If you compensate online influencers in any way to promote products or services, pay close attention, because things could get ugly if you’re not in compliance with US Federal Trade Commission (FTC) requirements. In fact, you could owe the US government over $40,000 per violation per day if the influencers do not comply with US requirements for transparency regarding compensation and advertising of products.
The law is not new, it is contained in Section 5 of the FTC Act which has been around since 1914 and amended over the years. It allows the FTC to take enforcement action to protect consumers from “unfair or deceptive practices in or affecting commerce”. The law is codified as 15 U.S.C. §45(a).
Although the FTC has always had the power to apply the FTC Act in the context of online influencers, until recently they hadn’t done so except in the most extreme cases. In a case brought by the FTC in March 2020 against a company called Teami, the company marketed a tea which it claimed would result in weight loss, detox, and a number of other health benefits. The FTC took enforcement action against the company and its owners, alleging that Teami and the influencers made claims about the tea which were fraudulent and deceptive. Here is a copy of the complaint filed in court:
You might be thinking, well my business does not make fraudulent or deceptive claims, and I don’t ask influencers to do this, so the FTC wouldn’t come after me. However, the FTC defines fraud and deception as the failure to disclose the fact that the influencers are compensated. So unless the influencers who you work with are sufficiently transparent about being compensated, your company is not in compliance with the requirements of section 5 of the FTC Act.
But what does adequate transparency look like? Luckily the FTC has published a guide for influencers to assist them with fulfilling their requirements. It can be found here on the FTC's website.
However, don’t fall into the trap of believing that if you provide this FTC guide to influencers then the burden is entirely on them to comply. You still have the obligation to ensure that promotion of your company’s products or services is in compliance with the FTC Act in order to avoid enforcement action. It’s not enough to say that the influencers have been made aware of the requirements.
Although we have cited the Teami case to show the willingness of the FTC to apply Section 5 in the online context, other more recent developments have changed the landscape in a much more serious way. These actions demonstrate that the FTC is upping its game in enforcement in the digital arena.
Let me explain:
After the inauguration of Joe Biden as US President, a new Chair was appointed at the FTC. Her name is Lina Khan, and she has serious concerns regarding the power of big-tech. She has long advocated regulating the reach and influence of big-tech and has indicated that this would be a priority for the FTC upon her appointment as Chair.
Then within months of Khan’s appointment, on July 1, 2021 the FTC published a resolution directing the use of the enforcement process to ensure that the requirements of Section 5 of the FTC Act would be applied in the context of technology platforms.
Within 4 months of this resolution, the FTC published a list of over 700 companies who were issued a “warning letter”. Here is the warning letter which was sent to the companies.
When we consider these three actions in context, it signals a major policy shift within the FTC regarding Section 5 of the FTC Act as applied in the digital context, and particularly when it comes to compensated promotion of products and services by influencers. The FTC is going to take enforcement action if influencers do not adequately disclose compensation arrangements when promoting an item.
So what should you do to avoid becoming the target of the FTC? As someone who has worked in regulation for many years, I can tell you that it all comes down to reasonably managing your risks. We know that it’s not possible to always eliminate risk without completely ceasing business activity, and I’m definitely not suggesting this, nor is the FTC. Reasonably managing your risks doesn’t always mean eliminating them entirely. You can reasonably manage your risks and still compensate influencers to promote products.
But the increased risk picture should serve as a wake-up call, especially when the penalty can reach over $40,000 per violation per day. The worst course of action is to do nothing. Even if you don’t catch every violation by an influencer which you have compensated, the fact that you have taken reasonable action will matter to the FTC. Their enforcement policy takes into account mitigating circumstances, and this includes efforts to ensure compliance, such as monitoring posts by influencers. The more posts you are able to monitor, the higher the likelihood that the FTC will have mercy on you if it discovers a post that it is concerned about. And if you can demonstrate that you have put some thought into how you monitor posts, that will help if the FTC approaches you.
To this end, you should have a good idea of which influencers are higher risk, and be prepared to explain to the FTC why you judged certain influencers to be worthy of monitoring as opposed to others. It could be because they have a history of non-compliance, but it could also be because of other behavioural factors. And perhaps some influencers might demonstrate to you that they have been trained in compliance with FTC requirements and have a track-record to evidence this.
Some of my colleagues recommend that you include language in the contract with the influencers to hold them liable for any non-compliance with FTC requirements. The idea is that even if your company incurs a fine, the influencer would be liable to reimburse you. Whilst I agree that it is worth including these provisions in the contract, I would not rely upon this. First, it might be very difficult to collect the judgment against the influencer. Even if a court upholds the contract, if the influencer cannot pay the judgment, you don’t collect the money and are still stuck with the fine. Second, I have not seen this tested in court yet, so I’m not entirely sure that a civil court would uphold this provision and force the influencer to pay. And third, even if the influencer ultimately reimburses you for the fine, this will only be after the FTC has already discovered a violation, imposed a fine, and perhaps ordered other sanctions such as monitoring which ultimately cause your brand to suffer.
The real 800-pound gorilla is how to monitor huge volumes of posts, because that’s the safest way to ensure that you won’t owe the US government money, but this is also very labour-intensive. Getting the balance right is your challenge. You want to capitalise on using influencers to promote your business, but you don’t want to run the risk of FTC enforcement action, and you certainly don’t want to break the bank to monitor posts to ensure compliance.
If I were in-house counsel for one of the 700 companies which just received a warning letter, I would be developing a compliance methodology and sharing my thoughts with the FTC enforcement team as I developed it. The methodology would certainly involve monitoring of influencer posts with selectivity around who gets monitored and why. I would want to show that the company is monitoring as many posts as practically possible without incurring prohibitive costs, but ensuring that violations are likely to be detected and corrected.
That’s the best approach for now.