Monday, January 04, 2010

The FTC Guidelines Part Two: Everyone's a Criminal

Disclaimer: I believe in openness and honesty. I believe people who are compensated for their speech should make that clear. But I don't believe that we should just blindly accept whatever regulation promises to make the world a better place.

So Last Time we introduced the new FTC guidelines. Today I want to talk a bit about why I care, why bloggers and others online are up in a tizzy, and why you might care.

A super-quick summary of key points:
  • No one wants deceptive advertising except criminal elements
  • The FTC process is intentionally vague and imprecise. Their Guidelines explain why this is.
  • Legitimate businesses want clear, concise rules so they can stay inside the law and get on with their business

And here's the bottom line of what's happening right now.

-- The FTC is trying to eliminate false or misleading statements.

-- Businesses are speculating (sometimes wildly) about how they will be affected by the new regulations.

-- The only thing businesses have to go on is the meager output from the FTC. And every time someone asks a question like "will you be suing bloggers?" the answer is either "That's not what we intended" or "We're just trying to create a level playing field." In other words, they're not answering questions but refuse to clarify because they don't want to paint themselves into a corner.

Last time we looked at an introduction to the 81 pages of guidelines. Now let's look at the rules themselves.

The World According to the FTC

The FTC does not appear to have an understanding of the real world. As I mentioned before, they're primarily going after people who sell Mare Sweat as a sleeping potion and the whole world of Health Miracle scams. But in an attempt to widen their net to include all online activity, advertising, and social networking, they have created some rules that are absurd.

Luckily, you can rest assured that the courts will eventually reign them in because of the overly-broad and overly-vague nature of the guidelines. This is in fact their plan: Claim a vast vague power to regulate arbitrarily and then let a series of lawsuits determine the actual limit of their power. This technique is designed to maximize their reach.

In The World According to the FTC, the key players are:
  • Advertisers. Those who pay (in some manner which is not limited to financial compensation) for their products and services to be promoted.
  • Endorsements or testimonials. Any message "that consumers are likely to believe reflects the opinions, beliefs, findings, or experiences of a party other than the advertiser." (Endorsements and testimonials are identical according to the guidelines.)
  • Endorsers. Individuals or organizations other than the advertiser that make positive statements about the advertiser or its product or service and have received or may receive some form of compensation from the advertiser.
  • Consumers. Not defined but the context makes clear that these are morons who populate the earth and don't have the common sense God gave a goose.
  • Traditional Ads. Print advertising, television, radio, mailings, postcards, etc.
  • New Social Media and Other Things Not Understood But Ripe for Regulation. This includes blogs, responses or comments made on blogs, news groups, forums, webinars, podcasts, "street team" personal interactions between individuals, and a whole world they refer to as "consumer-generated media."

In the FTC's world, here's how things work:

1. Advertiser offers payment. This might be money up front, or referral fee on the back end. Could be free merchandise. Could be free merchandise received at some point in the past (remember that swag you got at SMB Nation?). Could be the prospect of free merchandise in the future. Of course the payment might not be monetary or product related. It could be a favor or hope for a favor.

2. Endorser tells people about the product, service, or company.

3. Consumers believe the endorser for whatever reason (she's famous, she's a friend, she seems believable).

That is an endorsement. The endorser is deemed to be sponsored by the advertiser. The endorsement is subject to regulation. Unless it is obvious that the endorser is being compensated for her statements, she must disclose that there is a financial arrangement in place.

Interestingly, all of this is true even if the advertiser has no control over what the endorser says. It is very common practice for companies to offer 30-day trials or free sample merchandise. The companies assume that getting the product out there will generate a certain buzz. Clearly that's advertising. But if I post something that says "It's horrible and clunky, but better than the alternative" that's an endorsement.

4. All statements made in endorsements must be true, not misleading, represent a typical result, or state very clearly how typical the result is.

When an endorsement exists, the advertiser is responsible for the statements of the endorser.

The endorser is also responsible for his statements.

