FTC Busts “Fake Influencer” Racket

As the marketing power of social influencers has grown, so has the Federal Trade Commission’s desire to have influence, by monitoring and attacking deception in influencer marketing.  In legal actions against both advertisers using influencers and the influencers themselves, the FTC has sought to enforce its endorsement rules requiring clear and conspicuous disclosure of a “material connection” between a paid influencer and its sponsor, so that the consumer can know the endorsement is not entirely objective and weigh that fact in her product consideration and purchasing decision. 

What makes an influencer attractive enough to an advertiser to want to pay to use the person in its social media marketing is, of course, that the person has influence over the buying decisions of the advertiser’s target customers.  And the larger the influencer’s following, the more valuable she becomes to advertisers and the more money she makes.  It is therefore in the influencer’s self-interest to maximize the size of her following in just about any way she can.

One way, the FTC has discovered, is to buy “fake influence.” This month, the FTC again exerted its influence over social media marketing by suing and obtaining a settlement with a company that was selling fake indicators of influence, including fake followers, subscribers, views, and likes, to users of social media platforms, including LinkedIn, Twitter, YouTube, Pinterest, Vine, and SoundCloud. The company, Devumi, sold fake Twitter followers to actors, athletes, musicians, writers, and others who wanted to increase their appeal as online influencers, and to motivational speakers, law firm partners, investment professionals, and others who wanted to boost their credibility to potential clients. It allegedly filled more than 58,000 orders for fake Twitter followers; made more than 4,000 sales of fake YouTube subscribers and over 32,000 sales of fake YouTube views, including to musicians who wanted to increase the apparent popularity of their songs; and sold more than 800 fake LinkedIn followers to marketing, advertising, and public relations firms; companies offering computer software solutions; banking, investment, and other financial services firms; human resources firms; and others.  With these fake followers and views, the buyers were able to deceptively magnify their influence, thereby fooling consumers, potential clients, and investors.

The settlement bans the Devumi defendants from selling social media influence to users of social media platforms and misrepresenting anyone’s social media influence, and imposes a $2.5 million judgment against the owner-CEO, which was to be suspended upon an “ability to pay” payment of $250,000.

Although the deception was committed by the purchasers of the fake influence metrics and not by Devumi itself, the FTC’s complaint alleged that it was liable because it provided the “means and instrumentalities” for the deception.  Because the FTC lacks “aiding and abetting” authority other than in telemarketing cases, it seeks to get around that limitation by resorting to the use of this rather nebulous – and legally dubious – alternative pleading device.  Even if “means and instrumentalities” is merely “aiding and abetting” by another name, the FTC will continue to use it in non-telemarketing cases to sweep in third party defendants who cannot be directly charged with deception – until a party so charged has the means to sustain, and a court upholds, a legal challenge to the FTC’s own arguable fakery.

Pleading gamesmanship aside, the Devumi case is a warning not only to other sellers of fake social media influence, but to buyers of it, that the FTC is watching you and will not tolerate fraudulent gamesmanship in the influencer world.  When the FTC began to police influencer marketing, it first went after the sponsoring advertisers for failing to meet “material connection” disclosure requirements, and only later against the influencers themselves.  We can expect the same pattern here.  The next time the FTC discovers hanky panky in the acquisition and representation of fake influence, the purchasers, and not just the peddler, may incur its wrath as well.

FTC To Review Its Negative Option Rules. It’s About Time!

No marketing method has incurred the wrath of the Federal Trade Commission, with more dire consequences (asset freezes, receiverships, ruinous monetary judgments) to the targets of its wrath, than continuity, subscription or auto-renewal plans containing a “negative option” feature (under which the consumer agrees in advance to recurring charges for a product or service until he cancels). The issue with such offers is the adequacy of disclosure of the existence of a negative option, the length of any trial period (free or otherwise), the frequency and amount of the recurring charge, the right to cancel without incurring more charges, and the method to cancel. The FTC has shut down dozens of businesses, seizing and forcing the disgorgement of their (and their owners’) assets, for failing to disclose a negative option, or failing to do so effectively in its judgment, thus harming consumers who did not realize they were enrolling in an auto-renewal plan and did not knowingly authorize the recurring charges. The FTC puts deceptive negative options in the “fraud” category in its hierarchy of enforcement priorities, and policing them lies at the heart of its fraud enforcement program.

The FTC’s authority to prevent deceptive negative option marketing rests on Section 5 of the FTC Act, which prohibits unfair and deceptive business conduct, and on the “Restore Online Shoppers’ Confidence Act” (“ROSCA).  ROSCA codifies the principle –  articulated in FTC orders, guidance documents and court decisions – that for a negative option offer to be lawful, all material terms, including recurring charges, must be “clearly and conspicuously” disclosed before the consumer submits his billing information; the consumer must give his express informed consent to the offer; and it must be easy to cancel. 

