With this settlement of 11 July 2016, which regards an advertising campaign in which Warner Bros. allegedly failed to adequately disclose that YouTube influencers were paid to provide positive reviews of Warner Bros. products, the FTC has drawn attention to the line between acceptable and misleading native advertising.

Earlier this summer, we awoke to news that the US Federal Trade Commission (`FTC') had settled with Warner Brothers Home Entertainment Inc. (`Warner Bros')1. The announcement raised important questions for many companies (and ad agencies) contemplating social media campaigns for consumer products and services: specifically, what's driving the publicity surrounding our products and have the right people (or counsel) reviewed our marketing strategies to ensure we don't end up in the cross hairs of the FTC?

This `new' risk associated with social media based advertising campaigns is an understandable result of the FTC's long-standing efforts to ensure consumers can tell that advertising is advertising intersecting with the marked change in how companies approach the marketing of products to consumers. As we're all aware, advancements in technology and related changes in the manner in which consumers access information have resulted in lower consumer exposure to traditional advertising techniques (such as print ads and television commercials). As a result, an increasing number of companies are using embedded or `native' marketing strategies to reach consumers. As noted by PQ Media, the past decade has brought with it a striking increase in the use of integrated product messages.

Because the ultimate goal of these new marketing techniques is to capitalise on consumers' attention and identification with their favourite characters, programmes, and publishers, regulators, including staff at the FTC, are necessarily concerned about the potential blurring of lines between purely promotional or commercial messages and artistic, educational, or informational speech. Simply put, the FTC wants companies to remember that consumers should know whether or not they are being marketed to. As a result, we are seeing an uptick in otherwise well-intentioned (and arguably, successful) social media campaigns turning into 20 year FTC settlement orders premised on an alleged failure of a company or advertising agency to adequately disclose that the content disseminated by the campaign is promotional and not artistic, educational, or informational speech. This article provides a brief overview of the Warner Bros. settlement and other recent enforcement actions that highlight the risks associated with implementing campaigns without consideration of the FTC's enforcement priorities related to adequate disclosure of material connections between `influencers' and companies and then concludes with some practical advice on how companies interested in implementing native advertising campaigns can effectively do so without ending up in the FTC's cross hairs.

The FTC's July settlement with Warner Bros in regard to its YouTube influencer campaign for the Lord of the Rings video game spin-off, Middle-earth: Shadow of Mordor. The FTC's complaint against Warner Bros stemmed from a YouTube influencer campaign that the Company launched to help build excitement for the game. Warner Bros hired a third party marketing company, Plaid Social Labs, LLC (`Plaid'), to coordinate and launch this campaign and, subsequently, communicated its expectations and goals for the campaign through its contract with Plaid. Per its agreement with Warner Bros, Plaid tasked the influencers with creating positive gameplay YouTube videos reviewing the game. The influencers were also instructed to promote the videos on other social media platforms, such as Twitter and Facebook. The influencers were required to disclose that the videos were sponsored, but they were instructed to place the disclosure in the description box below the gameplay videos. (According to the FTC's complaint, this requirement often resulted in the influencer placing the disclosure in a place that could only be seen if a viewer clicked on a `Show More' button.) The agreements also required the influencer's reviews to be positive, prohibiting the influencer from showing any bugs or glitches in the game or communicating any negative sentiment about Warner Bros, its affiliates or the game. The sponsored videos amassed a total of over 5.5 million views by potential consumers and were publicly available for over a year.

Despite hiring Plaid, Warner Bros was still in control of key aspects of the campaign. For example, the contract between Plaid and Warner Bros stated that Plaid's work in this campaign was performed on behalf of Warner Bros and that Warner Bros is `the sole owner of all rights in and to the [w]ork of every kind and character whatsoever in perpetuity and throughout the universe.' Also, Warner Bros had the right to pre-approve all video posts before they were uploaded on YouTube and instructed influencers regarding where to place information. The FTC investigated the campaign and eventually issued a complaint against Warner Bros alleging that the Company had violated the FTC Act's prohibition on unfair and deceptive advertising practices by implementing a marketing campaign that insinuated that sponsored, positive gameplay videos posted on YouTube by gaming enthusiasts were objective and independent assessments of the video game, when they were not. The FTC alleged that the resulting videos were in essence "sponsored advertisements" that "misled consumers by suggesting that the gameplay videos of Shadow of Mordor reflected the independent or objective views of the influencers," a violation of the FTC Act. The FTC also took the position that Warner Bros., due to improper instruction and monitoring of the YouTube influencers, failed to adequately disclose that the gamers were compensated for their positive reviews, another alleged violation of the FTC Act.

Warner Bros. elected to settle with the FTC, stating that the Company "always strives to be transparent with [...] customers and fans when working with social influencers, and [is] committed to complying with the related FTC guidelines." While the resulting settlement order does not include a monetary penalty, the proposed order prohibits Warner Bros, directly or through a third party, from failing to disclose a material connection between it and an influencer or otherwise misrepresenting, expressly or by implication, that an influencer is an independent user or ordinary consumer of the product or service. It also orders Warner Bros to (1) provide all influencers with a statement of their responsibility to disclose their sponsorship in a `clear and conspicuous' manner; (2) establish and implement systems to ensure that disclosures given by Warner Bros, or third party agencies hired by Warner Bros, are adequate; and (3) immediately terminate and cease payment to any influencer that unreasonably failed to make proper disclosures. The term for the order is twenty years and subjects the Company to civil penalties of up to $16,000 per violation for any future failure to adequately identify promotional content or otherwise comply with the settlement provisions. Civil penalties stemming from violations of FTC orders can be incredibly costly for companies because the law surrounding `per violation' can support burdensome multipliers (including the number of consumers exposed to the violation and the number of days in which the company engaged in the violation).

