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FTC Laser Focused on Review Sites and MLM Schemes

FTC Laser Focused on Review Sites and MLM Schemes

The Federal Trade Commission has not been shy when making it known that it continues to devote substantial resources to police the Endorsement Guides and multi-level marketing schemes.

Endorsement Guide Enforcement

In October 2019, the FTC announced that it dropped the hammer on marketing practices of a company that allegedly used bogus product reviews posted by its employees on a well-known retail website.

According to the FTC, Sunday Riley Modern Skincare, LLC and its CEO have agreed to settle an FTC complaint charging them with misleading consumers by posting fake reviews of the company’s products on a major retailer’s website, at the CEO’s direction, and by failing to disclose that the reviewers were company employees.

“Dishonesty in the online marketplace harms shoppers, as well as firms that play fair and square,” said FTC attorney Andrew Smith, Director of the FTC’s Bureau of Consumer Protection.  “Posting fake reviews on shopping websites or buying and selling fake followers is illegal. It undermines the marketplace, and the FTC will not tolerate it.”

The FTC alleges that the company sells a variety of cosmetic products that are sold at a well-known chain of beauty stores (Sephora) that permit consumers to leave customer reviews of products sold on its website.  According to the FTC, the company, its managers and the CEO herself posted reviews of their branded products on the aforementioned websites using fake accounts created to hide their identity, and requested that other employees follow suit.

Interestingly, the FTC also alleges that after Sephora removed fake employee-written reviews, Sunday Riley employees suspected this was because Sephora recognized the reviews as coming from their IP addresses.  So, according to the FTC, Sunday Riley Skincare obtained a VPN account to conceal IP address and location.

The FTC complaint also alleges that the CEO directed staff to create multiple accounts on Sephora.com, registered as different identities, leave 5 star reviews and dislike negative reviews.

The FTC’s complaint charges the company and CEO with violating the FTC Act by making false or misleading claims that the fake reviews reflected the opinions of ordinary users of the products; and deceptively failing to disclose that the reviews were written by the CEO and/or her employees.

The proposed administrative order settling the FTC’s allegations is intended to ensure the respondents do not engage in similar allegedly illegal conduct in the future.  It prohibits the respondents, in connection with the sale of any product, from misrepresenting the status of any endorser or person reviewing the product.  This includes misrepresentations that the endorser or reviewer is an independent or ordinary user of the product.  The order also prohibits the respondents from making any representation about any consumer or other product endorser without clearly and conspicuously disclosing any unexpected material connection between the endorser and any respondent or entity affiliated with the product.  Such disclosures must be made in close proximity to the product review or endorsement.

The order also requires the respondents to instruct their employees and agents about their responsibilities to clearly and conspicuously disclose their connections to the respondents’ products in any endorsements.  Commissioner Chopra issued a dissenting statement relating to the settlement.

This matter is another clear warning from the FTC.  Marketers should consult with an experienced FTC defense attorney in order to ensure that brand campaigns do not violate legal regulations enforced by the Commission.  When it comes to reviews, endorsements and testimonials, it is critical that consumers are properly advised of material connections and any other information that could impact purchasing decisions.  The FTC also expects that its guidance will be incorporated by ad agencies and social media policies.

Illegal Pyramid Scheme Enforcement

On November 1, 2019, the FTC announced an enforcement action against a multi-level-marketer that sells supplements and skin creams through a network of “brand partners,” alleging that it operates an illegal pyramid scheme.

According to the agency, the company and its CEO operates an illegal pyramid scheme by pushing distributors or brand partners to focus on recruiting new distributors who make upfront investments, rather than retail sales to customers, and falsely promises recruits they will achieve financial independence if they join the scheme.  Get rich quick campaigns are a favorite of the FTC.

According to the FTC, the company and its CEO also have misrepresented that brand partners can earn substantial income and achieve financial independence.  The complaint alleges that the defendants promise “lifestyle-changing income” to its recruits, and that social media posts  feature brand partners who were supposedly able to retire from their jobs or earn a six-figure income.  In reality, the FTC alleges, the compensation plan is structured so that, at any particular time, the majority of brand partners will not make substantial income and will instead lose money.

The FTC is seeking to permanently stop the defendants’ deceptive practices and return money to consumers.  If you or your company are the target of an FTC lawsuit or investigation, contact an FTC defense attorney in order to assess strategic defense strategies.

“Participants in legitimate multi-level marketing companies earn money based on actual sales to real customers, rather than recruitment,” said  the Director of the FTC’s Bureau of Consumer Protection.  “But pyramid schemes depend on recruitment of new participants to pay out to existing participants, meaning that the vast majority of participants will ultimately lose money.”

What’s more, the FTC alleges that the defendants deceptively promote supplements as an antidote to concussions and chronic traumatic encephalopathy caused by repetitive brain.  The FTC alleges that such claims are not substantiated, and that the defendants recruited former professional football players to market the products.

The FTC reached a settlement with two related companies that supply the supplements and allegedly assisted with the deceptive promotion of the defendants’ products.

Richard B. Newman is an FTC defense attorney at Hinch Newman LLP. Follow him on Twitter @FTCLawDefense.

Informational purposes only. Not legal advice. May be considered attorney advertising.

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