There has been much ado in the blogosphere, of late, in response to the Federal Trade Commission’s press release announcing its Final Guidelines Governing Endorsements, Testimonials. The press release, the one document most bloggers have seen, seems to indicate that bloggers must disclose any free products when they write a review or risk being hit with an $11,000 fine. Here is the relevant scary language:
The revised Guides also add new examples to illustrate the long standing principle that “material connections” (sometimes payments or free products) between advertisers and endorsers – connections that consumers would not expect – must be disclosed. These examples address what constitutes an endorsement when the message is conveyed by bloggers or other “word-of-mouth” marketers. The revised Guides specify that while decisions will be reached on a case-by-case basis, the post of a blogger who receives cash or in-kind payment to review a product is considered an endorsement. Thus, bloggers who make an endorsement must disclose the material connections they share with the seller of the product or service. …And a paid endorsement – like any other advertisement – is deceptive if it makes false or misleading claims.
That language, though, comes from a press release, not the actual Guideline. The press release merely describes the actual Guidelines which are 12 pages long. Further, they were issued with comments used to help interpret the Guidelines, and that expands the whole thing to a whopping 81 pages. But wait, there’s more. You see, I keep using the word “Guidelines” for a reason.
Wait! You have to take me to shore. According to the Code of the Order of the Brethren…
“…the code is more of what you call guidelines than actual rules,
welcome aboard the Black Pearl, Miss Turner…”
These are more what you’d call “guidelines” than actual rules. The actual rule is a federal statute; Section 5 of the Federal Trade Commission Act (§ 5, 15 U.S.C. § 45), Unfair methods of competition unlawful; prevention by Commission. It is rather long and boring, so here are just the important pieces, for the purposes of this discussion:
(a) Declaration of unlawfulness; power to prohibit unfair practices; inapplicability to foreign trade
(1) Unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce, are hereby declared unlawful.
(b) Proceeding by Commission; modifying and setting aside orders
Whenever the Commission shall have reason to believe that any such person, partnership, or corporation has been or is using any unfair method of competition or unfair or deceptive act or practice in or affecting commerce, and if it shall appear to the Commission that a proceeding by it in respect thereof would be to the interest of the public, it shall issue and serve upon such person, partnership, or corporation a complaint stating its charges in that respect and containing a notice of a hearing upon a day and at a place therein fixed at least thirty days after the service of said complaint. …If upon such hearing the Commission shall be of the opinion that the method of competition or the act or practice in question is prohibited by this subchapter, it shall make a report in writing…and shall issue and cause to be served on such person, partnership, or corporation an order requiring such person, partnership, or corporation to cease and desist from using such method of competition or such act or practice.
(l) Penalty for violation of order; injunctions and other appropriate equitable relief
Any person, partnership, or corporation who violates an order of the Commission after it has become final, and while such order is in effect, shall forfeit and pay to the United States a civil penalty of not more than $10,000* for each violation, which shall accrue to the United States and may be recovered in a civil action brought by the Attorney General of the United States.
(m) Civil actions for recovery of penalties for knowing violations of rules and cease and desist orders respecting unfair or deceptive acts or practices;
(1)(A) The Commission may commence a civil action to recover a civil penalty in a district court of the United States against any person, partnership, or corporation which violates any rule under this chapter respecting unfair or deceptive acts or practices (other than an interpretive rule or a rule violation of which the Commission has provided is not an unfair or deceptive act or practice in violation of subsection (a)(1) of this section) with actual knowledge or knowledge fairly implied on the basis of objective circumstances that such act is unfair or deceptive and is prohibited by such rule. In such action, such person, partnership, or corporation shall be liable for a civil penalty of not more than $10,000* for each violation.
(B) If the Commission determines in a proceeding under subsection (b) of this section that any act or practice is unfair or deceptive, and issues a final cease and desist order, other than a consent order, with respect to such act or practice, then the Commission may commence a civil action to obtain a civil penalty in a district court of the United States against any person, partnership, or corporation which engages in such act or practice –
(1) after such cease and desist order becomes final (whether or not such person, partnership, or corporation was subject to such cease and desist order), and
(2) with actual knowledge that such act or practice is unfair or deceptive and is unlawful under subsection (a)(1) of this section.
In such action, such person, partnership, or corporation shall be liable for a civil penalty of not more than $10,000* for each violation.
*46 U.S.C. 2461, the Civil Monetary Inflation Act, increases amounts of maximum civil penalties. Therefore, the present maximum penalty is $11,000.
Did you get through all that? Do you have any idea what it means? Did you catch the important words and phrases? Let me try to help. Let’s break it down into bite-sized pieces, shall we?
(a) Declaration of unlawfulness; power to prohibit unfair practices; inapplicability to foreign trade
(1) unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce, are hereby declared unlawful.
That one isn’t too hard. It is very general, and defines the power of the Federal Trade Commission. It has power over unfair methods of competition AND unfair or deceptive practices. It says nothing here about manners, or morals, just unfair, and/or deceptive. Believe it or not, that is important.
