Affiliate Summit East 2012

FTC Issues in an ERSP Advertising Challenge

William I. Rothbard, Law Offices of William I. RothbardPeter C. Marinello, Dir., Electronic Retailing Self-Regulation Program

THE ADVERTISING INDUSTRY’SSELF-REGULATORY SYSTEM

1971 - The Self-Regulatory System formed as a response to consumer activists pushing for increased government regulation of the advertising industry

Three major advertising trade associations and the Council of Better Business Bureaus created the system

TODAY…• FTC points to ERSP as an example of successful

industry self-regulation in America

• The Board has expanded to include:

ERSP GOALS & PROCEDURES• Improve/restore consumer

confidence in electronic retailing• Provide a quick and efficient

mechanism for reviewing direct response advertising campaigns

• Demonstrate to the regulatory agencies the direct response industry’s commitment to strong self-regulation and compliance with legal requirements

“Lose 287% the weight compared to placebo”

“The World’s Fastest Weight-Loss

Solution”

“Within 7 days my acne

completely disappeared”

“The Clinically Proven Weight Loss

Supplement!”

“The #1 Doctor Recommended Joint Supplement”

ISSUES & CLAIMS REVIEWED BY ERSP

- Testimonials/Endorsements

- Before and After Depictions

- Weight Loss

- Health and Safety

- Establishment Claims

- Disclosures

- Social Media

- Puffery

- Demonstrations

ERSP PROCESS• Advertising comes to the attention of ERSP through its monitoring

of the marketplace and consumer and competitive challenges• Process

– Opening Letter– Marketer’s Reply– ERSP Reply– Marketer’s Response– Final Decision– Marketer’s Statement– Press Release

• ERSP final decisions and press releases are published in the ASRC Online Archive

ERSP CASE REPORTS• Case reports are

available through the ASRC Online Archive (www.asrcreviews.org)

• Press releases can be found on the ASRC website and the ERSP blog (ersp.blogspot.com)

OVERVIEW OF TOPICS• Ad Substantiation – Weight Loss Claims • Clear & Conspicuous Disclosure -- Negative

Option• FTC Endorsement Guidelines• FTC Business Opportunity Rule • Affiliate Marketing Liability & FTC Orders• Affiliate Marketing -- Compliance Tips

RED FLAG ISSUES• Cause weight loss of 2 pounds or more a week for a month or more without dieting or

exercise• “Lose up to 35 pounds in 2 months without diet, without counting calories,

without doing exercise.” • “Lose up to 30 pounds in 30 days”

• Cause substantial weight loss no matter what or how much the consumer eats• “Eat the same way …. proven to reduce weight without special diet or

exercise.”• “Lose Weight Without Cutting Your Favorite Foods”

• Cause permanent weight loss (even when the consumer stops taking the product)• “Lose Weight Fast & Keep it Off”• “The inches have stayed off…”• “Everything you lose, you will never gain back, guaranteed.”

RED FLAG ISSUES• Block the absorption of fat or calories to enable consumer to lose substantial weight

• “Blocks carbs. Eat the foods you want and still slim down”• “The ingredients increase the rate of fat metabolism, which reduces both

surface and intestinal abdominal fat and helps inhibit future formation of these abdominal fats.”

• Safely enable consumers to lose more than three pounds per week for four weeks• “Your patch has already helped my current weight loss of 15 pounds in one

week.”• “In further case studies, participants lost up to 20 pounds of fat in only 14 to

21 days!”

• Cause substantial weight loss for all users• “With this product, there are no excuses for why this won’t work.”• “It works on everyone including you.”

• Cause substantial weight loss by wearing it on the body or rubbing it on the skin• Amazing Diet Patch

Before disseminating an ad, the advertiser must be able to

support all objective claims with:

COMPETENT AND RELIABLE EVIDENCE

SUBSTANTIATION

Advertisers must substantiate all objective performance, efficacy, health, and safety claims — express and implied — with:

COMPETENT AND RELIABLE SCIENTIFIC EVIDENCE

What would independent scientists with expertise in the field rely on?

