Strumming the Blues - FTC Slaps Guitar Lesson Firm and its Online Affiliate Program for Misleading "Independent Reviews," $250,000 payment to FTC

On March 15, 2011, the Federal Trade Commission ("FTC") announced a settlement with a Nashville, Tennessee-based Legacy Learning Systems Inc. and its owner, Lester Gabriel Smith for using misleading online "consumer" and "independent" reviews in violation of the principles set forth in the FTC's Endorsement & Testimonial Guidelines. Legacy Learning sells guitar lesson DVDs through various social media channels. According to the FTC's complaint, Legacy Learning advertised using an online affiliate program, through which it recruited “Review Ad” affiliates to promote its courses through endorsements in articles, blog posts, and other online editorial material, with the endorsements appearing close to hyperlinks to Legacy’s website. Affiliates received in exchange substantial commissions on the sale of each product resulting from referrals. According to the FTC, such endorsements generated more than $5 million in sales of Legacy’s courses.

The FTC charged that the company disseminated deceptive ads by representing that the endorsements reflected the views of ordinary “independent” consumers, without clearly disclosing that the affiliates were paid for every sale they generated. To settle the case, the company must pay $250,000 and monitor affiliates to ensure they are disclosing the commissions.

This isn’t the first case a regulator has brought against this type of campaign. Last year, the FTC settled with Reverb, a PR firm (See here for the firm's reviews about its clients' apps on the iTunes store). The FTC alleged that the reviews were couched as "independent reviews reflecting the views of ordinary consumers."

Endorsers need to disclose any material connections to the companies whose products they endorse. Companies should establish and enforce written policies about their employees', bloggers' and agents' use of social media.

Twitter, Chitika and More Power for the FTC?

The FTC is making other news this month affecting evolving media, including the finalization of its 2010 proposed settlement with Twitter arising out of data security and privacy breaches (most notably not dealing with credit card numbers or medical information), a tentative consent decree with Chitika (a provider of online behavioral advertising services) requiring it to institute a "do not track" notice and opt-out mechanism for the ads it serves, and Larry Strickland, Assistant Secretary of the Commerce Department, testified before the Senate Commerce Committee that the Obama Administration supported federal consumer privacy legislation with the FTC vested with enforcement authority.