Wednesday, October 7, 2009

Guest Post: FTC FAQ For Book Bloggers

  Today I'm featuring a guest post by Boston internet and media attorney Jeffrey Hermes, of the firm Hermes, Netburn, O'Connor and Spearing, P.C., who will answer some frequently-asked questions about the FTC regulations governing reviews and endorsements. Please see the comments for more discussion on this issue and feel free to ask questions!
FAQ for Review Bloggers:
The Federal Trade Commission’s “Guides Concerning the Use of Endorsements and Testimonials in Advertising”

1. What is this FAQ? What is it not?
This FAQ represents a general analysis of, and commentary on, the Federal Trade Commission’s “Guides Concerning the Use of Endorsements and Testimonials in Advertising.” This document is limited to an analysis of United States law, and does not purport to address the laws of any other country or how U.S. law might apply to residents of other countries.

2. What is the Federal Trade Commission?
The Federal Trade Commission (better known as the “FTC”) is an agency of the United States government. The FTC is responsible for protecting consumers in the U.S. from unfair competition and unfair or deceptive acts or practices in commerce.

3. What powers does the FTC have?
The FTC was created by, and receives its powers from, federal statute; specifically, an Act of the U.S. Congress popularly known (simply enough) as the “Federal Trade Commission Act” or “FTC Act.” The text of the FTC Act may be found at 15 U.S.C. §§ 41-58 (that’s Title 15 of the United States Code, at Sections 41 through 58, for those unfamiliar with legal citation formats).
The most important section of the FTC Act is 15 U.S.C. § 45 (also known somewhat confusingly as “Section 5” of the FTC Act, because it is the fifth of the bundle of sections making up the Act). Section 5 states that “Unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce, are hereby declared unlawful.” Basically, all of the powers entrusted to the FTC are intended to assist the agency in rooting out and preventing the types of practices declared wrongful under Section 5.
These powers include, among others:
· Conducting investigations into whether a certain business’s or individual’s business practices are unfair or deceptive;
· Issuing cease and desist letters directing businesses or individuals to stop any practices found by the FTC to violate Section 5;
· Filing a federal lawsuit against a business or individual that has violated Section 5 or failed to comply with a cease and desist letter, including seeking monetary penalties against the business or individual;
· Issuing regulations and guidance informing the public how the FTC interprets Section 5 in specific circumstances and advising businesses and individuals how to voluntarily comply with Section 5.
If the FTC declares a particular business practice to be unlawful under Section 5, that determination will be given significant deference in any lawsuit that the FTC files in a federal court. Similarly, if the FTC issues regulations or guidance about what it considers to be an unfair or deceptive trade practice under Section 5, a federal court may later declare that the FTC has misinterpreted Section 5, but ordinarily a federal court will defer to the FTC’s interpretation.

4. What are the “Guides Concerning the Use of Endorsements and Testimonials in Advertising”?
The “Guides Concerning the Use of Endorsements and Testimonials in Advertising” (which from now on I’ll simply call the “Guides”) are guidance issued by the FTC under the rulemaking authority granted to the FTC under the FTC Act. They are part of the Code of Federal Regulations, which collects regulations issued by U.S. federal agencies, and may be found at 16 CFR Part 255.
Specifically, the Guides are intended to inform the public about how the FTC interprets and intends to apply Section 5 of the FTC Act to endorsements and testimonials used in advertising. The Guides deal with manufacturers, advertisers, and endorsers of goods or services.
The Guides provide advice and examples of how Section 5 would apply to a variety of sample situations. However, while the Guides are phrased as advice, it is important to remember that they are backed up with the FTC’s enforcement authority under the FTC Act. If an individual or business engages in conduct that the Guides suggest is unlawful, the FTC may file a federal lawsuit against the individual or business for a violation of Section 5.
The Guides become effective as FTC policy as of December 1, 2009.

5. What do the Guides say?
The primary focus of the Guides is ensuring that endorsements of products by consumers, celebrities, or experts are not unfair or deceptive. To that end, the Guides indicate (among other things) that any endorsement must represent the endorser’s own honest findings, opinions and experience with the product. In the case of an endorser that is represented to be an expert, the endorser must in fact have the relevant expertise and that expertise must be applicable to the endorsed product or service. If a product or service is represented as being endorsed by an organization, the endorsement must in fact represent the judgment of the organization as a body.
Furthermore, the Guides indicate that most endorsements will be considered a representation that the product or service endorsed is “effective for the purpose depicted in the advertisement” and typical of what consumers will experience when using the product. For example, if an advertisement includes a customer’s testimonial about their experience with a particular brand of refrigerator, that testimonial may be considered to be not merely a subjective statement, but a representation that the refrigerator works as promised and that other consumers will have similar experiences with that brand. Use of such an endorsement by an advertiser may be considered false advertising in violation of Section 5 if the endorsement is not backed up by adequate evidence possessed by the advertiser.
However, a review of an artistic work (for example, a book or a movie) will probably not be considered a statement that the work is “effective for the purpose depicted,” because readers of the review will know that the review represents one person’s subjective judgment rather than a promise of typical results.
Finally, the Guides are concerned with bias among endorsers. For example, if someone who endorses a product is compensated for that endorsement by the manufacturer or advertiser of the product, the FTC is concerned that the endorser will be biased toward a favorable review. Similar concerns might arise where the endorser is related to or otherwise connected with the manufacturer. Accordingly, the Guides state that where readers of a review might not expect there to be a compensation arrangement, failing to disclose such an arrangement or other “material connection” may violate Section 5 because readers may be misled into thinking that a review is unbiased.

