October 06, 2009
Do the FTC's New Endorsement/Testimonial Rules Violate 47 USC 230?
By Eric Goldman
In reading the FTC's new rules on endorsements and testimonials in advertisements, I was struck by the FTC's expansive vision of advertiser liability for third party-caused violations. In particular, the FTC apparently has made the same analytical error that the SEC recently made in the SEC's proposal to hold securities issuers liable for third party content they link to. In my comments to the SEC, I explained that trying to hold a linker liable for content at the terminus of a link violates 47 USC 230.
In this case, in commentary to §255.1, the FTC provided example #5 (starting on page 63 of the PDF) clearly targeting PayPerPost/Izea and its competitors:
Example 5: A skin care products advertiser participates in a blog advertising service. The service matches up advertisers with bloggers who will promote the advertiser’s products on their personal blogs. The advertiser requests that a blogger try a new body lotion and write a review of the product on her blog. Although the advertiser does not make any specific claims about the lotion’s ability to cure skin conditions and the blogger does not ask the advertiser whether there is substantiation for the claim, in her review the blogger writes that the lotion cures eczema and recommends the product to her blog readers who suffer from this condition. The advertiser is subject to liability for misleading or unsubstantiated representations made through the blogger’s endorsement. [my emphasis]
The blogger also is subject to liability for misleading or unsubstantiated representations made in the course of her endorsement. The blogger is also liable if she fails to disclose clearly and conspicuously that she is being paid for her services. [See § 255.5.]
In order to limit its potential liability, the advertiser should ensure that the advertising service provides guidance and training to its bloggers concerning the need to ensure that statements they make are truthful and substantiated. The advertiser should also monitor bloggers who are being paid to promote its products and take steps necessary to halt the continued publication of deceptive representations when they are discovered.
Per this example, the FTC appears to think advertisers can be liable for a blogger's rogue content merely because there is an underlying sponsorship relationship. This situation is prima facie preempted by 47 USC 230. Frankly, this doesn't even look like a close case.
I'm kicking myself because I should have raised the 47 USC 230 concern with the FTC during the comment period. My weak excuse: too many misguided regulatory proposals, not enough Eric. The FTC's discussion prefacing its guidelines doesn't mention 47 USC 230 at all, which now makes me wonder if anyone raised the statutory concern to the FTC. Instead, the FTC breezily brushed off concerns about over-expansive advertiser liability by treating this as a situation where the advertiser assumes the risk that bloggers might write rogue content:
Imposing liability in these circumstances hinges on the determination that the advertiser chose to sponsor the consumer-generated content such that it has established an endorser-sponsor relationship. It is foreseeable that an endorser may exaggerate the benefits of a free product or fail to disclose a material relationship where one exists. In employing this means of marketing, the advertiser has assumed the risk that an endorser may fail to disclose a material connection or misrepresent a product, and the potential liability that accompanies that risk. The Commission, however, in the exercise of its prosecutorial discretion, would consider the advertiser’s efforts to advise these endorsers of their responsibilities and to monitor their online behavior in determining what action, if any, would be warranted. [emphasis added]
Uh, no. As I tried to explain at the ABA Consumer Protection Conference this summer (which many FTC staffers attended), 47 USC 230 requires the FTC and other consumer protection agencies to fundamentally rethink their basic endorsement liability paradigms. If you're looking for a paper topic, I think the interplay because 47 USC 230 and government agencies' theories about liability for endorsing online content is ripe for smart analysis.
While an FTC enforcement action pursuant to its misguided advertiser liability theory should be an easy defense win, I don't expect we'll ever see that result. As we know, the FTC is fairly careful in selecting enforcement actions, and most defendants choose quickly settle rather than fight. Those that don't settle usually don't present the best facts to the court, and sometimes their lawyers don't even know about 47 USC 230.
If the issue ever does get to court, I'd expect the FTC to marshal up every plaintiff win under 230 to show how it can pin third party content on the advertiser. However, at the moment, I don't think any of the scrappy plaintiff wins bolster its theory. For example, I don't think the Roommates.com case helps because this isn't a situation where the advertiser has encouraged illegal content. I also don't think the Mazur case helps the FTC because the advertiser never chose the words communicated by the blogger.
Because it appears fundamentally inconsistent with 47 USC 230, I hope the FTC will reconsider its basic liability approach here.
UPDATE: In response to comments I've received on this post, I have provided a fuller explanation of my thinking about 47 USC 230 and the new guidelines.
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