Photo of Lauren B. Aronson

This article originally appeared in Bloomberg Law Big Law Business.

Pop-star Selena Gomez is an international celebrity with 144 million followers on Instagram. That’s second only to soccer icon Cristiano Ronaldo who trumps her by 500 followers.

So you might think companies would jump at the opportunity to enlist them as brand ambassadors. But companies are increasingly turning away from deals with mega stars like Gomez and Ronaldo and tapping lesser known social media personalities to represent their products. Too often, though, the liabilities involved in working with so-called micro-influencers are overlooked.

Companies can do more to protect themselves by simply using the same high level of caution with non-celebrity influencers as is used when entering arrangements with household names.

Influencers are becoming sought-after for two primary reasons:

  • they are considered more cost effective, and
  • their endorsements are often seen as being more authentic and better able to reach a highly engaged audience.

In fact, it is estimated that nearly 80 percent of professionals in fashion, luxury, and cosmetic industries in the U.S. and Europe implemented influencer campaigns last year.

However, the line between the traditional celebrity and the influencer is not as clear-cut as it once was. While influencer marketing continues to be far cheaper and can be more effective in reaching potential buyers, many influencers have shifted from casually filming videos in their bedrooms to becoming highly recognizable household names. Influencers are increasingly transforming this celebrity to build their own brands. With this transformation comes more risk.

While many companies have rapidly embraced influencer marketing, their legal strategies haven’t always kept pace. Missteps around content ownership and the lack of cohesive policies around disclosure requirements have led to costly and drawn out legal battles.

Accordingly, we suggest treating influencers like more conventional celebrities, specifically by focusing on the following.

1. Social Media Content Ownership

Companies should ensure that influencers are aware that sharing any image containing copyright-protected works might be infringing on third-party intellectual property and privacy rights and establish indemnity clauses and/or holdbacks for infringement by an influencer in any contract.

Further, while it is standard for influencers to own the content in social media posts, the brand should be sure both to retain the right to re-use it for future campaigns or advertisements and the ability to require the influencer to take down a post.

2. Design Collaborations

As influencers grow in popularity, many have established or are seeking to establish their own “brand” identity. Deals with influencers now go beyond mere endorsements, as many influencers aspire to launch their own product lines. This creates a gray area: does that, let’s say, pocket design belong to the company or is it emblematic of the influencer’s own brand?

In 2015, when Becca Cosmetics entered into a partnership with makeup artist and influencer Jaclyn Hill, it appears the company failed to establish ownership of the product packaging design of their wildly popular “Champagne Pop” collection. When another cosmetics company called Morphe later collaborated with Hill to launch a new “Vault” eyeshadow pallet with an arguably similar packaging design, Becca sent Morphe a cease and desist letter, prompting Morphe to file a lawsuit, leaving the two makeup companies embroiled in a legal battle. (See Morphe LLC v. Becca Inc., No. 2:18-cv-06667, C.D. Cal.)

Where both company and influencer may be competing for brand recognition, agreements with influencers should clearly specify which party owns the various elements relevant to the design collaboration and require an assignment of rights where necessary.

3. Risk of Reputational Harm

Brands may also want to make sure contracts with influencers protect against the reputational harm that can be associated with an influencer’s behavior, and not just focus on number of followers.

Influencers, like conventional celebrities, can become embroiled in scandals which can embarrass companies they work closely with. For example, beauty guru Laura Lee’s eponymous makeup line was recently dropped by Ulta Beauty after fans of rival beauty guru Jeffree Star uncovered racially charged tweets Laura sent in 2012.

To protect against these potential reputational risks, Companies should add mortality and non-disparagement clauses to the influencer’s contract, allowing them to terminate the relationship and/or recover damages in the event the influencer does anything that would reflect unfavorably on the brand.

4. Disclosure Requirements

In April 2017, the FTC sent letters to 90 influencers and marketers reminding them of their obligation to clearly disclose their relationships with brands when endorsing them on social media. The issue here is not always whether companies know that influencer disclosure requirements exist, but rather whether brands monitor their influencers’ compliance with these requirements.