Law, you see, is interpreted by courts. Courts, not Commissions, get to decide what the law means. I will get back to this. It is the key to understanding the whole thing.
Okay, next?
(b) Proceeding by Commission; modifying and setting aside orders
Whenever the Commission shall have reason to believe that any such person, partnership, or corporation has been or is using any unfair method of competition or unfair or deceptive act or practice in or affecting commerce, and if it shall appear to the Commission that a proceeding by it in respect thereof would be to the interest of the public, it shall issue and serve upon such person, partnership, or corporation a complaint stating its charges in that respect and containing a notice of a hearing upon a day and at a place therein fixed at least thirty days after the service of said complaint….If upon such hearing the Commission shall be of the opinion that the method of competition or the act or practice in question is prohibited by this subchapter, it shall make a report in writing…and shall issue and cause to be served on such person, partnership, or corporation an order requiring such person, partnership, or corporation to cease and desist from using such method of competition or such act or practice.
If the FTC thinks you’re breaking the rules, they send you a notice and set it for a hearing. If they win, you get a “cease and desist order;” an order saying “Don’t Do That!” So, if the Commission thinks you’re breaking the rules, they send you a notice. You can agree that you will stop doing what they don’t like, or you can go to a hearing and fight it. I did not include the language about appeal rights, finalizing orders, court hearings, etc., because they don’t matter for the purposes of this discussion. The bottom line is, under this section you get notice and a chance to stop doing the activity or fight for the right to do it.
From a blogger’s point of view, this means that UNDER THIS SECTION (keep reading, there is more) she won’t get hit with fines without notice and a chance to punt first. This is consistent with public statements by the FTC in response to questions about the new rule. Richard Cleland, assistant director of the FTC’s Bureau of Consumer Protection, told PC World Magazine they would only take enforcement actions in “particularly problematic” cases, and that “in terms of bloggers, we’re primarily focused on education.”
Okay, time to move on.
(m) Civil actions for recovery of penalties for knowing violations of rules and cease and desist orders respecting unfair or deceptive acts or practices;
(1)(A) The Commission may commence a civil action to recover a civil penalty in a district court of the United States against any person, partnership, or corporation which violates any rule under this chapter respecting unfair or deceptive acts or practices (other than an interpretive rule or a rule violation of which the Commission has provided is not an unfair or deceptive act or practice in violation of subsection (a)(1) of this section) with actual knowledge or knowledge fairly implied on the basis of objective circumstances that such act is unfair or deceptive and is prohibited by such rule. In such action, such person, partnership, or corporation shall be liable for a civil penalty of not more than $10,000* for each violation.
Uh-oh! This section does not require notice and a hearing first. This is the “you broke the rule, you owe us money” section. This is the scary section, and it requires further analysis.
The Commission may commence a civil action to recover a civil penalty in a district court of the United States against any person, partnership, or corporation…
So they get to start the action without getting the cease-and-desist order first? Yup. In certain cases, they can go straight after the penalty without giving you a chance to back down first. Keep reading.
…which violates any rule under this chapter respecting unfair or deceptive acts or practices …with actual knowledge or knowledge fairly implied on the basis of objective circumstances that such act is unfair or deceptive and is prohibited by such rule.
If you knowingly break a rule, you can get fined right out of the box.
Oh no! Now we’re in trouble. That new rule tells bloggers they have to disclose freebies, so we’re bound by it or we’re in a deep pile of you-know-what, right? Well, not really. You see those ellipses in the middle of that sentence? There is a parenthetical statement we have to discuss:
(other than an interpretive rule or a rule violation of which the Commission has provided is not an unfair or deceptive act or practice in violation of subsection (a)(1) of this section)
I added the bold emphasis this time around. This is the key to understanding how this rule must be enforced. Now we need to look at the actual Guidelines in conjunction with the statute. The key phrase from the Guidelines, for the purpose of this discussion, is this:
§ 255.0 Purpose and definitions. (a) The Guides in this part represent administrative interpretations of laws enforced by the Federal Trade Commission for the guidance of the public in conducting its affairs in conformity with legal requirements.
“Administrative interpretations of laws.” That sure sounds like an interpretive rule to me. How about you? What does that mean? It means the FTC needs to go through the notice, hearing, cease-and-desist order, process rather than straight to the fine. Phew! That’s good news.
Time to move on.
(m) Civil actions for recovery of penalties for knowing violations of rules and cease and desist orders respecting unfair or deceptive acts or practices;
(B) If the Commission determines in a proceeding under subsection (b) of this section that any act or practice is unfair or deceptive, and issues a final cease and desist order, other than a consent order, with respect to such act or practice, then the Commission may commence a civil action to obtain a civil penalty in a district court of the United States against any person, partnership, or corporation which engages in such act or practice –
(1) after such cease and desist order becomes final (whether or not such person, partnership, or corporation was subject to such cease and desist order), and
(2) with actual knowledge that such act or practice is unfair or deceptive and is unlawful under subsection (a)(1) of this section.