Example One:
- ABC Company offers a 30 day free trial of product ABC. You sign up, try it, and then blog that you like it. (Or tell someone at a meeting, or Twitter, or Facebook, or post in a forum.) You need to disclose the compensation. ABC Company is legally liable for any claims you make regarding the product. You are legally liable for any claims you make, even if you did not intentionally mislead anyone.

Example Two:
- XYZ Company has a great product. They offer a referral fee if you send business their way. You love the product and tell the world (again, via blog, an in-person meeting, Twitter, Facebook, or post in a forum). You need to disclose the compensation. XYZ Company is legally liable for any claims you make regarding the product. You are legally liable for any claims you make, even if you did not intentionally mislead anyone.

Many, many times in the 81 page guidelines the FTC makes the claim that these rules will have no chilling effect on free speech or the general tone of online social media communications.

That would only be true if everyone completely ignored the guidelines.

Note: This spider web of liability has a chilling effect on free speech and free commerce.

Holding spokespeople responsible for their statements makes some sense when you're talking about weight loss programs and multi-level marketing programs. But the online world of social media is a big, complex set of human interactions. It is absurd to think that any company - even one paying for referrals or giving 30 day free trials - can be held responsible for every fact stated on the internet regarding their product.

In the old guidelines there was a "safe harbor" that said you could simply use a disclaimer that results are not typical. That safe harbor is gone. You need to be much more precise about what is typical or how typical the endorser's experience is.

This is impossible to enforce. But in the meantime it is already having a negative effect on online activity.

At the same time, there are companies pulling all of their endorsement-based advertising in order to vet all statements that are made and clear them with a legal team. I have already been contacted by several companies regarding guidelines about how they want their product portrayed, what I "can" say and can't say.

As a blogger and amateur gadfly, I want to say whatever I want! But when I say good things about a company I don't want to get them in trouble. I'm stuck. The guidelines reiterate: If an endorsement "conveys more than one meaning, only one of which is misleading, a seller is liable for the misleading interpretation even if nonmisleading interpretations are possible."

Without guidelines from every business I discuss, how will I know whether my results are typical, atypical, substantiated, or misleading? The FTC requires a statement about how typical my results are ONLY if the endorsement is misleading. So how do I measure that? The poor company I'm trying to help is legally liable for my stupidity if I make a non-misleading claim that accidently has a misleading interpretation.

Oh but it gets worse.

Not only is the advertiser responsible for every word you utter about their product, they're responsible for messages the consumer takes away from your endorsement. It's one thing if they produce a TV commercial and control the whole process. It's quite another when they're responsible for your words AND how your words are interpreted by someone who stumbled upon them on the Internet.

Again, totally unenforceable. But that doesn't stop companies from spending lots of money trying to figure out how to stay inside the law.

Oh wait there's more.

Advertisers are also responsible for making sure that endorsers "make the necessary disclosures and to monitor the conduct of those endorsers." That means the advertiser has to make sure you only utter truths, are never misleading, and properly disclose the "material connection" with the advertiser.

Oh, and that compensation could be direct or indirect. So if you won a processor from Intel at the SMB Books Booth at SMB Nation, you and Intel a have relationship that affects both of you legally and financially. Good luck.

Meanwhile Back in The Real World

Let's talk just about the SMB community. There are hundreds of blogs that I know about. There are probably thousands. I try (feebly) to follow about three dozen at some level. In addition there are tens of thousands of small business consultants on Twitter, LinkenIn, Facebook, Experts Exchange,, etc., etc., etc.

Then there are hundreds of webinars and podcasts. Some are put on by the vendors themselves. Some are put on by individuals and generally nice guys like me. In all there are thousands of guests who appear on these webinars and podcasts. Then there are hundreds of events -- user groups, special interest groups, national conferences, international conferences, and vendor-sponsored conferences.

In other words, it's a big complicated world out there.

Here's a real-world example of how you become an endorser under the FTC regulations.

Example: Karl and ASCII

I love the ASCII Group ( I save tens of thousands of dollars every year because I'm a member of the ASCII Group. So I tell the world I love the ASCII Group. I think my membership costs me $120/month. More or less.