Why does this matter?

The FTC's recent settlement with Warner Bros. is only one of several high-profile FTC actions regarding the use of native advertising in social media. For example, in November 2014 the FTC settled charges against Deutsch LA after alleging that it engaged in misleading advertising practices during the rollout of Sony Computer Entertainment America LLC's PlayStation Vita hand-held gaming console. Deutsch LA's executives sent a company-wide email asking the agency's staff to promote the PlayStation Vita ad campaign for Sony, its client, by posting positive comments about the device on their personal Twitter accounts with the hashtag `#GAMECHANGER.' Employees were not instructed to disclose their relationship with Sony. The FTC claimed these tweets were misleading because they did not reflect the views of actual consumers who had used the device. Here, the advertising company, rather than the company selling the product, was penalised, reinforcing that liability for failing to follow FTC guidelines can also fall on the advertising agency. In fact the FTC has stated that "[t]he FTC's Enforcement Policy Statement on Deceptively Formatted Advertisements doesn't apply just to advertisers. In appropriate circumstances, the FTC has taken action against other parties who helped create deceptive advertising content - for example, ad agencies and operators of affiliate advertising networks. Everyone who participates directly or indirectly in creating or presenting native ads should make sure that ads don't mislead consumers about their commercial nature3."

Importantly, FTC enforcement is not limited to the gaming world. In March 2016, the FTC settled with Lord & Taylor regarding the company's Instagram-based influencer campaign. Again, the issue was that the paidpromotional nature of the influencers' posts was not revealed.

How do companies make and internally evaluate the need for (and adequacy of) disclosures?

The good news is that the FTC has also published helpful guidance regarding effective compliant use of native advertising. In December, the FTC issued Native Advertising: A Guide for Businesses and a new Enforcement Policy Statement on Deceptively Formatted Advertising that summarises how the FTC has applied, and will continue to apply, its traditional truth-in-advertising principles to native advertising4. The Enforcement Policy Statement and Native Advertising Guide provide practical guidance to help advertisers answer the two key questions in this area: When must a company disclose its sponsorship of content? And, assuming that disclosure that the content is a sponsored advertisement is necessary, how should it be made? The FTC's Native Advertising Guide provides 17 examples to help advertisers anticipate how the FTC inteds to enforce the new guidelines. Three governing principles are: 

  • A company's sponsorship of content does not need to be recognisable as an advertisement when the content does not discuss the company's products or product categories5.
  • A company must disclose sponsorship of content where the content discusses the company's products or product categories and the content's subject matter and format are similar to regular, independent content typically disseminated by the publisher6.
  • When sponsored content warrants disclosure that the content is an advertisement, and can be accessed in more than one manner (e.g., from a website and from a search engine), the disclosure must be clear and conspicuous via each entry point to the advertisement7.

The examples contemplate content placement in various media and provide helpful guidance for any marketing team integrating sponsored content into its marketing strategies.

The Native Advertising Guide and Enforcement Policy Statement also provide helpful guidance for companies on how to ensure that a disclosure is made in a clear and conspicuous manner8 (as required by the FTC Act). For example, the Native Advertising Guide and Enforcement Policy Statement caution that disclosures should be (1) easily readable or heard (audio messages may require an audio disclosure) and be in the same language as the advertisement; (2) in close proximity to the claim it is qualifying; (3) in a place where readers are most likely to look first (e.g., before the headline, where the reader is most likely to start looking on the click-through page, or in the picture, graphic, or video thumbnail that is the central element of a native advertisement); and (4) when used in multimedia advertising, in the advertisement itself, as close as possible to the advertising message.

Finally, the FTC's recent orders are a helpful source for guidance regarding implementing a native advertising campaign without unnecessarily increasing the risk profile for the company. For example, in recent orders, including the Warner Bros order, the FTC spends a notable amount of real estate defining `clear and conspicuous,' noting, among other things that (1) to be `clear and conspicuous' requires a disclosure to be difficult to miss (i.e., easily noticeable) and easily understandable by ordinary consumers; (2) advertising communications that are solely visual or solely audible must have a disclosure made through the same means that the ad is presented and (3) if an ad communication is both audible and visual, a disclosure must be presented simultaneously both audibly and visually even if the representation requiring the disclosure is made using only one means. The orders also note that, in order for a disclosure used on the internet or in software to be `clear and conspicuous,' the disclosure must be unavoidable.

The FTC's settlement orders with Warner Bros, Deutsch LA, and Lord & Taylor also outline compliance programmes that companies may want to consider to help ensure that material connections between the companies and any paid influencers are adequately disclosed. For example, the orders require that, when implementing or hiring a third party to implement an influencer campaign, Warner Bros, Deutsch LA, and Lord & Taylor (or their agents) (1) provide each influencer with a statement regarding their responsibility to disclose `clearly and prominently,' on any related communication, the influencer's connection with the seller, (2) conduct an initial review of the endorsement before it is made public to assure compliance, and (3) monitor the endorsement video or communication after it is disseminated for continued compliance.

In conclusion, these settlements serve as a warning to both consumer product companies and advertising agencies that a failure to account for the FTC's guidance regarding native advertising can result in dire consequences. Taken together, the steps outlined above can help companies to effectively implement native advertising strategies without the cost of unwanted scrutiny and enforcement by the FTC.