Indeed, lack of compliance is so widespread that the FTC cracked down on companies and influencers and released updated FAQs clarifying how and when to comply with the 2008 Endorsement and Testimonial Guides.

While companies can’t shift the legal burden of disclosure to an influencer, they can protect themselves by crafting proactive compliancy policies, training influencers in the best practices for disclosure, and including a clear, simple, and specific disclosure mandate in the influencer’s contract. Companies must also actively monitor the influencer’s compliance.

Final Thoughts

As marketers have enthusiastically seized on influencer marketing as a relatively inexpensive and powerful way to reach their target consumers, the influencer economy has evolved. Influencers have increasingly transformed themselves into quasi-celebrities, building their own brands as they amass larger followings and command higher fees and more lucrative brand deals.

As the line between traditional celebrity and the influencer blurs, risk to brands engaged in influencer marketing increases. Legal departments can no longer engage with influencers as unsophisticated amateurs and should rethink the way they enter into agreements, incorporating some of the same protections they would when engaging with traditional celebrities.

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The FTC’s Consumer Protection Division has long targeted advertisements for “work-at-home,” business and investment opportunities that exaggerate the earning potential and downplay risks. Recently, the FTC announced that it filed a complaint against four individuals doing business as “Bitcoin Funding Team” in the U.S. District Court for the Southern District of Florida for deceptively advertising a cryptocurrency scheme that promised consumers that they could turn a cryptocurrency payment of approximately $100 into $80,000 in monthly income. Specifically, the complaint alleges two counts: 1) that Defendants’ representations that the programs are structured to operate as bona fide money-making opportunities are false or misleading and violate Section 5(a) of the FTC Act, and 2) that Defendants’ representations that consumers who participate in the programs are likely to earn substantial income are also false or misleading, violating Section 5(a). On March 16th, the Commission secured a temporary restraining order against, and froze the assets of pending trial, the defendants it alleges who were operating and promoting cryptocurrency pyramid schemes.

Continue Reading FTC Targets Cryptocurrency Pyramid Schemes

In the largest-ever penalty issued against an ad agency, the Federal Trade Commission announced that Marketing Architects, Inc. (MAI) agreed to pay $2 million dollars to settle a false advertising complaint filed with the FTC and the State of Maine Attorney General’s Office.

The ad agency came to the FTC’s attention after the Commission settled with Direct Alternatives (DA) and Sensa Products, LLC  for more than $16 million and more than $26 million respectively to resolve claims that the companies engaged in the false and deceptive advertising, marketing and sale of weight loss products.  According to the Complaint, MAI created direct response radio ads for Sensa and DA as well as MI6 Holdings, LLC (MI6) and other unidentified clients with toll free numbers inviting consumers to call and purchase weight loss. In addition, for some clients, including DA, MAI created and implemented scripts for its Interactive Voice Response (IVR) system, providing testing, analysis and strategic advice regarding the performance of its IVR scripts and ads as well as collecting payment information.

Continue Reading Holding Agencies Accountable: Ad Agency Agrees to Pay Largest Penalty Ever for False Advertising

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On January 8, 2018, the FTC announced settlement of its first connected toy case with VTech Electronics Ltd (“VTech”) for violating the Children’s Online Privacy Protection Act (COPPA) Rules by failing to properly collect and protect personal information about and from children and violating the FTC Act by misrepresenting its security practices. In addition to paying a $650,000 civil penalty, VTech agreed to comply with COPPA, implement and maintain a comprehensive information security program with regular third-party security audits for the next twenty years, and not misrepresent its privacy and data security practices.

The settlement comes more than two years after VTech learned that a hacker had gained remote access to databases for its interactive electronic learning products (ELPs), including for its Kid Connect chat application, in what was described at the time as the largest known hack targeting children. According to the FTC’s Complaint, the hacker accessed VTech’s databases “by exploiting commonly known and reasonably foreseeable vulnerabilities,” and VTech was unaware of the intrusion until it was informed by a reporter.

