The Federal Trade Commission (FTC) recently made public its first investigation under the “Guides Concerning the Use of Endorsements in Advertising” (Guides). 16 CFR Part 255. The announcement marked the FTC’s first public enforcement of the Guides and provides some valuable insight into the FTC’s mindset when it considers whether a company marketing practices constitute a violation.

The investigation focused on a special event held by the popular fashion company, Ann Taylor LOFT. In January 2010 Ann Taylor LOFT launched a preview of its summer collection and announced the event to bloggers, noting that the “Bloggers who attend will receive a special gift, and those who post coverage from the event will be entered in a mystery gift card drawing where you can win up to $500 at LOFT!” The potential gifts ranged from $50 to $500. The small print of the announcement explained the catch: the bloggers who went to the event would have to send a link to their posts back to Ann Taylor LOFT's publicist within 24 hours and she would reveal the value of gift card they had won.

The press was overwhelmingly positive, even though there were mumblings within the industry of the possibility for action under the Guides. The Loft’s president, Gary Muto, defended the event and explained that the company had not given an incentive to the press to write a positive review and said that bloggers were free to write whatever they wanted about the event. Still, a number of fashion bloggers that covered the event provided the company with praise for its new line. Some of the bloggers disclosed the gift card, while others did not mention it at all.

The FTC learned of the event and initiated an investigation into the potential violation of the Guides. The Guides were issued in October 2009 to address the endorsements of products made via social media mechanisms, including Twitter, Facebook, blogs, and YouTube. They cover “any advertising message … that consumers are likely to believe reflects the opinions, beliefs, findings, or experiences of a party other than the sponsoring advertiser.” 16 CFR Part 255(b). Thus, the FTC enacted the Guides in an attempt to protect consumers from being deceived into believing that an endorsement by their favorite blogger was legitimate when, in fact, the blogger had been paid to make the praise, just like a celebrity endorsement on television.

In this regard, the Guides prohibit false or unsubstantiated claims and require disclosure of “material connections” between the endorser and the company selling the product or service. 16 CFR 255.5. According to the FTC, connections that “might materially affect the weight or credibility of the endorsement” must be disclosed where the connection is “not reasonably expected by the audience.”

On April 20, 2010, the FTC's Division of Advertising Practices announced that it had declined any enforcement against Ann Taylor LOFT and that it had closed its investigation into the company for suspected violations of the Guides. In its closing letter, the FTC explained that it had been concerned that the bloggers who attended the event would fail to reveal the fact that they had received gifts for posting content about the event. The FTC cited Section 5 of the FTC Act, explaining that the Act requires the disclosure of a “material connection” between the advertiser and the endorser when such a connection would not otherwise be apparent to the viewer.

Still, the FTC declined to take action against the fashion company, explaining that several factors affected its decision. First, it noted that the preview event was the first and only event of its kind held by Ann Taylor LOFT. Second, the FTC explained that “only a very small number of bloggers posted content about the preview, and several of those bloggers disclosed that LOFT had provided them gifts at the preview.” In this regard, the FTC noted that the fashion company had posted a sign at the preview telling bloggers that they should disclose the gifts if they posted comments about the preview. The FTC indicated, however, that the bloggers may not have seen the sign.

Third and finally, the FTC considered the fact that, following the January event, Ann Taylor LOFT had adopted a written policy explaining that it will not issue any gift to any blogger without first informing the blogger that he or she must disclose the gift in his or her blog. The FTC explained that it “expects that LOFT will both honor that written policy and take reasonable steps to monitor bloggers' compliance with the obligation to disclose gifts they receive from LOFT.” The FTC then reserved the right to take further action, if deemed necessary.

This investigation was the first under the new Guides and demonstrates that the FTC is monitoring marketing events and the blogosphere for potential violations of the Guides. Thus, if companies have not already, they should ensure their marketing teams are educated with respect to the rules contained in the Guides and that they are enforcing policies surrounding their social media forums. If this action is any indication, a small gift bag could trigger an enforcement action.

The FTC normally issues “warnings” such as this before imposing a fine or penalty against a company that violates one of its new rules. In this investigation, the FTC is warning the entire industry that it is willing to take action and watching for violations. Arent Fox is monitoring this issue and will continue to provide updates on the FTC’s activity with respect to the Guides.

In the meantime, if you have any questions, please contact Anthony V. Lupo or Sarah Bruno.

Anthony V. Lupo
lupo.anthony@arentfox.com
202.857.6353

Sarah L. Bruno
bruno.sarah@arentfox.com
202.775.5760