FTC Cracks Down on Undisclosed Endorsement Compensation

social media tablets and cell phone

Customer endorsements, critic reviews, and recommendations from the right people can make all the difference in online sales. A recent survey released by social video community company Telly found that 67% (52 million) of 78 million mobile device owners find videos through social recommendations as compared with 41 percent (32 million) who discover them through search engines. This isn’t news to affiliate marketers. While affiliates have long been profiting from the credibility and persuasiveness that positive customer reviews can garner, major change is coming that will affect how customer testimonials and reviews can be used. The FTC has recently cracked down on those that cross ethical lines and disguise paid promotions as organic customer reviews. A recent online advertiser’s settlement to FTC charges of deceptive advertising provides affiliate marketers with some helpful guidance on how to properly implement paid promotional content.

What Happened

On September 2, 2015, the FTC filed a complaint against California-based online advertiser Machinima, Inc. (“Machinima”), alleging that it engaged in deceptive advertising by paying “influencers” to post YouTube videos endorsing Microsoft’s Xbox One system and launch titles (Forza 5, Dead Rising 3, and Ryse: Son of Rome). The complaint alleged that Machinima exceeded the scope of its agreement signed with Microsoft, which described Machinima’s duties as leveraging a group of “influencers” that Microsoft could “incentivize . . . to create content” on YouTube. FTC v. Machinima, Inc., Complaint at 2.

The bulk of Machinima’s trouble came from the language within their YouTube promoter contracts, which, claimed ownership to all intellectual property rights of the videos and required the promoters “to keep confidential at all times in perpetuity all matters relating to” their agreement with Machinima. Id. at 3. Furthermore, the FTC took issue with Machinima’s insistence that their video promoters adhere to the the talking points sent to them, which explicitly included directions to describe what the promoters enjoyed about Microsoft’s products. Id. at 2.

Interestingly, Microsoft did not catch much flak for this incident, as FTC staff were rather quick to send letters to both it and Starcom (another company involved as a payor to Machinima) closing its investigation as to them. According to the letter, while Microsoft and Starcom both were responsible for the promoters’ failure to disclose their connection to the companies, Commission staff considered the fact that these appeared to be isolated incidents that occurred in spite of, and not in the absence of, policies and procedures designed to prevent such lapses. The companies also quickly required Machinima to remedy the situation after learning that Machinima was paying influencers without making the necessary disclosures.

What Affiliate Marketers Can Learn from the Settlement Terms

The settlement terms contained three main directives that affiliate marketers can learn from. As the first part of the settlement, Machinima agreed that it had to amend its policies to provide notice to all promoters of their duty to clearly disclose compensation received for making videos, social media postings, or communications. The company was also required to collect signed acknowledgments from all promoters, stating their intent to comply with such terms.

The second core settlement term mandated that Machinima review all promotional videos prior to compensating the party or posting the content online. Third, Machinima was tasked with reviewing all content “within ninety days of the date of the Influencer’s final compensation, but not before two weeks after that date.” Id. at 5. Taken together, these mandates would pose a heavy administrative burden on any affiliate marketer, as engaging in such policing activities is costly and time-consuming; especially for those working with large groups of promoters.
Affiliate marketers can avoid the headaches that Machinima faces for the next twenty years (the duration of the FTC settlement) by proactively working with counsel to develop air-tight promotional contracts and compensation processes that are up to current standards.