Continue Reading FTC Settles First Connected Toy Case With VTech After Massive Data Breach

Online dating company eHarmony will pay more than $2 million to settle a consumer protection lawsuit brought by four California counties and the city of Santa Monica. In total, the company will pay up to $1 million to California customers who enrolled in eHarmony’s automatic subscription program between March 10, 2012 and December 13, 2016 and an additional $1.28 million civil penalty to the California communities that brought the lawsuit.

Pursuant to the Settlement Order, eHarmony is required to make several improvements to its business practices, including:

  • Disclosing the terms of the automatic renewal offer in a clear and conspicuous manner before the subscription is fulfilled.
  • Only charging a consumer for an automatic renewal service once obtaining affirmative consent to the automatic renewal term offers. Specifically, consent must be “obtained by an express act by the consumer through a separate check-box, signature, or other substantially similar mechanism.” The automatic renewal terms must be conveyed in a clear and conspicuous disclosure immediately above the check box and the disclosure cannot include any other information.
  • Sending an acknowledgement with a clear and conspicuous disclosure of the automatic renewal terms. The subject line must identify the message as confirmation of the transaction.
  • Providing a toll free number or e-mail address or other easy cancelation mechanism. Additionally, eHarmony must provide written notice of cancellation by email. All cancelations must be effective within one business day.

The eHarmony settlement follows on the heels of several settlements with companies promoting subscription serves, including the FTC’s settlement with AdoreMe last month as well as recent updates to the California Automatic Renewal Law and ongoing enforcement in that state. Advertisers offering subscriptions that automatically renew should review their advertising and cancelation procedures. Not only should offer terms be clearly and conspicuously communicated to consumers before they are charged, the terms of recent settlements suggest that advertisers should require consumers click a separate check box to obtain express consent and offer an easy, online cancelation mechanism.

For additional recommendations, please see our prior blog post on auto-renewals.

UPDATE

Crowell & Moring received a statement on the settlement from eHarmony:

“Since eharmony’s inception, we have endeavored to give appropriate contract notices and disclosures to our subscribers. We remain as committed today as we were 17 years ago to providing a high-quality user experience. Without any admission, we have cooperated with the government, which has previously launched similar investigations against a long list of eCommerce companies, and have chosen to settle to avoid the distraction and expense of protracted litigation. In collaboration with the government, eHarmony has implemented a new industry standard when disclosing terms in order to make the user experience even better. With the settlement now behind us, we look forward to continuing the important work of helping singles find enduring love.” – Ronald N. Sarian, Vice President & General Counsel, eharmony

 

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Subscription services for everything from food delivery to beauty products to exercise gear have grown exponentially in the past five years. Such services require consumers to enroll in a program to purchase goods on a consistent basis. They typically automatically renew, often on a monthly basis, and require customers wishing to cancel to take affirmative steps to avoid being charged. Marketers know that consumers often fail to take steps to cancel timely, which only benefits the marketers’ bottom lines.

With the explosion of subscription business models, consumer complaints have skyrocketed as well, with consumers complaining that the terms of the negative option offer – an offer that interprets a consumer’s failure to take an affirmative action as an agreement to be charged – were not clearly explained. For example, consumers have complained that were not told they would be charged each month, were not adequately reminded of how to “skip” being charged each month, that prepaid credits expire without notice, and that it can be difficult to cancel. Thus, subscription businesses have faced increasing regulatory scrutiny and all advertisers that offer products or services that automatically renew should pay close attention.

AdoreMe Settlement

AdoreMe, a subscription lingerie service launched as a rival to Victoria’s Secret, recently agreed to pay $1.38 million to settle the Federal Trade Commission’s charges that the company did not clearly communicate to consumers the terms of its “VIP Membership” program which automatically billed consumers if they failed to “skip” a month within a 5-day window, falsely claimed that store credits could be used “any time,” and made it difficult for subscribers to cancel their memberships in violation of Section 5(a) of the FTC Act as well as the Restore Online Shoppers’ Confidence Act.

