“Watch What You Say” – by John Feldman

John Feldman, Partner at Reed Smith and TAAN’s esteemed legal counsel, wrote the following article that originally appeared January 30, 2009 in MediaWeek. Any marketer who uses testimonials or endorsements should take a few minutes to read it.

Here is the article text:

Watch What You Say
New FTC guidelines may significantly hamper endorsement advertising

MediaWeek – Jan 20, 2009
-By John P. Feldman

Advertisers may tell you that their diet plans will help you lose weight or that their language courses will help you learn Turkish in no time at all. Consumers, however, are more impressed when the claim comes from those who have already experienced the product or service. That’s the power of a testimonial or endorsement. In recognition of that power, the Federal Trade Commission is poised to revise its Guides on Endorsements and Testimonials, in ways that could significantly affect the use of testimonials for years to come.

The commission is accepting public comments on its proposed revisions until Jan. 30.

Disclaimers such as “Results not typical” or “Your results may vary” may no longer be enough to protect advertisers against regulatory scrutiny. When Acme Heating and Cooling, for example, presents an individual who states that she, as an Acme customer, saves $125 on her monthly utility bills, the FTC likely will assume that the audience members believe that they, too, can reasonably expect to save $125 on their monthly utility bills. But, if Acme knows that a small minority of its customers achieve a savings of $125 or more, and most save, on average, $50 in cold months and $20 in warm months, the commission would argue that the testimonial is deceptive because it falsely implies that a $125 savings per month is typical of consumer experiences. Currently, advertisers address this implied claim by disclaiming that an extraordinary result is “not typical.” And, up to now, the commission has approved this sort of disclaimer, treating it virtually as a safe harbor against regulatory actions.

That’s about to change. An advertiser like Acme presenting a testimonial would have to disclose what consumers could reasonably expect to achieve, not just that the experience described in the advertisement was atypical. What if Acme did not keep data on the savings its customers routinely achieved but did have proof that some people did, in fact, save $125 per month on their utility bills after installing an Acme product? Acme would not be able to make its claim without the risk of liability.

Another core principle in the current Guides is that advertisers are subject to liability if they do not disclose a material connection that exists between themselves and their endorsers. The FTC’s proposed amendments to the Guides regarding “material connections” suggest new areas of heightened scrutiny and a likelihood of enforcement activity.

• The FTC is proposing and is seeking comment on a recommendation that if an expert is given compensation for his endorsement, and that compensation is other than a flat fee or is somehow related to the success of the advertiser or the sale of the advertised product, then the commission would be likely to require disclosure of that relationship.

• The commission also is asking for comments on a proposal from a group of attorneys general that would require an advertiser to disclose the payment to an outside research group that tests the advertiser’s product if the advertiser ultimately advertises the outside research group as its source for claim substantiation.

• In the guides, a celebrity’s financial connection to the advertiser must be disclosed in the context of a routine interview if he or she makes an endorsement. Using one of the new examples provided by the FTC, consider a television talk show during which the host introduces a well-known professional tennis player. During the course of the interview, the tennis player glowingly mentions her corrective vision surgery at a named clinic, specifically referencing speedy recovery and how she can now engage in a variety of activities even at night. The failure to disclose that she has a contract with the eye vision clinic, which pays her to speak publicly about the service, could lead to a regulatory inquiry.

• For consumer testimonials, the general rule is that an advertiser cannot pay or otherwise compensate a person to give an endorsement without disclosing the material connection. Bloggers who receive compensation—or even free products from advertisers—may now have to disclose that connection with the advertiser if they provide a positive review of those products. Similarly, an employee of an electronic game manufacturer who posts messages promoting the manufacturer’s product on a third-party message board must disclose his relationship with the manufacturer. “Street team” programs in which members gain points every time they talk to their friends about a particular advertiser’s products could also run afoul of the FTC Guides.

Subtle changes to the Guides could help set the stage for regulatory activity and profound changes in the way some advertiser’s market their products. The comment period that closes at the end of January may be an important and final chance to point out how these changes could impact some industries unfairly by imposing prohibitive costs and possibly even unconstitutional restraints on truthful commercial speech.

John P. Feldman is a partner in the Advertising, Technology and Media group at Reed Smith, an international law firm.