While embedding in statute the ban on “unclear” and “inconspicuous” negative option sales, ROSCA does not define the meaning of “clear and conspicuous” but leaves that task to the FTC.  According to the agency, for a disclosure to be conspicuous, it must be “unavoidable.” What, exactly, does “unavoidable” mean?  Clearly it does not mean burying the negative option terms on a hyperlinked “Terms & Conditions” page, separate from the website, or placing them at the bottom of the checkout page, “below the fold” (requiring scrolling down to see them) and far from the order button and credit card fields.  But what about negative option terms that are placed in the vicinity of the order button and credit card fields and are even disclosed multiple times?  Are those disclosures “conspicuous enough” for the FTC?  Do they pass the “unavoidability” test?               

The FTC’s answer has been no.  In FTC v. One Technologies, LP, for example, an action against a provider of credit monitoring services, the FTC alleged that the terms of a negative option offer, including a recurring monthly charge, were not adequately disclosed even though they were presented on several pages of the website: at the top of the home page (“Free 7 Day Trial when you order your 3 Free Credit Scores.  Membership is then just $24.95 per month until you call to cancel.”); on an inside page, via a link to “Offer Details” which the consumer agreed to by clicking a button to continue the enrollment process; and on the signup page in an “Offer Details” box adjacent to the credit card fields and above the order button.

Despite being provided multiple times, well above the fold and viewable, One Technologies’ negative option disclosures weren’t up to snuff, according to the FTC, because they weren’t big enough or bright enough or prominently positioned enough.  Because they weren’t “enough” of what the FTC wanted, One Technologies was required to pay $22 million to settle. The moral of the case: not disclosing negative option terms in the exact color, font, type size, and place desired by the FTC can be legally perilous and expensive indeed.  

The vagueness of the “clear and conspicuous” standard, and the subjectivity with which the FTC applies it in the “grey zone” of negative option enforcement – where the adequacy of disclosure can be reasonably argued both ways and the FTC’s use of its draconian enforcement powers, including asset freezes and punitive settlements, is highly problematic – are fair targets for criticism.  Fortunately, the FTC has now provided a forum for marketers to voice that criticism to it directly.  Last month, the agency announced that it will be conducting a review of its regulation of negative option marketing, including subscription, continuity, auto-renewal and trial conversion plans that are presently regulated under Section 5 and ROSCA, and prenotification plans (e.g., book-of-the-month clubs) that are covered by its existing Negative Option Rule. The FTC is inviting public comment on a host of questions, including this one: “Should the Rule define ‘clearly and conspicuously’, given that it requires marketers to make certain disclosures clearly and conspicuously? If so, why, and how? If not, why not?” 16 CFR Part 425         

While all the questions on which the notice seeks public input are important, none is more urgent than the need for the FTC to decide that the correct answer to this question is yes!  It then must respond by promulgating clear, articulable, concrete guidance on the meaning and application of the “clear and conspicuous” standard as it applies to negative option disclosures, and then adhere scrupulously to its own guidance in future enforcement actions.  Never again should a company and its owners, like One Technologies, be so severely sanctioned based on a subjective and highly debatable determination by the FTC that its negative option disclosures were not “adequate” to prevent consumer deception.

The FTC Warns CBD Marketers a Second Time About False Health Claims

In December, it will be a year since Congress, as part of the “Farm Bill,” legalized hemp-derived CBD containing less than 0.3% THC (the psychoactive compound that distinguishes hemp from its cannabis cousin, marijuana, which remains on the ban list).  With this green light, and the new surge of momentum it was bound to give to the “CBD Rush,” I predicted that the Federal Trade Commission, which had been on the sidelines as long as CBD was a banned substance under the jurisdiction of the Drug Enforcement Administration, would get in the game. 

Last March, the FTC, acting jointly with the Food and Drug Administration, sent out its first set of warning letters to companies making false and unsubstantiated “disease treatment” claims for CBD products. The letters, which went to Nutra Pure LLC, Pot Network Holdings, Inc., and Advanced Spine and Pain, LLC (d/b/a Relievus), addressed advertising for a range of CBD supplements, such as “Hemp Oil,” “CBD Softgels,” “Liquid Gold Gummies,” and “CBD Oil.” Ads for these products claimed they could effectively treat diseases, including cancer, Alzheimer’s, fibromyalgia, and “neuropsychiatric disorders.” In addition, ads for Nutra Pure claimed that, “Science also shows that CBD has anti-emetic, anti-convulsive, anti-inflammatory and analgesic properties,” and that, “CBD is a viable option for minimizing these effects within the brain.”  The joint FTC-FDA letters warned the companies about the potential legal consequences of making unsupported health claims, and instructed them to notify the FTC of the specific action taken to address the agencies’ concerns.

