without clear and conspicuous disclosures of their relationship to the company.
Additionally, businesses would be prohibited from disseminating certain consumer testimonials written by their officers, managers, employees, agents, or relatives without proper disclosures of their relationships.
The proposed rule also addresses the solicitation of employee and insider reviews. Officers or managers who solicit consumer reviews from employees, agents, or relatives would need to ensure clear and conspicuous disclosures of the reviewer’s relationship to the business.
In response to comments from the industry, the proposed rule does not limit its scope to businesses publishing reviews themselves but includes situations where businesses cause the creation of insider reviews. The FTC aims to ensure that relationships are readily apparent and disclosed, particularly on workplace-review platforms such as Glassdoor.
- Company-Controlled Review Websites or Entities
Another aim of the new rule is to prevent businesses from making deceptive representations about independent reviews or opinions.
Specifically, businesses would be prohibited from claiming that a website, organization, or entity is providing unbiased reviews or opinions about a category of businesses, products, or services that includes their own business or offerings when, in reality, they control, own, or operate that website or organization.
In accordance with the proposed rule, the FTC seeks to curb deceptive practices where businesses create an illusion of impartiality by misrepresenting the independence of review sources. The rule intends to promote transparency and ensure consumers can trust the authenticity of reviews and opinions in the marketplace.
- Review Suppression
The proposed rule targets two forms of review suppression. First, the rule would prohibit unjustified legal threats, physical threats, intimidation, or false accusations to prevent consumer reviews’ creation or removal, ensuring consumers’ freedom to express their opinions without fear of reprisal. The provision defines “unjustified legal threat” as a baseless legal action initiated to challenge truthful speech or matters of opinion.
Second, the rule aims to prevent businesses from misrepresenting the consumer reviews displayed on their websites or platforms as representative of most or all reviews submitted, while suppressing negative reviews based on their ratings or content.
The rule allows exclusion of reviews containing sensitive information, false or misleading content, inappropriate language, discriminatory content, or unrelated to the offered products or services.
These criteria, similar to those in the Consumer Review Fairness Act, protect consumers’ ability to access genuine and unbiased feedback while permitting businesses to exclude reviews that do not meet the specified criteria.
In response to industry comments, the proposed rule does not prohibit businesses from engaging in good faith online reputation management practices, such as responding to negative reviews and offering explanations to address customer concerns. It also does not address businesses’ ability to remove off-topic comments, false statements, or inappropriate language from their websites or certain social media posts.
- Misuse of Fake Indicators of Social Media Influence
The final deceptive act to be banned by the proposed rule is the misuse of indicators of social media influence. These indicators include metrics such as followers, friends, connections, subscribers, views, plays, likes, reposts, and comments, which people use to assess an individual’s or entity’s social media impact.
Under the proposed rule, it would be prohibited to sell fake indicators of social media influence for commercial purposes, with the intention of misrepresenting one’s influence.
Similarly, acquiring fake indicators to falsely portray one’s importance in the social media space for commercial gain would also be prohibited.
The FTC’s proposed rule aims to maintain the integrity of social media metrics, ensuring that individuals and businesses cannot deceive others by inflating their influence through the use of fraudulent indicators.
FTC Updates Endorsement Guides
One day prior to the NPRM, the Commission released an update to its “Guides Concerning the Use of Endorsements and Testimonials.” Last updated in 2009, the Endorsement Guides advise businesses on how to stay in compliance with the FTC Act by avoiding advertising that uses unfair or deceptive reviews and endorsements.
In February 2020, the FTC invited public feedback on the overall costs, benefits, and regulatory and economic impact of the Guides. The comment period was extended for two months due to disruptions caused by the COVID-19 pandemic, resulting in 108 unique substantive comments.
In July 2022, the FTC published a Federal Register document discussing the comments received in 2020, proposing certain revisions to the Guides, and seeking additional input on those proposed changes.
After thorough review of the comments, the Commission has made further adjustments to the Guides and is now implementing the resulting revised Guides as the final version.
Expanded Definition of ‘Endorsement’
The FTC proposed revisions to the definitions of “endorsements” and “endorsers” in response to comments received. The proposed changes clarify that tags in social media posts can be considered endorsements, but not all tags necessarily qualify
The Commission also included language to emphasize that it would consider fake reviews and reviews by non-existent entities to be endorsements.