In such action, such person, partnership, or corporation shall be liable for a civil penalty of not more than $10,000* for each violation.
We really already discussed this part. This is part two of the notice, hearing, cease-and-desist order process. It is pretty simple–if you go to hearing and lose, or you agree to stop the action and don’t, then the FTC can come after you for a fine.
There you go. That’s the process. If you’re taking freebies, doing reviews and the FTC doesn’t like it, they will probably just tell you to stop. If the FTC really wants to go Florida-Gators-on-Ohio-State-quarterbacks-ugly on you, it will send you notice, set it for a hearing, etc.
Now there is one more thing to talk about, and that is the new Guideline. Is it legit? Will it stand up in court? What if you get a notice, go to the hearing, get a cease-and-desist order, and decide to fight it? Will the new Guidelines stand up to legal scrutiny? Curiously, there is an excellent chance that they will not.
In 1932, in Northam Warren Corporation v. Federal Trade Commission, 59 F.2d 196, 198 (2d Cir. 1932), the Court considered the very issue addressed by the new Guidelines; truthful review of a free product. Here is what they said:
The Federal Trade Commission Act does not purport to establish a decalogue of good business manners or morals.
and
Because a prominent person ventures an opinion without being requested to do so is no guaranty either of veracity or good judgment. If the testimonials involved here represent honest beliefs of the indorsers, there is no misrepresentation concerning the product, and no unfair competition is created. We have no right to presume that indorsers of commercial products falsify their statements because they have received compensation. There are no misrepresentations, and the Commission was without jurisdiction.
Yes, that is a 1932 case. That’s pretty old. Do we really want to rely on something that old? Two more modern state courts have, the Georgia Court of Appeals in Zeeman v. Black, 273 S.E.2d 910 (Ga.App. 1980), and the Massachusetts Court of Appeals in Newton v. Moffie, 434 N.E.2d 656 (Mass.App. 1982). It was pretty good reasoning back then, and it continues to be good reasoning today
But remember, if you want to fight these Guidelines, you are going to have to pay an attorney a fairly large pile of money and keep your fingers crossed for a year or two. So what is the best practice? What is the practice we use here at PALATE PRESS: The online wine magazine?
Another great question. You people are really on the ball today. To get to that answer, you have to dig deeper into the 81 pages of comments to find the distinction between a magazine and a “personal blog,” here:
The Commission acknowledges that bloggers may be subject to different disclosure requirements than reviewers in traditional media. In general, under usual circumstances, the Commission does not consider reviews published in traditional media (i.e., where a newspaper, magazine, or television or radio station with independent editorial responsibility assigns an employee to review various products or services as part of his or her official duties, and then publishes those reviews) to be sponsored advertising messages. Accordingly, such reviews are not “endorsements” within the meaning of the Guides. Under these circumstances, the Commission believes, knowing whether the media entity that published the review paid for the item in question would not affect the weight consumers give to the reviewer’s statements.101 Of course, this view could be different if the reviewer were receiving a benefit directly from the manufacturer (or its agent).
In contrast, if a blogger’s statement on his personal blog or elsewhere (e.g., the site of an online retailer of electronic products) qualifies as an “endorsement” – i.e., as a sponsored message – due to the blogger’s relationship with the advertiser or the value of the merchandise he has received and has been asked to review by that advertiser, knowing these facts might affect the weight consumers give to his review.
What the heck?! So magazines can suck up freebie wine by the case, but bloggers can’t? Yup. That’s the rule Guideline, and even though some people are offended by it, there is a reason behind it. Did you see where I put the words “personal blog” in bold? There is a reason for that. A magazine is not giving a “personal” opinion, a ‘just between us friends’ point of view. A “personal blog” APPEARS to be doing just that, which is why the Commission thinks it is misleading. Here at PALATE PRESS: The online wine magazine, though, we are not on anybody’s “personal blog.” But what about the rest of the sentence, the part where it says “or elsewhere”? Again, that is a “blogger” giving an opinion. Here at our MAGAZINE, we make it quite clear that, while some of our writers also have personal blogs, what they write for us is exclusive to the magazine and is part of the magazine. More important, we have an editorial structure with independent editorial responsibility. With that in place (not just the word “magazine” at the top), I would be perfectly comfortable arguing that PALATE PRESS: The online wine magazine falls under the “traditional media” exception.
But we don’t use that. Instead, we tell people if we are reviewing a press sample. Every time. We don’t do it because the FTC told us to, but because we think it is just the right thing to do.
Don’t you?
-David Honig, publisher of PALATE PRESS: The online wine magazine, spends his days practicing law. He is licensed to practice in Florida, Illinois and Indiana, and admitted before several federal district courts, three federal circuit courts, and the Supreme Court of the United States.