Rapid Growth of Influencer Marketing

With more consumers cutting the cord to their TVs and paying for premium subscriptions or ad blockers to avoid advertising, social media has become an important medium through which advertisers reach the purchasing public. Companies are allocating substantial marketing dollars to advertising on social media platforms, including Instagram, YouTube, Facebook and Snapchat, in the form of social media endorsements. In an attempt to reach the coveted millennial market, advertisers are willing to pay celebrities and “influencers,” or social media content creators with large followings, thousands of dollars per mention or post. Fashion influencers are used to increase brand awareness, set fashion trends, and lead consumers to the next hottest retailer. The next runway show can be seen from Snapchat or Instagram and famous bloggers can earn thousands of dollars for each new outfit they post.

The incorporation of brand messages and products into the personal accounts of individuals with social clout can result in seemingly authentic and commercially effective endorsements. However, promotional content created through this strategy runs the risk of lacking sufficiently clear disclosure of the incentivized relationship between the brand and the influencers. Influencers often use hashtags like #ad, #sp, or #sponsored to show that the post has been paid for, however, this may not be sufficient to comply with FTC guidelines. Nonetheless, as advertisers are able to create more organic connections with consumers, and in turn, reap higher return on investment, influencer marketing has become the hottest trend in digital advertising.

Adaptation of the Federal Trade Commission’s Guidelines

The increase in influencer marketing has not gone unnoticed by the Federal Trade Commission (FTC). In 2009, the FTC updated its Endorsement Guides for deceptive advertising under Section 5 of the FTC Act in response to the use of social media endorsements. The update extended the application of the Endorsement Guide to include individuals using social media to endorse products or services, requiring such testimonials to be truthful and not misleading, reflect the typical experience of a consumer, and disclose any material connections to the advertiser. The update also noted that advertisers are responsible for ensuring that any individuals, such as celebrities or influencers, that are compensated for testimonial posts must comply with the Endorsement Guides.

In 2013, the FTC also updated its Dot Com Disclosures guidance to address the digital advertising environment. It set out the “clear and conspicuous” requirement for disclosures. To determine whether a disclosure is “clear and conspicuous” entails evaluation of whether a consumer would actually perceive and understand the disclosure within the context of the entire ad. This evaluation considers proximity, placement, prominence, and other factors that assess whether the information is communicated effectively and the overall message conveyed is not misleading.

In 2015, the FTC published a Q&A on its Endorsement Guides titled “The FTC Endorsement Guides: What People are Asking” in an attempt to clarify the rules as applied to modern marketing strategies. It reiterates that endorser disclosures are the advertiser’s responsibility and thus, the FTC’s enforcement efforts will be focused on advertisers who fail to appropriately train or monitor their endorsers.

Also in 2015, the FTC released its enforcement statement and guidelines for native advertising. “Native advertising” is a type of advertising that is experienced in the same form and function of the platform in which it is placed, often blurring the line between advertising and unbiased content. The new policy, applicable to influencer marketing methods among other digital marketing tactics, again emphasizes the requirement of adequate disclosure to prevent deceptive advertising.

Though the FTC has adapted its policies regarding influencer marketing, the guidelines remain ambiguous. The ambiguity in the rules is likely the result of the great diversity of methods and mediums used to promote brands, products, and services. However, the FTC has maintained a consistent message—consumers have the right to know if they are looking at paid advertising. This will enable them to evaluate how much weight to give the information in testimonials, and to make informed purchasing decisions.

FTC’s Enforcement Efforts: Making an Example of Large Companies

In an effort to enforce its updated guidelines, the FTC has filed complaints against companies that have failed to sufficiently disclose paid promotional partnerships with influencers. In March 2016, the FTC issued a complaint against fashion retailer Lord & Taylor for paying fashion influencers to create posts about one of its dresses on Instagram without proper disclosure. While Lord & Taylor contractually obligated the influencers to tag the brand’s Instagram handle and use a designated hashtag, the retailer did not require influencers to disclose the compensatory nature of the relationship between Lord & Taylor and the influencer. Although the campaign was successful, and the dress quickly sold out, the FTC found that it was deceptive and in violation of the FTC Act.

A few months later, the FTC filed a complaint against Warner Bros. Home Entertainment for allegedly misleading consumers in promoting its Lord of the Rings-related video game. The campaign generated millions of views and created substantial buzz around the game. However, the FTC found that Warner Bros. failed to adequately disclose to consumers that the influencers, including a YouTube star with more than 50 million followers, were paid to develop gameplay videos and promote the content on multiple social media platforms.

Both Lord & Taylor and Warner Bros. settled with the FTC. The FTC’s orders prohibited both companies from misrepresenting that their paid advertising was from an independent source, and required clear and conspicuous disclosure of any material connection between the companies and any endorser of their products. The orders further required internal monitoring programs to review the companies’ endorsement campaigns and prevent future violations.

As evidenced by these two enforcement actions, the FTC is monitoring the social media marketing practices of advertisers. Though it is not likely that the FTC is capable of monitoring the sponsored campaigns of all companies, especially small, local businesses, it is likely that it will continue to pursue action against large advertisers that have broad marketplace exposure. With its efforts, the FTC has placed the onus on advertisers to ensure proper disclosure and fair advertising.

Practical Implications for Advertisers

The growth of influencer marketing and the FTC’s shifting rules and policies have significant implications for advertisers. While social media endorsements have become a desirable and lucrative way of connecting with consumers, advertisers must be mindful of the risks associated with such marketing tactics. The FTC issues administrative complaints in the public interest when it has reason to believe an advertiser is engaging in unfair or deceptive practices in commerce. Though there is an exception for first-time violations, each violation thereafter may result in a civil penalty of up to $16,000 per violation per day. Such penalties can compound into considerable fines, especially in light of the fact that social media endorsement campaigns entail multiple posts on a variety of platforms.

Advertisers may avoid the risk of enforcement actions and high fines through clear and conspicuous disclosure. When developing influencer marketing campaigns, advertisers should ensure that the compensatory relationship between the advertiser and the influencer is conveyed in such a manner that it is likely to be comprehended by the consumer. There should be careful consideration of the placement and prominence of the disclosure in relation to the testimony of the influencer. To further ensure transparency, advertisers should create written agreements with influencers that provide specific instructions on how disclosure should take place. Although marketers and influencers may believe creative freedom is essential to authentic and compelling endorsements, compliance with written restrictions may help defeat FTC enforcement actions. For this reason, advertisers should monitor the promotional content created by its endorsers to ensure compliance with the FTC’s disclosure requirements.

Marketing in the digital landscape is constantly evolving and, in response, the FTC continues to actively adapt its guidelines. Although advertisers may feel that the FTC’s evolving policies are burdensome, it is imperative for advertisers to be proactive in complying with them. Not doing so may result in enforcement actions with harsh and costly penalties.