The FTC has now launched a second round of warnings to three more companies that were also making unsubstantiated health claims for CBD products. Acting on its own this time, the FTC sent warning letters last month to 4Bush Holdings, LLC, NuLife CBD Oils, LLC, and Ocanna Co. that targeted claims for a variety of CBD-infused products, including oils, tinctures, capsules, “gummies,” and creams.

Each company advertises that its CBD products treat or cure serious diseases and health conditions. 4Bush Holding’s website claims CBD “works like magic” to relieve “even the most agonizing pain” better than prescription opioid painkillers. To bolster its claims that CBD has been “clinically proven” to treat cancer, Alzheimer’s disease, multiple sclerosis (MS), fibromyalgia, cigarette addiction, and colitis, the company states it has participated in “thousands of hours of research” with Harvard researchers.

NuLife CBD Oils’ website claims that its CBD products are proven to treat autism, anorexia, bipolar disorder, post-traumatic stress disorder, schizophrenia, anxiety, depression, Alzheimer’s disease, Lou Gehrig’s Disease (ALS), stroke, Parkinson’s disease, epilepsy, traumatic brain injuries, diabetes, Crohn’s disease, psoriasis, MS, fibromyalgia, cancer, and AIDS. The company also advertises CBD as a “miracle pain remedy” for both acute and chronic pain, including pain from cancer treatment and arthritis.

Ocanna’s website promotes CBD gummies as effective at treating “the root cause of most major degenerative diseases, including arthritis, heart disease, fibromyalgia, cancer, asthma, and a wide spectrum of autoimmune disorders.” The company also claims its CBD cream relieves arthritis pain and that its CBD oil may effectively treat depression, PTSD, epilepsy, heart disease, arthritis, fibromyalgia, and asthma.

In other words, CBD cures disease, period! 

The FTC letters warn that making health claims for CBD products – especially disease claims – without such substantiation violates the FTC Act and could have serious legal consequences, including an action for an injunction and consumer redress. The letters instructed the companies to notify the FTC within 15 days of the specific actions they have taken to address its concerns.

Unlike the FDA, which routinely sends warning letters to companies making unsubstantiated health claims or unapproved drug claims and gives them a chance to voluntarily comply, the FTC usually will open an investigation in the first instance and take enforcement action  unless it determines that no violation occurred.  Occasionally, however, and especially in the case of an emerging (or newly legal) product category or marketing method, it will initially use the softer “warning letter” approach. That almost certainly was the reasoning behind its decision to only “warn” these six companies; in a sense, it is using 2019 as a one-year grace period following CBD decriminalization for CBD marketers to become educated about, and begin to honor, their FTC compliance obligations.  They should consider themselves lucky, though, because make no mistake:  the FTC’s forbearance is limited and the warnings are clearly a shot across the bow. The next move the FTC makes against a CBD marketer – and there will be many more than one – will likely be a full-blown law enforcement action leading to a permanent federal court injunction, restitution, and, in the most egregious circumstances, an asset freeze against the company and its principals.

Current and would-be “cowboy” CBD marketers, consider yourselves amply warned:  the FTC is on the CBD beat, and with its immense (and scary) enforcement powers, is looking for its first scalps.  If you are, or are thinking about, selling a CBD product, good legal counsel can help you avoid being one of them.

FTCAdLaw’s Rothbard Opposes “Trojan Horse” Consumer Lending Law in California

In a recent op-ed in the San Francisco Chronicle, entitled, “Supposed Payday Loan Reform is a License for Predatory Lending, https://www.sfchronicle.com/opinion/openforum/article/Open-Forum-Supposed-payday-loan-reform-is-a-14371994.php?psid=j9NVn, FTCAdLaw’s William Rothbard unmasked consumer lending legislation then pending in the California Legislature that pretended to be pro-consumer but in fact is a trojan horse for lenders to deceive and exploit vulnerable borrowers in need of short-term loans. The legislation, AB 539, which has since passed the Legislature and is expected to be signed by the governor, appears on the surface to benefit consumers because it caps the annual percentage rate (APR) at 36%.  While still high, 36% is considerably lower than uncapped small-dollar loan APRs. What the legislation doesn’t prohibit, and does not even mandate disclosure of, are add-on fees and products (such as “credit life,” a  useless form of insurance) – a practice known as “loan packing” – that can increase loan costs by as much as 300%.

In his article, Rothbard advocated a ban on loan packing or at least clear and conspicuous disclosure of it so the consumer would know the true cost of the loan. Otherwise, he wrote, “AB 539’s loophole for such practices would do more harm than good to vulnerable California families….it’s not so much a consumer protection bill as a cleverly disguised license for unfair and deceptive lending.”  Unfortunately, the bill passed without those improvements. 

Building on its success in California, the small-dollar lending industry is now setting its sights on Congressional enactment of similar legislation for the whole country.

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