The Federal Trade Commission (FTC) actively has been monitoring the evolution of new marketing techniques, including word-of-mouth or “buzz” marketing, product placement, and marketing via cell phone as outlined among the priorities in remarks by Lydia Parnes, Director of the Bureau of Consumer Protection, in January at the 2006 Annual Advertising Law & Business Conference of Association of National Advertisers. In a recent staff opinion letter, the FTC has now addressed the issue of word-of-mouth marketing—the practice of marketing by encouraging consumers to endorse a product among other consumers. As the Commission indicates that it will start to bring enforcement actions against word-of-mouth marketing that it considers deceptive, any such campaign should be reviewed carefully prior to execution.

In particular, word-of-mouth marketing involving payment to the consumer in return for product endorsements should include a disclosure of this relationship. With respect to non-monetary compensation (such as free samples, reward points, swag, etc.), marketers should consult the FTC guidelines on Endorsement, as well as the industry best practices set forth in the Word-of-Mouth Marketing Association (WOMMA) ethics code, which requires disclosure regardless of payment. In addition, special attention should be focused on any campaigns targeted at children, particularly those that take place online and that are directed to children under the age of 13, given the children’s privacy requirements that may be triggered.

I. The Opinion Letter

The FTC issued its December 7, 2006 letter in response to an October 18, 2005 petition submitted by the consumer group Commercial Alert. Commercial Alert had requested that the Commission issue guidelines to govern word-of-mouth marketing and bring enforcement actions against marketers who use it deceptively. The Commission declined to issue guidelines, stating that existing standards concerning deceptive advertising would be sufficient. The Commission stated, however, that it would bring enforcement actions on a case-by-case basis against those who use deceptive word-of-mouth marketing.

II. Standards Described in the Letter

According to the letter, Commission staff believe that it would be deceptive for a marketer to pay consumers to endorse the marketer’s product without disclosing this relationship. The letter suggests that consumers are likely to place more credence in another consumer’s endorsement of a product based on the appearance that he or she is independent of the seller. If the endorsing consumer is not actually independent, the letter explains, this mistaken enhancement of trust renders the practice deceptive.

Commercial Action’s petition raised specific concerns about word-of-mouth marketing to children. In response, the Commission noted that it already takes steps to protect children from deceptive advertising, evaluating deceptiveness from the standpoint of an ordinary child. The Commission agreed with the petitioner that marketers also must comply with the Children’s Online Privacy Protection Act (COPPA).

III. Types of Compensation Covered by the Letter

The FTC letter focuses primarily on payments of money in return for endorsements, which it condemns as deceptive when there is no disclosure of the connection between consumer endorser and marketer. However, the letter also notes that some marketers “provide consumers with product samples, coupons, ‘inside’ information about new products, the ability to influence marketing campaigns, or similar incentives.”

Commission staff do not state definitively that they consider such incentives to be equivalent to monetary payments for purposes of the policy announced in the letter. Instead, they emphasize the standard set out in the Commission’s Endorsement Guides, considering “whether the connection between the seller and the endorser is likely to have a material effect on the weight or credibility of the endorsement.” See 16 C.F.R. § 255.5. Under the relevant guideline, a material connection is defined as one that is not reasonably expected by the audience. To illustrate this standard, the letter cites cases in which endorsers were presented as being independent, but in fact were business associates or relatives of the marketer. Thus, the deciding factor for the FTC in evaluating deceptiveness will be whether the incentive undermines the independence that the consumer appears to possess. Even a non-monetary incentive that has this effect presumably would be considered deceptive.

IV. Conclusion

The opinion letter establishes that the Commission is likely to take enforcement action against marketers who pay consumers to endorse their products without disclosing this fact. Accordingly, where the proposed marketing activity involves the payment of money to a consumer in return for his or her endorsement, this relationship should be disclosed.

The opinion letter is less clear with respect to other types of incentives— discounts, coupons, product samples, and similar compensation—given to consumers in return for endorsements, but the letter implies that the Commission will pay close attention to these consumer relationships as well. If the Commission believes that other consumers trust the word-of-mouth endorsement due to a perception of independence, and that the incentive given to the endorsing consumer makes this perception inaccurate, the Commission considers the practice to be deceptive. For this reason, when providing non-monetary incentives to consumers in return for their endorsements, these activities also should be reviewed carefully and the safest course of action would be to disclose these relationships as well.