ADVERTISING COMPLIANCE SERVICE

BULLETIN #664

SAMPLE ISSUE: Article #1:

DRASTIC CHANGES MAY OCCUR TO GUIDES ON ENDORSEMENTS AND TESTIMONIALS

PROFOUND CHILLING EFFECT ON MARKETERS USING TESTIMONIALS

Drastic changes may be about to occur to the FTC’s Guides on Endorsements and Testimonials in advertisements. If FTC's proposed amendments are adopted, you can expect a profound chilling effect on marketers using traditional media, as well as a wide variety of new media, including blogs, online discussion boards, "street teams," word-of-mouth advertising, and Twitter. Our article examines the comments that were recently jointly submitted to FTC by a broad spectrum of advertising and marketing associations. (Joint Submission of Comments Prepared by Venable LLP, Submitted to Donald S. Clark, Office of the Secretary, Federal Trade Commission, Re: Endorsement Guides Review, Project No. P034520, March 2, 2009, 2010.)

NEW GUIDES WOULD DISCOURAGE LEGITIMATE ADVERTISING PRACTICES

"We are concerned that the proposed revised Guides would discourage legitimate advertising practices and generate considerable uncertainty among marketers as to what the Commission believes Section 5 requires."

This is the major conclusion reached by these associations. The comments are divided into two parts and examine these major issues:

I. The Proposed Rules Concerning Testimonials Would Significantly Restrict Legitimate Advertising Practices And Lead To Uncertainty Among Advertisers.

II. The Proposed New Rules Regarding Disclosure Of Certain Connections Between Endorsers And Marketers Are Unclear.

COMPLIANCE DIFFICULTIES

Part I of the comments makes this point:

"Some products do not lend themselves to a conventional performance study yielding results that can be reliably generalized to the general consuming public because the performance of such products depends largely on the manner in which consumers use the product - whether they use the product regularly, whether they use it as directed, and so on."

The comments point to the example of an aerobic exercise device or regimen. The comments note that determining the "generally expected results" of such devices or regimens "can be very difficult for advertisers because the extent of those benefits will vary widely depending on individual factors beyond the advertiser's control." Logically, particular results for any given consumer would depend on–

"how often the consumer exercises, how long his or her exercise sessions are, and whether he or she exercises at the appropriate intensity level. A researcher may be able to control the conduct of study subjects, but there is no way to be sure how real consumers will use an exercise device or regimen when no one is monitoring them."

So let's say that your client advertiser wishes to use clearly accurate and documented testimonials from successful customers. Under this proposed new regulatory regime for endorsements and testimonials, this becomes problematic. You client may not be able to do so. Reason: They would be required to disclose the generally expected results achieved by consumers. And such disclosures are claims that must be substantiated. As noted in the comments, it–

"may not be feasible to generate typicality data that would meet the Commission's strict standards for the substantiation of such claims. There may be no real doubt that the product is effective for consumers generally,. . . and there may be no real doubt that the individual testimonials used in the advertisement are truthful. Yet, the advertiser would not be able to use such testimonials safely unless it could substantiate what the `typical' consumer would achieve."

INCREASED COSTS, IMPEDIMENTS

The Commission admits that its proposed revised Guides will lead to increased costs and could be an impediment to the use of testimonials by certain advertisers. Indeed, the Federal Register notice ("Notice") clearly states that the,

"Commission does recognize that a revision of renumbered Section 255.2(b) calling for non-typical testimonials to be accompanied by disclosure of the results consumers generally achieve with the advertised product would increase costs for those advertisers who have not previously tracked consumers' experiences with their products, and could present an impediment to the use of such testimonials by certain advertisers."

(73 Fed. Reg. 72381 (2008).)

The comments note that,

"The imposition of such a barrier is certainly not warranted based on the limited and flawed studies on which the Commission relies. And it is not warranted just because the typicality disclaimers used by some advertisers fail to meet the `clear and conspicuous' standard. If a marketer fails to meet this standard, the Commission can initiate an enforcement action, as it has in numerous instances."

STUDIES RELIED ON BY FTC ARE FLAWED AND TOO NARROW IN SCOPE

FTC's proposed revision of these Guides is largely based on two consumer perception studies. In the Notice, FTC essentially conceded that these studies are flawed, but argued that flawed studies are good enough to support its proposed revision to Section 255.2 of the Guides. However, the comments disagreed with FTC, noting that–

" . . . we believe that the impact of that proposed revision is far too great for the Commission to rely on flawed studies. The situation here is very different from that in the cases cited by the FTC in support of its argument that consumer research does not have to be flawless to be reasonably reliable and probative, each of which involved one product advertised by one advertiser; moreover, in each of those cited cases there was additional evidence for the Commission to consider. Here, the Commission is proposing a radical change that would have broad, general applicability to a wide variety of advertising and advertisers without other research to support that change."

Moreover, the comments characterize the two consumer perception studies as "narrow in scope relative to the far-reaching nature of the proposed new rule on disclosures of generally expected results." These two studies had tested a few similar variations of one type of print ad. "But advertisements come in many different forms and utilize various media," said the commenters. "Recognizing this diversity, the Commission has for many years evaluated advertisements on a case-by-case basis, considering the contents and context of the particular advertisement taken as a whole." (See: FTC Deception Policy Statement; FTC v. Sterling Drug, 317 F.2d 669, 674 (2d Cir. 1963); Am. Home Prods., 695 F.2d 681, 688 (3d Cir. 1982); In re Pfizer Inc., 81 F.T.C. 23, 58 (1972).)