Methodologically sound tests, studies, scientific research

Based on expertise of professionals in field

Objectively conducted by qualified people

Using procedures accepted as accurate

Yielding statistically significant results

Anecdotal evidence from consumers

Popular press articles

Sales materials from manufacturer

Low return rate

Money-back guarantee

COMPETENT AND RELIABLE SCIENTIFIC EVIDENCE

WHAT IT ISN’T WHAT IT IS

“NEW” FTC SUBSTANTIATION STANDARD?• IOVATE Consent

• Weight Loss Claims – at least 2 controlled clinical studies on advertised product by separate, independent researchers

• Disease Claims – FDA-Approved Only

“NEW” FTC SUBSTANTIATION STANDARD? • BUT: POM WONDERFUL Decision• Rejected controlled human clinical study

substantiation standard for ALL health claims, not just weight loss, citing “overreach” and free speech concerns

• Now on appeal to FTC• Could go to Supreme Court - A Case to Watch

“Clear and Conspicuous:” Effectiveness of Disclosures

Prominence Will consumers notice the disclosure?

Presentation Is the language easy to understand? Does it contradict other assertions in the ad?

Placement Is it located where consumers will see it?

Proximity Is it close to the language being qualified?

CLEAR AND CONSPICUOUS NEGATIVE OPTION• S. 3386, “Rockefeller Law” – terms of online negative option offers must be

disclosed “before obtaining consumer billing information”

• John Beck’s Amazing Profits (Family Products) – true also for telemarketing

• Commerce Planet/Grant Connect – trial verdicts of $18 million and $30 million for inadequate “below the fold” disclosure of negative option terms of “free” offers.

• Green Millionaire Consent – requires check box or signature to confirm consent to negative option, with disclosure statement of: all costs; statement of consumer OK to them; length of trial period; and need to cancel to avoid charge.

• California - more precise, stringent definition of “clear & conspicuous” for negative option than FTC standard; purchase terms must be in “larger” type than surrounding text, or clearly contrasted or set off from the surrounding text of “equal size.”

REVISED FTC ENDORSEMENT GUIDES

Testimonials still can’t be used to make claims that would be unsubstantiated if made directly by advertiser

Testimonials still must represent “typical” results

BUT: if they don’t, “Results not typical” disclaimer no longer suffices. “Clear & Conspicuous” disclosure of “generally expected results” now required, unless advertiser has proof consumers don’t think the results are typical.

Disclosure of material connections between advertisers and endorsers required. Applies to bloggers endorsing products, who also can be held liable for making false claims, and to celebrities endorsing products in unconventional formats (i.e., talk shows) or social media where consumer may not think celebrity is being paid. Applies also to “back-end” compensation deals for expert endorsers. Advertiser principally liable for failure to disclose.

BUSINESS OPPORTUNITY RULE

• Covers biz-ops in which seller offers to “provide outlets, accounts, or customers, including…Internet outlets, accounts, or customers, for the purchaser’s goods or services.”

• “Providing outlets, accounts or customers” includes ”requiring…recommending…[or] providing a list of…[or] collecting a fee on behalf of…lead generating companies…or otherwise assisting the prospective purchaser in obtaining…outlets, accounts, or customers.”

• Does not include providing “advertising and general advice about business development and training.”

BUSINESS OPPORTUNITY RULE

• Are Biz-Op web stores “Internet outlets”?• Is lead gen assistance to biz-op buyer providing

“Internet customers”?• Rule is a Biz-Op Killer if it applies• Requires 7-Day Pre-Sale Written Disclosure of:– Seller’s identity– If it’s making earnings claims (and substantiation for same)– Any prior legal actions– Any cancellation/refund policy– List of last 3 years’ purchasers

MERCHANT-ADVERTISER RESPONSIBILITY

• Claim Substantiation • Compliance with FTC Endorsement Guidelines• Clear and Conspicuous Pre-Sale Disclosure of Material Terms &

