In the latest iteration of the Federal Trade Commission’s (FTC) approach to testimonials and endorsements in the context of online advertising, the Commission alleged that AmeriFreight, a company that arranges the shipment of consumers’ cars through third-party freight carriers and its owner posted customer reviews without disclosing that it had provided a financial incentive for the reviews and for affirmatively representing that the reviews were unbiased.  The consent order underscores that incentivized reviews generally must be accompanied by some form of disclosure of the incentive.  The order also touches on an aspect in the growing jurisprudence of customer reviews, namely the use of contractual provisions between service companies and customers that restrict the nature of reviews published by those customers.  The FTC suggests that any such contractual provision is a material connection that must be disclosed if a resulting review is used in advertising.

When signing up for service, customers of AmeriFreight were offered a $50 discount for providing an online review.  The offer was presented to prospective customers up front in the written sales quote and the order confirmation form.  In fact, the $50 discount was baked into the deal.  The discount was described as a contingent “Instant Discount” that would disappear if the consumer did not leave a review within seven days from delivery of the customer’s vehicle.  One could opt out of the deal by simply indicating a desire to pay the additional $50 and not worry about writing a review.  Thus, writing a review was made part and parcel of the service contract.

It’s not entirely clear that that baked-in deal alone should have been sufficient for the FTC to allege a section 5 violation.  The FTC’s standard for determining whether a disclosure of material connection is required is that omitting the disclosure is deceptive if “there exists a connection between the endorser and the seller of the advertised product that might materially affect the weight or credibility of the endorsement (i.e., the connection is not reasonably expected by the audience)….”  16 C.F.R. § 255.5 (2014).  The FTC in the complaint implicitly alleges that people would not reasonably understand that a service contract might have a provision that contractually obligates the purchaser to leave feedback.  Further, the FTC presumes that finding out that there was a contractual provision requiring feedback – good or bad – would affect the weight one gives to the review.

None of the examples in the FTC’s Guides Concerning the Use of Endorsements and Testimonials contemplates a contractual provision that per se constitutes a “material connection.”  The closest example is that of the “college student” who is provided with free video games by the advertiser, “as it has done in the past,” and then the student is asked by the advertiser to write a review.  In that case, the scenario implies that there is some sort of quid pro quo whereby the student blogger will only continue to receive the free games to review if he is kind in his reviews.  But, in the case of AmeriFreight, there is no such requirement.

Or is there?

The FTC alleged that AmeriFreight presented customers with “Conditions for receiving a discount on reviews.”  In this written document, AmeriFreight stated that potential customers were also eligible for an award of $100 for the “Best Monthly Review Award” for the most “creative ‘Subject Title’” as well as “informative content.”  What was AmeriFreight communicating to those who take advantage of the Instant Discount?  AmeriFreight seemed to be offering a skill contest that invited customers to vie for a monthly prize of $100 based on the advertiser’s determination of the “best” review. AmeriFreight did not tell customers they had to write positive reviews; however, the terms of the “Best Monthly Review Award” contest certainly suggested that a positive review would have a better chance of winning, particularly since AmeriFreight was the judge.  Thus, in the context of this user-generated content (UGC) contest, according to the FTC, the sponsor implicitly promised customers a prize for positive reviews.  That sort of incentive is contemplated in the FTC Endorsement Guides and is clearly something that should have been disclosed along with the reviews.

Thus, the FTC alleged that both the contractual provision that required a customer review in order to save $50 and the chance to win $100 in exchange for the “best” review were violations of section 5.  While the UGC contest entry is probably not that much of a surprise (especially after the Cole Haan closing letter from a year ago), the articulation of a separate “material connection” arising from contractual provisions concerning feedback generally is new and it may be a stretch for the FTC to take the position that such a provision is the same as payment for an endorsement.  One fact that the FTC has chosen not to emphasize in its complaint or press release is that the “Conditions for receiving a discount on reviews” exhorts the customer to write a “fair” review but not necessarily a “positive” review.  This is interesting because a slew of cases across the country have dealt with contractual provisions that seek to impose liquidated damages on customers who write nasty reviews.  The validity of those provisions is generally addressed through common law principles of unconscionability and unenforceability.  In this case, AmeriFreight probably went too far in its instructions as to what was a “fair” review.  As stated in the written materials attached as an exhibit to the FTC complaint, AmeriFreight defined a “fair review”:

A fair review implies that customer will base the review mainly on the services of AmeriFreight acting as an agent on behalf of customer to arrange and assign a carrier to ship the customer’s vehicle. Errors and/or damage caused by carriers should not be considered in the review. Instead a seperate [sic] review can and should be left regarding the carrier’s services in such a case. A fair review does not indicate that a customer is required to leave a positive only review.

The molding of the customer review probably had something to do with the FTC’s discomfort with this practice, notwithstanding the statement that a “fair review” does not necessarily mean a positive one.

In the consent order, AmeriFreight and its principal agreed to the following:

  • To not misrepresent that reviews are unbiased
  • To disclose material connections between endorsers and themselves

Despite the simplicity of the order, the case is important because:

  • It represents an enforcement action that didn’t occur in the Cole Haan situation.  It is now clear that offering a prize in exchange for UGC reviews and then failing to disclose that the reviews resulting from that UGC contest were sponsored or incentivized, will expose you to liability under section 5.
  • It effectively creates a new “example” under the FTC Endorsement Guides.  Where the contractual relationship between an advertiser and a customer includes a provision that ties a monetary benefit (only monetary?) to writing a review, and where the instructions to the customer suggest what kind of review is expected., i.e., “fair”;  then failure to disclose that contractual benefit exposes you to liability under section 5.

There may be ways to contractually limit customers from writing nasty reviews.  But, if you want to go down that road, combining such methods with a customer review generation strategy becomes very tricky and requires some careful review and drafting.