On September 2, 2015, the Federal Trade Commission (FTC) announced its first settlement with an online video marketer over an alleged failure to disclose paid endorsements.1 The FTC settled with Machinima, Inc., a popular multi-channel network, over allegations that Machinima engaged in deceptive advertising practices when it paid "influencers" to post online videos endorsing Microsoft's soon-to-be-released Xbox One gaming system and several games without disclosure of the compensation or the connection to Microsoft.2 The FTC's settlement prohibits Machinima from making misrepresentations about endorsements and requires it to implement a program to monitor its influencers. Separately, the FTC issued a closing letter to Microsoft and its advertising agency, Starcom MediaVest Group, which had engaged Machinima to market on behalf of Microsoft. While the FTC alleged that Microsoft and Starcom also bear responsibility for the influencers' failure to disclose their paid endorsements, the FTC decided not to recommend an enforcement action against either company because the failures to disclose appeared "to be isolated incidents that occurred in spite of, and not in the absence of, policies and procedures designed to prevent such lapses."3 Taken together, the settlement and closing letter serve as an important reminder that companies should have robust programs and processes in place to ensure compliance with the FTC's Guides Concerning the Use of Endorsements and Testimonials in Advertising ("Endorsement Guides").4
Background
Microsoft contracted with Machinima through its advertising agency Starcom to conduct a marketing campaign to generate buzz for its new Xbox One gaming system in 2013. In the campaign, Machinima paid certain individuals with large online followings to post endorsement videos that looked like they were independently produced on their individual video channels. Machinima's agreements with the individuals, however, did not require any of the individuals to disclose that they were being paid, and the contract required the individuals to keep the business relationship confidential. In many instances, the individuals allegedly failed to disclose that they were compensated for creating and uploading their videos or that they had a "material connection" in light of such payment.
The FTC has issued guidance for the use of endorsements and testimonials in advertising in the form of its Endorsement Guides.5 According to FTC guidance, an endorsement is "any advertising message (including verbal statements, demonstrations, or depictions of the name, signature, likeness or other identifying personal characteristics of an individual or the name or seal of an organization) that consumers are likely to believe reflects the opinions, beliefs, findings, or experiences of a party other than the sponsoring advertiser, even if the views expressed by that party are identical to those of the sponsoring advertiser."6 The FTC requires that "when there exists a connection between the endorser and the seller of the advertised product that might materially affect the weight or credibility of the endorsement and the connection is not reasonably expected by the audience, such connection must be fully disclosed."7
In its complaint, the FTC alleged that Machinima misrepresented that "the video reviews...reflected the independent opinions of impartial video game enthusiasts." The FTC also claimed that the failure to adequately disclose that the influencers were compensated for their endorsements was material to consumers' decisions to purchase Xbox One consoles and the video games available at the launch, and that this material connection would not be reasonably known to or expected by viewers. The FTC alleged the failure to disclose constituted material misrepresentations that violated Section 5 of the FTC Act. The FTC also investigated Microsoft and its advertising agency, but it decided against issuing a complaint against them.
Settlement
In its settlement with the FTC,8 Machinima agreed to:
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not misrepresent that an endorser of a product is an independent user or ordinary consumer of the product;
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clearly and prominently disclose any material connections between an endorser and the company whose product is being endorsed; and
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take reasonable steps to ensure that its campaigns comply with the above requirements, including establishing a system to monitor and review its endorsers' representations and disclosures and to maintain reports to show the results of the monitoring.
The settlement provides useful guidance for businesses that compensate or incentivize new media and social media endorsers. The settlement requires Machinima to implement "reasonable steps" to ensure the proper disclosures accompany compensated endorsements, including the following:
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requiring contractual agreements with endorsers stating that they have a responsibility when making endorsements to "clearly and prominently" disclose any material connection to the advertiser, which must be on a separate page from other parts of its general agreement and be written in a manner reasonably calculated to be easily understood by the endorsers;
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notifying endorsers that the advertiser will monitor compliance with the endorsement disclosure requirements;
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paying an endorser only after conducting an initial review of all unique online video endorsements and ensuring they contain the proper disclosures;
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continuing to monitor online video endorsements by conducting another randomly timed review between two weeks and 90 days after final compensation of the endorser and without notifying the endorser in advance, as long as the video is still available;
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immediately suspending payment to, and any current work with, an endorser who makes misrepresentations or fails to make the proper disclosures; and
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disqualifying from any future advertising campaigns endorsers who repeatedly misrepresent or fail to disclose material information.
Closing Letter
The FTC also issued a closing letter after its investigation to Microsoft and Starcom that explained its decision not to recommend an enforcement action against the companies.9 The FTC stated that companies normally have responsibility for their compensated endorsers' failure to disclose a material connection. In the letter, the FTC explained that its decision to close its investigation was supported by the following factors:
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Microsoft had a "robust compliance program in place...including specific legal and marketing guidelines concerning the FTC's Endorsement Guides."10
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Microsoft made relevant training available to its employees, vendors, and Starcom's personnel.
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Microsoft and Starcom implemented additional safeguards regarding sponsored endorsements since the Xbox One advertising campaign.
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The companies committed to requiring their employees to monitor campaigns conducted by subcontractors.
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The companies quickly required Machinima to insert appropriate disclosures in the endorsement videos in question once they learned about the lack of disclosures by paid influencers.
Implications
The FTC's settlement with Machinima provides a reminder to companies of the risks of making inadequate disclosures when compensating or otherwise incentivizing individuals for endorsing their products or services. It is also an important reminder of the necessity to have systems and procedures in place to obligate endorsers to disclose material information and to monitor new media and social media endorsers to ensure compliance with disclosure requirements. The closing letter to Microsoft and Starcom is also a reminder to advertisers that they could be held liable for the mistakes of their advertising networks and partners, such as failures to disclose material connections. The letter makes clear that advertisers have the ability to reduce their risk in this area by implementing policies and procedures to comply with advertising and disclosure requirements and address any issues that arise. Companies should review their internal policies and procedures to ensure they effectively address the potential actions of employees, agents, and subcontractors.
1 FTC Press Release, "Xbox One Promoter Settles FTC Charges That It Deceived Consumers with Endorsement Videos Posted by Paid Influencers," September 2, 2015, https://www.ftc.gov/news-events/press-releases/2015/09/xbox-one-promoter-settles-ftc-charges-it-deceived-consumers.
