FTC Online Endorsement Guidelines Strike Again – FTC Dings Legacy Learning Over Allegedly Misleading Affiliate Reviews

[Post by Venkat Balasubramani with some comments by Eric]

In re Legacy Learning Systems, Inc., FTC File No. 102 3055 [FTC Release] [Complaint (pdf)]

An FTC press release notes that the FTC settled with Legacy Learning over allegations that Legacy improperly utilized affiliates to “promote its courses through endorsements in articles, blog posts, and other online editorial material.” Specifically, the FTC complaint alleges:

[Legacy] recruited “Review Ad” affiliates for [Legacy's affiliate program], who promote Legacy’s instructional courses through positive endorsements in articles, blog posts, or other online editorial copy that contain hyperlinks to Legacy’s website in close proximity to the endorsements. [Legacy's] Review Ad affiliates often post such endorsements using statements that give readers the impression the endorsements have been submitted by ordinary consumers.

As noted in the release, the guidelines – which govern endorsements or testimonials – require disclosure of a material connection between a reviewer and a company. Under these guidelines, a positive review from a person connected with the seller or product (“someone who receives cash or in-kind payment to review a product or service” or who gets a cut of the sales) should come with a disclosure. The complaint alleges that twenty-five of Legacy’s “review ad” affiliates were responsible for at least $5 million in sales of Legacy’s products.

What did the reviewers do wrong?: Reviewers did not disclose that they were affiliates of Legacy – i.e., received a cut of the sales, and in some cases were paid to review Legacy products . These were not “the independent reviews reflecting the opinions of ordinary consumers.” (Examples of the reviews can be found in Exhibit A to the Complaint [pdf].) In some cases, the reviewer websites had disclosures, but the disclosures were anemic at best and were not contained in the posts themselves (e.g., “we are paid by some of the companies who’s [sic] products we review” – not exactly a robust disclaimer). [Italics added.]

Where did Legacy go astray: For one thing, Legacy called these affiliates “review ad” affiliates. I would probably avoid this terminology. The complaint did not include a copy of the affiliate terms, so we don’t know whether Legacy contractually required the affiliates to comply with the FTC’s guidelines or explained how to comply. The complaint also does not specify whether Legacy paid the reviewers for their reviews (it alleges that the affiliates received a cut of the sales), but judging from some of the reviews and the websites of the reviewers, and from Legacy’s suggestions to its affiliates, this seems to be the case (at least with some reviewers). Legacy offered suggested disclaimers (to affiliates) on its website but even these were ambiguous (“Affiliate Disclosure Requirements and Examples Legacy Learning Systems“):

[Suggested] Disclosure: We are a professional review site that receives compensation from the companies whose products we review. We test each product thoroughly and give high marks to only the very best. We are independently owned and the opinions expressed here are our own. [emphasis added]

Regardless of what Legacy may have suggested or required of its affiliates, Legacy also did not have any sort of compliance program to make sure that its affiliates made the necessary disclosures.

As part of the (proposed) settlement, Legacy will:

- pay $250,000;

- monitor and submit monthly reports about their top 50 revenue-generating affiliate marketers;

- make sure that affiliates disclose they earn commissions for sales and are not misrepresenting themselves as independent users or ordinary consumers.

Professor Goldman has posted a bunch about possible section 230 issues with the FTC’s guidelines (“Do the FTC’s New Endorsement/Testimonial Rules Violate 47 USC 230?“; “A Fuller Explanation of Why the FTC Endorsement/Testimonial Guidelines Violate 47 USC 230“). The facts are somewhat similar to those alluded to in his example. Here, Legacy set up an online affiliate program (on its site, using ShareASale). Legacy is the provider of an interactive computer service. Its affiliates are third parties, and Legacy is being sued for content generated by third parties (its affiliates). This looks like Blumenthal v Drudge, where AOL was sued for allegedly defamatory content provided by Drudge and AOL had paid Drudge for the content. The only difference is that here, Legacy was subject to potential liability for content that was placed on the affiliates’ websites, whereas AOL was sued for content which Drudge submitted to AOL’s website. I don’t have a good answer on the Section 230 issue (here’s a response to Paul Levy to Professor Goldman’s posts on the FTC guidelines and Section 230: “Do the FTC’s New Advertising Guidelines Run Afoul of Section 230?“), but it looks like the FTC isn’t too worried about Section 230 acting as a bar to enforcing their guidelines against companies whose products are promoted without proper disclosures.

Previously, the FTC went after a company which posted fake reviews on behalf of its client. (“FTC Dings PR Firm for Fake Reviews — In re Reverb Communications.”) The FTC also issued a warning shot to AnnTaylor over gifts to bloggers. (“FTC Drops Investigation of Advertiser Who Gave Gifts to Bloggers.”) This time, rather than merely firing the warning shot, the FTC went after Legacy, and extracted a settlement.

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Eric’s Comments: I agree with Venkat’s post, especially the questions about 47 USC 230′s applicability to this situation. I should note that my view on 47 USC 230′s applicability is idiosyncratic. In addition to Paul’s post, Rebecca Tushnet has also voted that my arguments are bunk. Rebecca Tushnet, Attention Must Be Paid: Commercial Speech, User-Generated Ads, and the Challenge of Regulation, 58 Buff. L. Rev. 721 (2010). Nevertheless, I would love to see someone test the FTC’s theory here. I don’t see it as a slam dunk that a judge would accept the FTC’s theories.

For this post, I’ll raise a different issue. I wonder if this case is another step in an ongoing winddown of the online affiliate industry. We’re already seeing a big contraction of online affiliate programs due to states’ adoptions of the “Amazon tax.” As we’ve seen repeatedly, Amazon and others toss their affiliates overboard when states adopt these laws. (Which ironically makes these laws a type of fool’s gold for state legislatures: the laws have failed to generate new sales tax revenues but have reduced income tax bases for the states that have adopted them).

Now, the FTC is taking the position that an affiliate program operator is legally responsible for consumer reviews written by its affiliates that failed to make appropriate disclosures. Furthermore, the program operator’s main crime is that it failed to check out these affiliates and find out what they were writing and whether they had made adequate disclosures. The FTC’s fix is to require the program operator to monitor 100 affiliates (the top 50 plus another randomly selected 50) each month to see if they are up to no good. What a hassle. The FTC settlement also requires than any non-complying affiliates are supposed to get the axe immediately, without notice or a cure period–a one-strike rule. Nice. At the peril of an FTC investigation, who needs crap like this? For most affiliate program operators, the profit-maximizing response is to just cut loose the long-tail affiliates or shut down the program entirely. Combining this effect with the Amazon tax sweeping the nation, the affiliate industry is on the run.

Another ironic note: I bet many of the program operator’s affiliates are, in fact, experts in that market niche and therefore are better positioned than many other consumers to evaluate the product offerings in the niche. So the FTC crackdown may counterproductively reduce the flow of USEFUL consumer reviews about products.

A final irony: courts are less willing to extend liability to affiliate program operators than regulators are. As the most recent example, see the 1-800 Contacts v. Lens.com ruling. We didn’t see an affiliate program operator-friendly ruling in the Amazon tax litigation in New York, but I keep hoping that gets reversed on appeal. If it does, and if anyone actually stands up to the FTC juggernaut, perhaps we’ll see the courts revitalize the affiliate industry. If not, I say we’re at the beginning of the end for affiliate programs as we’ve known them for the past 15 years.