6. Why do the Guides matter to bloggers?
Bloggers who review products and services may be considered “endorsers” under the Guides. Accordingly, the FTC may find that a blogger violates Section 5 if the blogger (1) posts a positive review that does not represent their honest experience with the product or service; (2) makes misrepresentations about key features of the product or service; or (3) fails to disclose a “material connection” or compensation arrangement related to the review.

As discussed above, blogs that review artistic works are unlikely to be found to be making representations as to how others will experience a book, movie, et cetera, as opposed to providing subjective opinions. However, such a blog may still be found to violate Section 5 if the blogger posts a positive review that is not their own honest opinion (for example, if a book blogger has not read enough of a reviewed book to provide an honest opinion but suggests that they have), or if the blogger fails to disclose a “material connection” or compensation arrangement related to the review.

Critically, the Guides suggest that a blogger’s receipt of a sample of a product, or a copy of a work for review, might be considered compensation for a review and a “material connection” to the advertiser or manufacturer (at least if the blogger is permitted to keep the product/copy after the review is completed). Similarly, if a blogger receives free services (including free tickets to a movie) in exchange for a review, that might constitute a “material connection.” Accordingly, the Guides indicate that bloggers should conspicuously disclose when they receive free services, or review copies or sample products that they are allowed to keep, in expectation of a review.

7. Do these Guides apply to professional reviewers who write for media outlets?
Yes. However, the FTC has separately suggested that it will not generally consider professional reviewers to be compensated by a manufacturer or publisher, since they are separately compensated by the publication for which they write. Thus, the FTC will presume that professional reviewers are unbiased (or, at least, less biased) than non-professional bloggers.

8. Do the Guides prohibit bloggers from accepting ARCs/galleys/review copies of books or other media, or participating in blog tours?
No. However, if the publisher has given the blogger a copy of a book, etc., that they can keep in expectation that the blogger will provide a review, that fact should be disclosed. For the purposes of the Guides, the fact that a review copy is an unedited advanced review copy (“ARC”) is not relevant.

The Guides do not provide clear guidance as to when a copy is provided in exchange for a review. Remember that the FTC's primary focus is on preventing unfair and deceptive advertising, and so the agency will concentrate on distribution of free copies by publishers or advertisers where a review is clearly expected (even if the book was not solicited by the blogger, and even if the publisher states that the blogger is not required to review the book). However, publishers also distribute books for free in situations where no review is solicited or even expected; for example, at library conferences publishers may give away galleys, not for the purpose of obtaining reviews, but in order to encourage librarians to buy the final books for their collections. Arguably, therefore, the fact that a book is obtained at such a conference would not need to be disclosed. The FTC will review such situations on a case-by-case basis.

Alternatively, the blogger may return or dispose of the review copy, provided that the blogger receives no compensation for disposing of the copy (for example, by selling it at a used bookstore).

9. Do the Guides prohibit bloggers from including advertising or “click here to purchase” links on their blogs?
No. However, if a blogger includes advertising or a purchase link for a product (such as a book) reviewed on the blog, and the blogger receives compensation for purchases of the product through the blog, the blogger should disclose that fact. 

10. The Guides say that a “material connection” or other compensation arrangement only needs to be disclosed if readers/viewers wouldn’t expect such an arrangement to exist. Doesn’t everyone know that blog reviewers get review copies and get compensated for purchases through links?
According to the FTC, no. If you were sued, you might be able to present a court with evidence to the contrary, but the FTC’s judgment on that issue would receive deference.
11. What about my First Amendment rights?
Section 5, and the Guides which interpret it, prohibit false and deceptive endorsements and advertising. False advertising has been held to be outside the protection of the First Amendment, which generally only protects true speech or speech that cannot be proven true or false (for example, artistic expression or statements of opinion).
Thus, while a blogger cannot be penalized for presenting their honest opinion, they might be penalized for an explicit false statement of fact (e.g., that a product does something that it cannot), or an implied false statement of fact (e.g., that the reviewer has seen a reviewed movie when in fact they have not seen it, or that there was no compensation for the review).

12. Will the FTC come after bloggers personally if they don’t comply?
Possibly. The FTC has stated that enforcement of Section 5 against individual bloggers is unlikely to be an efficient way to pursue the goals of the Guides. Rather, the FTC is more likely to focus on the manufacturers and advertisers who reach out to bloggers, to make sure that those companies fully inform bloggers about their responsibility to disclose compensation arrangements and material connections.
However, the FTC has not restricted itself from pursuing individual bloggers (including issuing cease and desist letters or filing a lawsuit) if it decides that this would be an effective way to prevent misleading endorsements.

13. Can a blogger be sued by anyone other than the FTC for violation of the Guides?
Possibly. Although the FTC Act does not permit lawsuits by anyone but the FTC, most states have their own laws (known as “Little FTC Acts”) granting private parties and/or the state Attorney General the ability to file lawsuits seeking damages for unfair or deceptive trade practices. Such “Little FTC Acts” are typically interpreted by state courts in accordance with the FTC’s interpretation of Section 5 of the FTC Act. Therefore, a state court might hold that the Guides, which interpret the FTC Act, also provide a basis for private parties to sue under a “Little FTC Act.”

14. If the FTC considers ARCs/galleys/review copies to be compensation, does that mean they represent taxable income if I keep them? We’re not supposed to resell ARCs, so how can they have cash value?
Maybe; this question is not addressed by the Guides. Generally, the Internal Revenue Service (“IRS”), and not the FTC, would be the agency responsible for determining what constitutes taxable income. If this is an issue of concern to you, you should consult a tax attorney. NOTE: This FAQ does not provide tax advice and is not intended or written to be used, and cannot be used, for the purpose of: (i) avoiding penalties under the Internal Revenue Code; or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.