Quotations Matter and Advertiser Liability Is on the Table
One of the changes to the Guides involves the use of quotations from endorsers in advertisements. The new guideline clarifies that an ad must use an endorser’s exact words only when it represents that it is presenting the endorser’s exact words, such as through the use of quotation marks.
The FTC is also addressing the liability of advertisers in the context of misleading or unsubstantiated statements made through endorsements.
While some commenters supported the proposed revision, others argued that advertisers should not be held liable for what endorsers say unless there is a contractual relationship. However, the FTC disagrees and expects advertisers to be responsible for monitoring the actions of their endorsers.
The updated guidelines also cover the liability of endorsers and intermediaries involved in advertising transactions. The FTC is adopting a suggestion to address the liability of reviewers who falsely represent that they personally used a product or service.
Additionally, the revised guidelines specify the entities intended to be addressed as “intermediaries” and clarify their potential liability for deceptive endorsements.
Performance and Typicality Claims
The Commission has proposed revisions to its guidelines on performance claims in advertisements made through endorsements.
The proposed changes emphasize that advertisers must possess adequate substantiation, including scientific evidence if necessary, to support claims made through endorsements. This principle applies to both express and implied claims, as clarified by the FTC in response to comments from one supportive commenter.
Regarding typicality claims, the FTC’s current guidelines require advertisers to disclose the generally expected performance when an endorser’s experience is not representative of what consumers will achieve. A proposed addition states that the disclosure of generally expected performance should not misrepresent what consumers can expect.
Additionally, the FTC highlights that effective disclosures should alter the net impression of an advertisement to avoid being misleading.
Introducing a new guideline for advertisers’ handling of consumer reviews of their products or services, the NPRM addresses advertisers procuring, suppressing, boosting, organizing, or editing reviews in a way that distorts or misrepresents consumers’ opinions.
While several commenters supported this addition, others expressed concerns about the FTC’s scope of regulation. The FTC clarifies that the guidelines are administrative interpretations, not regulations, and do not create inconsistencies with other laws.
The NPRM also addresses the use of expert endorsements in advertising, noting that an endorser must have actually demonstrated the expertise that they are portrayed or presented as having.
In other words, if an individual is represented as possessing a specific level of knowledge or skill in a particular area, they must have genuinely utilized that expertise in evaluating the product features or characteristics they are endorsing.
This requirement ensures that expert endorsements are based on real expertise and not merely a superficial or misrepresented claim of knowledge.
When there is a connection between the endorser and the seller of the advertised product that might materially affect the weight or credibility of the endorsement, and that connection is not reasonably expected by the audience, such connection must be disclosed clearly and conspicuously.
“A material connection needs to be disclosed when a significant minority of the audience for an endorsement does not understand or expect the connection,” as emphasized by the revised guidelines.
Material connections in endorsements encompass various aspects, including business, family, or personal relationships. These connections involve monetary payments, free or discounted products (even unrelated to the endorsed product), or other benefits such as early access, potential payment, prizes, or media appearances.
The revised Guides emphasize that while disclosures must convey the connection’s nature clearly, they need not provide exhaustive details, allowing consumers to assess its significance.
Endorsements Directed to Children
The Commission addresses the unique concerns regarding endorsements in advertisements targeted at children. Practices that might not raise questions in ads directed at adults may be questioned when aimed at children due to the character of the audience. Several public comments supported this new section.
Some commenters urged the Commission to provide more detailed guidance on impermissible techniques and practices for children, while others called for a ban on targeted and influencer advertising to children and teens.
The Commission believes the new section is beneficial in establishing a general principle without imposing duplicative requirements on marketers. Further research on children’s cognitive development and advertising to children in digital media, including endorsements, is being explored by Commission staff.
Commission Seeks Clarity and Transparency
These guidelines provide essential clarity and updates to ensure transparency and fairness in advertising practices. With these revisions, the FTC aims to safeguard consumer trust, promote informed decision-making, and maintain ethical standards in the evolving landscape of advertising and endorsement practices.