Cliffsnotes for Online Marketers To Avoid FTC Liability From Affiliates and Resellers

Copyright © 2009 Chip Cooper

There's been a lot of buzz in the blogosphere about the 81-page Guides for the use of Endorsements and Testimonials in Advertising issued by the Federal Trade Commission (FTC). Most of the debate and discussion has centered on the rules (and potential liability) facing bloggers who write testimonials and endorsements.

But what about the advertisers that recruit bloggers and other intermediaries to write testimonials and endorsements (think online marketers that recruit affiliates or resellers)? What are the rules affecting these advertisers, and what's their liability if they don't comply?

When Are Online Marketers Regulated By The Guides?

The threshold question for online marketers is "when do the Guides apply to my marketing practices"?

If all you do is market directly from your website with no involvement by intermediaries, the Guides do not apply.

However, if you recruit intermediaries - such as affiliates or resellers - to pitch your products or services, then the Guides apply, and with them, potential liability. Intermediaries would also include viral marketing programs with incentives and network marketing programs where endorsers periodically review your products or services and they receive a free product or service about which they write a review.

If the Guides do apply, you're classified as an "advertiser", and your intermediaries are classified as "endorsers". As an advertiser, you're required to:

* provide guidance and training to your endorsers to help them understand their legal obligations regarding advertising statements about your products or services; primarily, that their claims are truthful, not misleading, and substantiated, and

* monitor your endorsers and take steps to remedy advertising statements, practices, or procedures that are unlawful.

If the Guides do apply, and you fail regarding the two obligations listed above, you may be held liable for the actions of your endorser. This is the way the FTC put it: "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".

Suggestions For Advertisers

Your first priority should be to get a legal review of your affiliate and/or reseller agreements. Modify your agreements to comply with the Guides. Although the following list of suggested clauses is not exhaustive, it would be a good start:

* No-Spam Policy - at the least, strict compliance with the U.S. CAN-SPAM Act of 2003 should be required; and you should consider prohibiting any and all bulk, unsolicited email, even though it is permitted under the CAN-SPAM Act subject to certain requirements; also consider requiring your endorser to indemnify you against claims based on their violation of the no-spam policy;

* Recruitment of Sub Affiliates - if sub affiliates are permitted, they should be subject to prior review and acceptance by you and be required to enter into your agreement;

* FTC Rules Regarding Endorsements and Testimonials - this clause addresses the guidance and training requirement discussed above; it focuses on the endorser's requirements regarding endorsements and testimonials;

* FTC Rules Regarding Truthful and Non-Deceptive Advertising - this clause also addresses the guidance and training requirement discussed above; it focuses on the endorser's requirements regarding truthful and non-deceptive advertising;

* Monitoring Rights - this clause addresses the monitoring requirement discussed above; it provides that you may require the endorser to modify or cease any marketing methods, procedures, or communications for purposes of compliance with applicable laws and regulations; and

* Consent to Release Information - this clause provides that you have the right to release information regarding the endorser to any governmental or regulatory agency, or to any private party or organization which you believe has a good faith claim based on the endorser's marketing methods, procedures, or communications.

In addition to reviewing and revising your affiliate and/or reseller agreements, what actions should you take? Although the following list of suggested actions is not exhaustive, it would be a good start:

* familiarize yourself with the applicable rules and regulations; you won't be able to perform your guidance, training, and monitoring obligations if you don't;

* find a quick and easy way to continue to stay on top of all the latest legal developments in this area such as a frequent newsletter; again, you won't be able to perform your guidance, training, and monitoring obligations if you don't;

* exercise your monitoring rights and obligations, and document that you have done so; be careful to actually enforce your policies, and again, document, document, document. If the FTC ever comes calling, you'll need to be able to document your compliance; and

* do a thorough job of screening your potential endorsers before you approve them; remember, an ounce of prevention is worth a pound of cure.

Conclusion

You need to be aware that legal scholars are currently debating whether the FTC may impose liability on advertisers for advertising claims made by their endorsers. A well-established federal statute (47 USC 230(c)(1)) may provide a defense to this liability. This will have to be resolved by judicial interpretation in the future. At present, advertisers can't count on this defense to get them off the hook.

Time is growing short for advertisers that are covered by the Guides to begin a compliance program. The Guides go into effect on December 1, 2009.