Conditions, including key billing terms on order page, not in hyperlinked T&Cs

• Getting express, informed consumer billing consent - no prechecks• Responsive customer service, including fulfillment of stated

cancellation/refund policies• Anti-Affiliate Fraud Policies and Procedures• Clear Privacy Policy Terms and Data Sharing Opt-Out Rights

AFFILIATE/NETWORK RESPONSIBILITY

• CAN-SPAM Compliance

• Endorsement Guidelines compliance, including disclosure of material financial connections to advertiser

• Compliance with merchant-advertiser’s compliance guidelines and approved non-deceptive ad copy, avoidance of hyped, unapproved claims

• Avoidance of fraudulent or confusing incentivized marketing schemes

• Effective network monitoring of, and disciplinary action against, affiliate misconduct

OVERLAPPING ADVERTISER AND AFFILIATE NETWORK LIABILTY

• Advertiser and Affiliates/Networks can have “cross liability” for the other’s acts. Liability isn’t automatic, depends on degree of participation, ratification, and negligent or willful ignorance or disregard

• Affiliates/Networks could be liable not only for their deceptive claims and practices but advertiser’s claims as well if they were involved in creating the claims or had reason to believe they’re untrue or unsubstantiated; can’t necessarily rely on advertiser’s assurances

• Advertiser is liable for deceptive claims it directs and pays its affiliates to make. • Advertiser also can be liable for deceptive claims and practices of affiliates it did not

authorize but had reason to believe were occurring and ignored or didn’t take action to stop

• Advertiser-Affiliate/Network contracts should contain reps and warranties of legal compliance, including with FTC laws and regs, CAN-SPAM, etc., and hold harmless indemnity clauses to protect against damage caused by the other party.

Top 5 Tips For Affiliates• Ensure that affiliate advertising of any merchant’s products or services is

truthful, substantiated, and not deceptive or unfair;

• Do not publish "flogs" (fake blogs) or other false content, false or unsubstantiated product claims, or offer incentives to consumers in return for their response to any ad, unless the terms and conditions of the offer are clearly and conspicuously disclosed;

• Do not publish fake news articles or other fake media titles, without clearly and conspicuously disclosing that the content is an advertisement;

• Do not publish false or unsubstantiated endorsements, and be sure to clearly and conspicuously disclose any material connections with the merchant and/or the network; and

• Do not infringe on the personal rights, trademark, copyright, patent rights, service mark, or any other intellectual property right of any third party mentioned in published content.

Top 5 Tips For Merchants/Networks• Enter into written agreements with affiliate marketers, requiring that all

affiliates abide by state and federal consumer protection laws and regulations including the FTC Act, the FTC’s Endorsement Guidelines, and the CAN-SPAM Act.

• Agreements should require that affiliates not infringe on the personal rights, trademark, copyright, patent rights, service mark, or any other intellectual property right of any third party.

• Agreements should require that affiliates clearly and conspicuously disclose the terms and conditions of any incentives, points, rewards, cash, or prizes promised to consumers in return for their response to any advertisement.

• Agreements must provide that any affiliates who engage in non-compliant acts be terminated and forfeit commissions.

• Monitor affiliate behavior and enforce contractual sanctions against misconduct

CONCLUSION: CAVEAT VENDOR!• Affiliates, networks and merchants should consider themselves on

notice: everyone in the online advertising stream who engages in or assists with fraud might end up in the crosshairs of law enforcement.

• Everyone involved in online marketing must be careful to publish truthful content that is not deceptive and contains the proper disclaimers and disclosures, and they must learn to adapt to this more aggressive regulatory landscape.

• It is advisable to seek expert counsel who thoroughly understands the FTC’s and state AGs' thinking and likely enforcement strategies, so you have the benefit of sound advice concerning the best ways to avoid or fight off these regulatory challenges.

QUESTIONS?

• William I. Rothbard Peter C. Marinello• 310-453-8713 212-705-0126 • Rothbard@ftcadlaw.com pmarinello@ersp.bbb.org• www.ftcadlaw.com www.asrcreviews.org