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As a follow up to our previous posts on digital assets and social media, the Federal Trade Commission recently published a Consumer Protection Data Spotlight on June 3, 2022.  In the post, the FTC provides insights on the fraud reports submitted to the FTC from January 1, 2021 to March 31, 2022.  According to the FTC, the fraud reports show that social media and digital assets are a “combustible combination for fraud” with nearly half of those who reported losing cryptocurrency to a scam saying that it “started with an ad, post, or message on a social media platform.”  Since the start of 2021, more than 46,000 people reported losing over $1 Billion of cryptocurrency to scams, and during the reporting period, nearly four out of every ten dollars that was lost to a fraud that originated on social media was lost in crypto.  This report is another example of agencies and courts taking note, and informing the public that the connection between social media and digital asset fraud is direct, and significant.

As the world struggles to move forward, our thoughts and support are with our readers and we hope for their good health and improving situations.

Today’s post involves an FTC settlement that was announced just as New York was going into “lockdown” mode and so we wanted to make sure it did not escape your attention. In March of 2020, the U.S. Federal Trade Commission (FTC) announced a settlement of its federal court complaint against a company that the FTC alleged made unsubstantiated health claims for its teas and skincare products—and used celebrity social media influencers whose endorsements did not disclose their compensation. (Federal Trade Commission v. Teami, LLC, No 8_20-cv-00518 (M.D. Fla. March 5 & March 17, 2020))

Social media influencer marketing has had a significant impact in the way brands reach consumers worldwide. Social media influencers are very important to platforms such as YouTube and Instagram and even more so to brands. As independent contractors, social media influencers garner more outreach than any company’s advertising team could ever hope to accomplish. From engagements like brand awareness and product placement and “authentic reviews,” according to Business Insider, the influencer marketing industry is expected to be worth up to $15 billion by 2022—up from $8 billion in 2019. Influencers, once a niche group, are now everywhere—we can spot them on the red carpet, in commercials, and on runways. As their numbers become more widespread and controversies settle over fake engagements and followers, virtual influencers have entered the market and are set to transform the influencer industry.

In this age of social media, companies and brands have faced countless criticisms for their lack of transparency, copyright infringements disguised in the form of “flattery or inspiration” and we can’t forget the many inclusivity flops.

Brands, including beauty brands, are now dedicating more of their marketing budgets to paying influencers for their “honest” reviews in hopes that they can convince the public to purchase their products. What’s more striking is that consumers are heavily relying on social media for help in determining where to place their value and money. With these stakes, some companies have turned to deceptive practices in a search for social media popularity.

How important are online reviews in your shopping experience? Many rely heavily on consumer reviews in order to generate business. But what happens when instead of providing customers the candid information that they deserve, companies try to silence their critics in order to improve their online reputation?

In recent years, companies selling products and services have included non-disparagement clauses (“gag clauses”) in their contracts in hopes of curtailing online criticism. Gag clauses are aimed at discouraging customers from writing honest reviews that criticize the company—and punished customers for their negative reviews in the form of liquidated damages. The problem is such clauses are illegal. In 2016, as we had previously written, Congress passed the Consumer Review Fairness Act, which prohibits companies from implementing gag clauses in non-negotiable consumer form contracts. In so doing, lawmakers sought to encourage free speech, consumer rights and the integrity of truthful criticism regarding goods and services sold online.

On September 7, 2017, the U.S. Federal Trade Commission (FTC) announced that it had entered into a proposed consent agreement with two individuals and their company that allegedly ran an online gaming community website that allowed users to gamble virtual currency.  According to the FTC complaint, the two individuals promoted the gaming site and not only failed to disclose their ownership interest in the site or that they were playing with company money, but they also paid other social media influencers between $2,500 and $55,000 to promote the site.

As we had previously written, in the Spring of 2017, the FTC issued 90 letters to social media influencers and the companies they may have endorsed on Instagram.  The letters reminded the recipients that the FTC expects any “material connection” between an influencer and the provider/service/company to be conspicuously disclosed.  A “material connection” is a “a connection that might affect the weight or credibility that consumers give the endorsement,” which can be a direct payment, free products, an ownership interested in the company, or even a family connection to the company.  As part of the FTC’s September 7 announcement, the FTC also stated that it sent warning letters to 21 social media influencers who had received the Spring letters.  (The FTC did not disclose the names of the influencers or companies that received the warning letters.)  Consequently, the FTC may be bringing additional actions in this area.

On May 4, 2017, the public received access to the U.S. Federal Trade Commission’s (FTC) advisory letters to approximately 45 companies and 45 celebrities/bloggers relating to potential “endorsements” on Instagram.  As a result, we now have some additional guidance on the FTC’s expectations with respect to its Endorsement Guides.

Increasingly, companies are turning to the internet and social media platforms to advertise their products, often by using native advertising or by providing incentives such as payments or free products to social media “influencers” (Instagrammers, Pinners, Bloggers and Vloggers, to name a few) in exchange for an endorsement.

As we have previously discussed, the FTC has issued Endorsement Guides that provide guidance on appropriate advertising on social media. The FTC has stated that advertising on social media platforms is subject to the same consumer protection laws that prohibit deceptive advertising and that advertising claims must be accompanied by “clear and conspicuous” disclosures.  For example, the FTC has stated that endorsements from social media influencers constitute advertisements that require a disclosure of the connection between the endorser and the advertiser company. If a necessary disclosure is not made or is insufficiently clear and conspicuous, companies may face enforcement action from the FTC.