SIGNIFICANT FIRST AMENDMENT CONCERNS

"The proposed revised Guides raise First Amendment issues, as the revised Guides would disallow the use of typicality disclaimers to qualify possibly non-typical testimonials regardless of whether the disclaimers are readily and accurately understood by reasonable consumers," according to the comments. The comments noted that,

"As the District of Columbia Circuit Court of Appeals stated in Pearson v. Shalala, `disclaimers are constitu- tionally preferable to outright suppression.' . . . Proposed Section 255.2(b) regarding generally expected results effectively prohibits non-typical testimonials - even truthful testimonials - if the testimonial is qualified only by a typicality disclaimer."

Accordingly, the comments urge FTC "to reconsider imposing a requirement that suppresses facially truthful speech even when such speech is accompanied by qualifying typicality disclaimers that meet the traditional `clear and conspicuous' standard."

DISCLOSURE OF CERTAIN CONNECTIONS BETWEEN ENDORSERS AND MARKETERS

FTC has proposed several changes to section 255.5 of the Guides. Specifically, FTC would add new Examples 7, 8, and 9 to Section 255.5. These examples are intended to illustrate that marketers must disclose certain connections with persons who provide endorsements through such new forms of media as blogs, online discussion boards, and "street teams." (See 73 Fed. Reg. at 72390.) These proposed examples "raise significant issues regarding the scope of advertiser liability for third party activity in the context of new media and word-of-mouth marketing." The comments add that,

"While the three examples focus specifically on blogs, message boards and street teams, they leave many questions unanswered as to advertiser liability for third party conduct in the new media context; there are many more forms of `word-of-mouth' and other types of new media marketing that are left unaddressed, and even the specific examples offered are, as discussed below, in many respects ambiguous as to the nature and extent of marketer liability for third-party conduct in the context illustrated."

What may be worse, FTC seems to treat "online conduct differently than its `offline' counterpart." As noted in the comments:

"What is clear is that the FTC should not address the issue of the proper way to regulate word-of-mouth marketing and endorsements in the new media context without giving the implications of such regulation full consideration, particularly where the industry has already acted - successfully - to self-regulate using vehicles such as the Word of Mouth Marketing Association's Ethics Code and Principles for Ethical Contact by Marketers and the Blog Council."

COMMENTERS: FTC SHOULD REEVALUATE PROPOSED CHANGES BEFORE MAKING FINAL DECISION

The comments point out that FTC's Guides concerning the use of endorsements and testimonials in advertisements have remained consistent for many years. "The proposed changes to the Guides would represent a drastic change in the Commission's policy that would result in uncertainty and increased costs for marketers, and impede the use of even truthful consumer testimonials. We are concerned that the Commission is basing such a radical change on consumer research of limited scope and reliability."

The commenters also expressed their concern "that the proposed amendments regarding the disclosure of `material' connections in the context of `new media,' such as blogs and online discussion boards, also create uncertainty as to what exactly are the requirements for marketers."

Accordingly, the commenters are asking FTC to "gather additional empirical evidence and reevaluate the proposed changes to the Guides before making a final decision."

WHAT TO EXPECT

Advertising Compliance Service asked Edward F. Glynn, Jr., Partner, Venable LLP, whether FTC has given any indication that they will make any changes to the proposed revised Guides as currently revised? Mr. Glynn told us that, "There have been no statements by the Commission formally since the close of the comment period on March 2." He said that "Nobody knows" when FTC is expected to make the proposed FTC Guides final–if they do.

We asked Mr. Glynn whether the proposed revised Guides, if adopted, will be challenged in court on First Amendment or other grounds? "That is a close question that we will have to explore after the Guides come out. If adopted in [their current] form, they could have a substantial chilling effect even if advertisers use truthful statements"–by testimonials.

The three new examples added by the Commission–found under "Disclosure of Material Connections" (i.e., Section 255.5)–involve blogs, online message boards, and "street teams". Advertising Compliance Service asked Mr. Glynn this question: Presumably, these rules would also extend to such other new media as Twitter, word-of-mouth advertising, and so forth. "I think that's right," he told us. He noted that these examples were "sort of parachuted in at the last minute."

Mr. Glynn was the principal drafter of these comments.

BROAD SPECTRUM OF ADVERTISING AND MARKETING ASSOCIATIONS

The comments discussed in this article were prepared by Venable LLP and were jointly submitted to FTC by the following advertising and marketing associations on March 2, 2009, 2010:

• American Association of Advertising Agencies
• American Advertising Federation
• Council for Responsible Nutrition
• Direct Marketing Association
• Direct Selling Association
• Electronic Retailing Association
• Interactive Advertising Bureau
• Promotion Marketing Association
• U.S. Chamber of Commerce

LAWYER's REFERENCE SERVICE

Joint Submission of Comments Prepared by Venable LLP, Submitted to Donald S. Clark, Office of the Secretary, Federal Trade Commission, Re: Endorsement Guides Review, Project No. P034520, March 2, 2009, 2010.

ADVERTISING COMPLIANCE SERVICE

SAMPLE ISSUE: Article #1: DRASTIC CHANGES MAY OCCUR TO GUIDES ON ENDORSEMENTS AND TESTIMONIALS

SAMPLE ISSUE: Article #1:

DRASTIC CHANGES MAY OCCUR TO GUIDES ON ENDORSEMENTS AND TESTIMONIALS