San Francisco-based marketing company Member Source Media wanted to drive consumers to its branded online promotions. Like its competitors, the company registered several domain names, paid for web advertising and launched a pro-active email marketing campaign. However, the company distinguished itself from other web marketers by relying on a single surefire method of drawing consumers: offering something for nothing. In ubiquitous banner ads and email solicitations, Member Source Media dangled the promise of free gifts, such as laptop computers and iPods, in exchange for taking the time to fill out a few online surveys. These offers ultimately proved to be too good to be true. The Federal Trade Commission (FTC) filed charges against the company for sending emails with deceptive subject lines and for failing to disclose that consumers in fact had to pay for these “free” gifts. In 2008, Member Source Media paid a highly publicized civil fine of $200,000 and changed its websites to inform consumers that the so-called gifts required a separate purchase.

In the digital age, many business owners have adopted the Internet as a relatively inexpensive, high-return marketing tool. Online advertising is a way to reach potential clients and customers in a seemingly limitless variety of ways. For little or no expense, companies can now target large groups of people and connect with diverse audiences via blogs, message forums, Twitter, social networks like Facebook, and a variety of other new media platforms. The freedom of web communication has fostered a free-for-all online marketplace where businesses aggressively deploy creative new advertising strategies to turn casual browsers into paying customers. But in the process of spreading the word online, businesses often overlook the fact that Internet advertising, like any other form of advertising, is subject to regulation. New policies in this developing area of regulation, such as the FTC’s May 2009 guidelines for word-of-mouth product endorsements online, have created confusion and concern in the blogosphere.

The Federal Trade Commission Act (Act) established the FTC in 1914 for the purpose of preventing unfair methods of competition and unfair or deceptive acts or practices in or affecting commerce. This independent federal agency continues to carry out its purposes today and has the authority to define unfair or deceptive practices, as well as investigate the business, practices and management of entities engaged in commerce. If the FTC finds that a business has violated statutes under Federal Trade Commission Act, it has the authority to levy fines and seek other relief. The FTC, which may target a single company or an entire industry, aggressively investigates and takes action against fraud and false advertising. Unlike civil litigation where a plaintiff brings a claim against a defendant, FTC actions originate in the administrative courts with the agency’s attorneys acting as prosecutors. If a company seeks to appeal the administrative judge’s decision, the decision can be appealed through a lengthy process starting with FTC review, then review by the U.S. Court of Appeals or the Supreme Court, if the court chooses to hear the case.

In recent years, the FTC has made an effort to update guidelines so that they reflect new changes in technology. The FTC has also taken an aggressive stance against Internet companies that have violated federal laws. Because of this trend, it is advisable for business owners to be aware of the regulations in this space and to make expectations clear to business partners and contractors, such as hired bloggers, email marketing firms or social media experts. It may also be advisable to vet online advertising strategies with a legal professional before sinking funds into a marketing campaign that could lead to liability.

• Testimonials. The FTC regulates testimonials in advertising, which includes personal experiences from consumers and quotes from a third-party (such as excerpts from a film review embedded in a movie poster). According to May 2009 regulations issued by the FTC, the rule now also applies to statements made by bloggers, Twitterers and other word-of-mouth marketers who might make statements about a product or brand online. A company may, for example, be liable if it posts a single positive phrase from an overwhelmingly negative blog review of a product because it mischaracterizes the testimonial.
• Endorsements. Additionally, the FTC regulates the use of endorsements in advertising. Under FTC rules, paid endorsements need to “reflect the honest opinions, findings, beliefs, or experience of the endorser” and “may not contain not contain any representations which would be deceptive, or could not be substantiated if made directly by the advertiser.” Likewise, under new regulations, new media marketers and advertising affiliates are obligated to disclose their interests when making endorsements after receiving money, free product giveaways or other forms of compensation. Liability may extend not only to the individual who made the false or misleading statement, but also to the company advertising the product. For example, a blogger who is paid to include a link to a nutrition bar brand under a list of “Fit Foods I Love To Eat” should disclose the sponsorship. Failure to do so puts both the blogger and the company selling the nutrition bars at risk for liability.
• Advertisements. The Federal Trade Commission Act also provides that (1) advertising must be truthful and non-deceptive, (2) advertisers must have evidence to back up their claims; and (3) advertisements cannot be unfair. According to FTC’s policy on deceptive statements, an ad is deceptive if it includes or omits information that is likely to mislead consumers acting reasonably under the circumstances. The statement or omission must also be important to a consumer’s decision to buy or use the product. These rules now apply not only to more traditional forms of media, such as radio and broadcast advertising, but also to ads posted online. The FTC cited and fined Member Source Media for the banners it used to attract consumers, with headlines such as “Congratulations. You’ve won an iPod Video Player”, “Here are 2 free iPod Nanos for You: confirm now” and “Confirmation required for your $500 Visa Gift Card.” Beyond FTC regulation, states may also have laws regulating advertising.
• Emails. The FTC is also authorized to take measures against companies that violate the federal laws governing the usage of email as an advertising tool. Under the CAN-SPAM Act, a “commercial electronic mail message” is “any electronic mail message the primary purpose of which is the commercial advertisement or promotion of a commercial product or service (including content on an Internet website operated for a commercial purpose).” Under the CAN-SPAM Act, companies may be liable for sending emails with false or misleading header information or deceptive subject lines. Companies can also be liable under the Act for failure to provide a legitimate opt-out link, failure to include a valid physical postal address or failure to properly mark the message as an advertisement. Again, although individual recipients of emails cannot pursue claims against a company, the FTC can levy hefty penalties of up to $11,000 per violation, as well as criminal penalties under certain circumstances.

- By Dava Casoni, Annie Lin