Somebody reads that, goes to the ASCII web site, and signs up as a member.

Sometime later I get an email that says that this person signed up and said they heard about it from me. As a reward, they give me a free month's membership. Woo-hoo.

Was my statement an endorsement? Probably not because I didn't know there would be a reward. But now I DO know. So that statement is out on a Facebook status from two months ago. If someone reads it, I'm responsible for it.

Of course if I post again, I need to have a disclaimer . . . unless you could reasonably expect that I'm being paid to advertise for ASCII.

Is this my decision? Well no, not really. Who's responsible for my actions? Who's responsible for my claims? Who's responsible for monitoring my behavior? ASCII is.

Okay. Skip ahead.

Now let's say I'm asked to do a webinar with some vendor on some topic. In the middle of the webinar someone mentions ASCII and I say "I love ASCII. We saved more than 75% on our Worker's Comp Insurance with them."

That's an endorsement. Will I be compensated? Probably not. Have I been compensated in the past? Yes. Might I be compensated in the future? Yes. So that's a paid endorsement.

I don't mind disclosing that. But I would say the same thing whether I got a free month or not.

For ASCII it's a different story. They are responsible for every word uttered by every member who participates in every blog, podcast, etc.

BTW: I have no idea what's typical. I only know what happens in my company. I promise I'm not lying. I'd put a disclaimer here, but if you read the example you know the gig.

In a business filled with free months of service, free trials, and referral programs, virtually everyone who reads this is violating the law every time they say something positive about any company, product, or service on the Internet.

Does that seem right to you?

It shouldn't.

Remember, these are the people who brought you the Canned Spam Act. And these stupid regulations will be TWICE as effective as that!

Next Up: Karl's complete disclosure with all the juicy details. Stay tuned.


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  1. It is often said that we get the government we deserve. Well I want to state for the record that I and every other citizen of the United States don't deserve THIS over-reaching form of government! When exactly did we, as a nation, provide a mandate to any branch of the government to assume that we are all scamming each other when we are exercising our free speech rights? As far as I know, we haven't given away that right ... just yet!

    I'm completely in favor of truth in advertising. What I object to is the way government wants to literally assume the worst in us and make us prove that we are innocent. That is the exact opposite of what criminal law presupposes. It stands justice on its head.

    What can we do about this? Perhaps we all need to flood the FTC with requests for advance rulings on everything we wish to write, post or blog about. If all of these requests are sent via good old-fashioned snail mail it will also be a boon to the poor, struggling US Postal Service. Talk about doing one's civic duty. That should be a win-win situation. Two government agencies get to stay busy at one time :>).

    The inherent bureaucratic supposition that we, as consumers, are all idiots in need of ever greater protection from ourselves is highly demeaning. Unfortunately, there is a grain of truth hidden therein. Some of us definitely fall into that category but most of us don't. The parallel here to the so-called health care reform that is being touted is uncanny. Instead of trying to correct the abuses and deal with legitimate complaints and problems, government wants to overhaul the way we communicate and essentially seize control of a significant portion of our free speech rights. Why not deal with real complaints instead of creating a whole new class of criminal behavior and assuming guilt before innocence? Does anyone see a pattern here?

    DISCLOSURE: As far as I know, I have never been compensated by the FTC, either in cash, products or services of any kind, to provide this assessment of its incompetence. My view of its total over-reaching as a government agency is strictly my personal opinion and I encourage everyone to comply with every lawful directive ever uttered by them. In this case, show them as much love as possible and be sure to request advanced rulings so that they can't say that you didn't do everything possible to satisfy the rigid standards of the truth squad, uh, Federal Trade Commission :>).

    And I hope everyone can find the elements of humor hidden in this post. That's another disclosure, by the way, just in case you were not smart enough to figure it out on your own :>).

  2. A friend emailed me this link (I assume he wants annonymity since he didn't post it here):

    Totally unrelated to me or this post. Show the absurdity of these rules in other arenas.


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