Why it matters: Less than three months after the Federal Trade Commission issued its December 2015 Policy Statement and Business Guide on native advertising ("Native Advertising Guidance"), the Commission announced its first enforcement action and settlement in a native advertising case with department store chain Lord & Taylor. The action stems from a highly successful social media campaign launched by Lord & Taylor to promote its private label clothing brand Design Lab. The campaign included branded blog posts, photos, video uploads, native advertising editorials in online fashion magazines, and online endorsements by a team of specially selected "fashion influencers."

According to the FTC, Lord & Taylor failed to disclose that the native articles and posts were paid commercial content and the fashion influencers failed to disclose that they had been paid by Lord & Taylor and received free product. Thus, because the case involves compliance with both the FTC's native advertising guidelines and the Testimonial and Endorsement Guides, it provides important lessons for marketers utilizing any form of native advertising or more broadly engaging in social influencer campaigns.

Detailed discussion: According to the FTC's complaint, Lord & Taylor engaged fashion magazines to produce native content designed to promote the Design Lab Paisley Asymmetrical dress. As part of the campaign, Nylon, an online magazine, posted a photograph to its Instagram account of the dress along with a caption. Lord & Taylor edited and approved the post without disclosing the commercial arrangement between itself and Nylon. Additionally, Nylon also ran an article regarding Design Lab, pre-approved by Lord & Taylor, without disclosing that the article was paid advertising content.

Furthermore, the FTC alleged that Lord & Taylor also engaged social media influencers to promote Design Lab on Instagram without ensuring compliance with the FTC Guides Concerning the Use of Endorsements and Testimonials in Advertising. Lord & Taylor gifted the Paisley dress to 50 fashion influencers with sizeable social media followings and paid them between $1,000 to $4,000 to post stylish photographs of themselves wearing the dress on Instagram along with a caption. While the influencers were contractually obligated to mention and tag the company by using the user designation @lordandtaylor and to add the hashtag #DesignLab to the caption, they were not contractually obligated to disclose any material connection with the company. None of the posts disclosed that the dress was given for free, that the influencer was compensated, or that the posts were part of a Lord & Taylor advertising campaign.

According to the FTC, Lord & Taylor's failure to disclose the commercial connections between itself and Nylon and the social media influencers communicated the false message to consumers that the Instagram images, captions and Nylon article were all independent content produced by unbiased consumers and an unbiased publication when in fact they were all part of Lord & Taylor's advertising campaign.

Not surprisingly, the Proposed Consent Order, which is up for public comment through April 14, 2016, prohibits Lord & Taylor from misrepresenting that "paid commercial advertising is a statement or opinion from an independent or objective publisher or source," that endorsers are independent users or ordinary consumers, or otherwise failing to disclose an unexpected connection with an endorser. Importantly, the Order also imposes significant compliance obligations on the company similar to those that the FTC imposed in a case brought several months earlier against Machinima. The company must:

  • Provide each endorser with a clear statement of responsibility regarding disclosure obligations and obtain a signed and dated statement acknowledging receipt and agreeing to comply;
  • Establish a monitoring system to monitor and review advertisements and communications made by endorsers as part of an Influencer Campaign; and
  • Immediately terminate any endorser for misrepresenting impartiality or failing to disclose a material connection.

The FTC has made it clear that it is closely watching Influencer Campaigns and that advertisers are responsible for ensuring that material disclosures by endorsers—social media influencers and publishers—are clearly and conspicuously disclosed. Advertisers should take note of the obligations imposed on Lord & Taylor and consider incorporating the following requirements as they develop future Influencer Campaigns.

  • Put Disclosure Obligations in the Contract. Obtain a signed agreement from endorsers with a clear statement of responsibility and agreement to comply with disclosure obligations.
  • Closely Monitor Endorsers. Create a monitoring system designed to ensure that endorsers are properly representing their relationship to the advertiser and clearly and conspicuously disclosing the material connection.
  • Training is Crucial. Make sure that affiliates are trained to properly review sponsored content and endorsements.
  • No Third Chances. If an influencer makes a mistake and fails to adequately disclose a material connection, the advertiser may give them a second chance if the advertiser has reason to believe the failure to disclose was inadvertent. However, the advertiser must inform the influencer that they will be immediately terminated in the event of a subsequent compliance failure.