New FTC guides on advertising–applicable to you?

Endorsing products or services is anything but risk-free.  In October, 2009, the Federal Trade Commission (FTC) adopted revised Guides Concerning the Use of Endorsement and Testimonials in Advertising (Guides) which became effective December 1, 2009. Under Section 5 of the Federal Trade Commission Act (15 USC Section 45) (FTC Act), the FTC has broad authority to prevent persons from using unfair methods of competition, or unfair or deceptive practices in commerce.  To provide guidance for advertisers who want more definition about what constitutes unfair methods of competition, or unfair or deceptive practices, the FTC has adopted the Guides.  Although the Guides are based on voluntary compliance, the FTC has significant remedies in its arsenal if it chooses to pursue endorsements and advertising inconsistent with the Guides.  Presumably if certain acts are contrary to the Guides, the FTC would also find the behavior in violation of the FTC Act.

The Guides apply to any endorsement, which is any advertising message, and includes verbal and non-verbal representations, demonstrations, or the depictions of the name, signature, likeness, or other identifying personal characteristics of a person, that consumers are likely to believe reflects the opinions, beliefs, or experiences of another, including experts.  Endorsements may be made in many ways, including television advertisements, radio promotions, infomercials, blog entries, demonstrations, film critic reviews, restaurant critic reviews, and scientific papers.  Blogs as a new form of communication are a great way to promote goods and services, but any blog entry that fits the definition of an endorsement may fall within the scope of the Guides.

Any seller of a product or service that either has engaged a third party, or knows a third party is endorsing its products or services, needs to pay attention to the Guides.  Whether the statements are intended to be endorsements may not be relevant.  If the endorser is making representations or statements that reasonably could be interpreted as endorsements may bring such statements within the scope of the Guides.

The Guides identify several principles that govern endorsements and advertisements.

1.      Endorsements must reflect the honest experience, beliefs, findings, and opinions of the endorser.  For example, if the endorser claims to be using a product, the endorser must be using the product.

a.     Should an endorser make any claims that are not substantiated?

b.     If a product is modified, may an endorsement used for the product before modification continue to be used?

2.     Advertisements with endorsements by consumers regarding the performance of a product or service will be interpreted as representing that the product or service is effective for the advertised purpose.  The advertiser must be able to substantiate the claims in the endorsement in the same way it would if it were making the claims directly.

3.     The experience of a consumer in an endorsement  of a key attribute of the product or service will be deemed to be representative of what consumers will achieve generally with the advertised product or service.  Again, the advertiser must be able to substantiate the claims in the endorsement.

a.     If testimonials are given by several consumers for a weight loss product, what evidence must support the assertions made in the testimonials?

b.     Does it make a difference if the testimonial is based on personal preference, rather than scientific results, for example, families that prefer cake mixes over cakes made from scratch?

4.     Endorsements that purport to be made by consumers need to be made by consumers.

a.     If a consumer receives some benefit for the endorsement, is she/he no longer a “consumer?”

5.     Experts giving endorsements must possess the qualifications that give the expert the expertise for the endorsement.

a.     May a chemical engineer hold himself/herself out as an expert on the design of an automobile in an endorsement?

b.     Is it deceptive for a doctor with a Ph.D in exercise physiology to endorse a hearing aid, if the advertisement implies or makes it clear that the endorser is a “doctor?”

6.     Endorsements by organizations, especially expert organizations, will be viewed as an endorsement based on the collective judgment or experience of the group, and not that of an individual member of the group.  The expectation is that the judgment will be free from the bias and subjectivity of an individual member.

a.     Is it sufficient to have an organization endorse a product, or does the organization need to have an independent basis for endorsing the product, such as independent testing or compliance with an organization standard?

7.     When there is a relationship or connection between the seller of a product or service and the endorser that might materially affect the credibility of the endorsement, the relationship must be fully disclosed, assuming the connection is not reasonably expected by the audience for the endorsement.

a.     Should bloggers disclose if the product being endorsed was given to the blogger free, or at a substantially reduced cost?

b.     If a blogger posts a glowing endorsement about a product in a chat room, on a message board, or some other open forum, does he/she need to disclose his/her employment by the manufacturer of the product?

Generally speaking, the Guides do not create any obligations beyond being honest, accurate, not misleading, and reasonable when using endorsements.  Asserting a lack of knowledge may not be a good defense.  The FTC may bring a civil action under the FTC Act against anyone who engages in unfair or deceptive acts or practices with knowledge, or “knowledge fairly implied on the basis of objective circumstances” that the acts are prohibited.  The potential downside is a civil penalty of not more than $10,000 for each violation.

The right to amend online contracts

Managing online contracts can be challenging. Circumstances change, technologies change, and business methods change. As a result, service providers, sellers and distributors of products find it beneficial to include a provision in an online contract that allows for changes to the contract. However, unlike the traditional paper contract which require amendments to be in writing and signed, there are significant benefits to online providers to be able to make changes unilaterally.

Unfortunately, including a clause in an online contract that allows the online provider to make changes to the contract unilaterally, and in the sole discretion of the online provider, can be problematic. In a case decided on April 15, 2009 in the United States District Court for the Northern District of Texas, Harris v. Blockbuster, the court found that an online contract that allowed one party to unilaterally change any part of the contract at any time was not supported by consideration, and therefore was illusory and unenforceable.

When providing online contracts, if the online provider wants to be able to make changes without having to have the express consent of each potential user of the website, at a minimum, the contract should provide that no amendment to the contract will be enforceable until the passage of a reasonable time after the notice of the change is posted and the amendment should not be applicable to certain provisions of the contract, such as an arbitration clause, until the user has had an opportunity to exercise its rights under that provision prior to the amendment.

Transformative use leading to fair use

The transformative use of an original work of authorship may be sufficient to find fair use by the user of an original work, if other elements are satisfied. Generally speaking, the owner of a copyrighted work has several exclusive rights. However, if a user of the copyrighted work can establish that the use is fair use, there is no infringement for that use.

Several high school students filed an action against an online service provider that compares essays and other written works of students against several databases to determine if the students’ works include any plagiarism. Each of the high school students submitted an essay for review by the online service provider, but, specifically instructed the provider not to maintain a copy of their paper in the provider’s database.

The court considered the four factors for fair use and focused on the transformative nature of the papers. The court looked at the transformative nature of the students’ works, and based on the transformative use, held that storage of the students’ works in its online database did not constitute infringement, but fair use.

Fair use is a difficult analysis to make, particularly from a prospective position. Based on this case, however, the more transformative of the use, the greater the likelihood that the use will be found to be fair use.