Continue Reading ROSCA Enforcement Ahead: FTC Settles with AdoreMe for $1.38 Million

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The FTC is closely watching influencers to remind them to clearly disclose material connections to brands. In June 2017, the Commission settled with a trampoline manufacturer for relying on misleading endorsements and, in March, the Commission sent more than 90 letters to influencers and brands to remind them to clearly disclose relationships. The FTC has now made clear that it will target influencers who fail to comply with its Endorsement Guides. While the FTC had previously settled claims against various advertising networks, advertising agencies, and brands for failing to comply with the Endorsement Guides, the FTC has announced that it has settled its first ever enforcement action against social media influencers. In the same press release, the FTC simultaneously stated that it sent follow-up warning letters to 21 influencers that first received letters in March.

The message is clear: influencers that fail to disclose a material connection to brands do so at their own peril—and brands are responsible for implementing clear measures to make sure that the influencers they work with comply with disclosure requirements. Furthermore, the FTC has also made clear that many commonly used disclosure methods and practices are inadequate in its newly revised Endorsement Guides FAQs. Brands and the influencers they work with should take note of these recommendations and ensure that their disclosure practices comply.

Continue Reading FTC Announces First Enforcement Action Against Social Media Influencers and Updates FAQs Rejecting Common Disclosure Practices

On August 1, 2017, the Advertising Self-Regulatory Council (ASRC) and Council of Better Business Bureaus (CBBB) announced that Laura Brett has been appointed as director of the National Advertising Division (NAD). Ms. Brett has served as Acting Director of NAD since Andrea Levine, former Director of NAD, retired after 20 years as NAD Director. She joined NAD as a Staff Attorney in 2012 and was later an Assistant Director. Prior to joining NAD, Ms. Brett was a litigator at Willkie Farr & Gallagher and a solo practitioner. She was also a member of the Rye City Council and Deputy Mayor of Rye, NY.

At NAD, Ms. Brett has authored decisions in numerous cases challenging the adequacy of disclosures in native advertising formats, sponsored content, and other online and social media advertising issue. Before the FTC adopted its long-awaited native advertising guidance, Ms. Brett used the NAD’s self-monitoring authority to fill a regulatory gap and bring several challenges of native advertising. In her decisions, she pushed for improved disclosures and provided detailed guidance for companies engaged in novel forms of online advertising. She has not shied away from using NAD’ s authority to challenge the advertising practices of well-known tastemakers with large social media followings, challenging the Kardashians and Kate Hudson this year.

Continue Reading Laura Brett Named New NAD Director

FTC Moves Ahead Enforcing Endorsement Cases

A few months ago, acting Federal Trade Commission Chairwoman Olhausen stated that the FTC should shift focus to cases of actual harm, leaving many to wonder whether FTC would still actively enforce endorsement cases. However, in April, the FTC sent out ninety letters to brand influencers and marketers reminding those influencers and marketers to clearly and conspicuously disclose their relationship to brands. On the heels of these April letters, the FTC filed a complaint and ultimately reached entered a proposed settlement order (“order”) with two brothers that relied on deceptive endorsements and misleading review websites to sell Infinity and Olympus Pro brand trampolines.

Continue Reading Trampoline Manufacturer Can’t Bounce Away From FTC Trouble

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There’s a new tool for deceptive pricing class actions challenging “up to __%” savings promotional messaging:  A new lawsuit filed in New Jersey alleges that the clothing retailer’s “up to _% off” promotional messaging violates New Jersey’s consumer protection laws. The plaintiff sued Jos. A. Bank under the New Jersey Truth in Consumer Contract, Warranty and Notice Act (TCCWNA), N.J. Stat. § 56:12-15. This once-forgotten statute has recently been in the limelight, invoked in numerous class actions due to its generous civil penalties provision providing “not less than $100.00 or for actual damages, or both” at the choice of the consumer, plus attorney’s fees. See N.J. Stat § 56:12-17.

Continue Reading A New Twist on a Familiar Theme: NJ Lawsuit Targets Retailer’s Savings Claims, Seeking Damages Under Once Obscure Statute