When the FTC revised its Endorsement Guides in 2009, it signaled that it would focus more of its efforts on deceptive advertising conveyed through social media and evolving methods of online advertising. The FTC warned advertisers that they risk enforcement action when material connections between an endorser and an advertiser are not disclosed, regardless of where the endorsement appears.
Since then, the FTC has kept that promise, and last week announced that it settled a case against Machinima involving its deployment of "influencers" who were paid to "build an early buzz" surrounding the launch of Microsoft's Xbox One console in late 2013.
Machinima is a producer and distributor of content relating to video games, via one of the top entertainment networks on You Tube. Machinima guaranteed Microsoft's advertising agency Starcom Media Vest Group that it would engage its influencers to post Xbox One game play videos that would generate at least 19 million views on You Tube. Machinima agreed that the videos would not portray the Xbox One or the games in a negative manner. In the first phase of the program, Machinima paid two well-known video bloggers $15,000 and $30,000 to produce videos positively reviewing the Xbox One and the game Ryse to be uploaded to their individual You Tube channels. According to the FTC's complaint, the videos appeared to be independently produced and gave the impression that they reflected the vloggers' personal views. Nowhere did the videos disclose that Machinima paid these influencers to create and upload the videos. As FTC Commissioner Julie Brill put it succinctly – in a tweet – "Endorsement Guides are clear: #vloggers, like old-school advertisers, must disclose when compensated or gifted for reviews."
In the second phase of the influencer program, Machinima recruited members of its influencer network to produce and upload endorsement videos and promised to pay these influencers $1 for every $1,000 views, up to $25,000. Many of these videos also did not disclose that Machinima had offered compensation in exchange for creating and uploading the videos. In total, the influencer videos generated more than 30 million views.
Under the consent order, Machinima agreed that it would not misrepresent in any influencer campaign that the endorser is an independent user of the product or service being promoted, that it would prominently disclose any material connection between the endorser and the advertiser (as it should have been doing all along), and that it would not compensate any influencer who did not make the required disclosures. Machinima is also obligated to establish and implement a system to monitor its influencers' disclosures.
It is important to note that the FTC declined to take action against Microsoft, whose products were being advertised in the videos, and its advertising agency Starcom. This, despite the fact that Microsoft and Starcom reviewed and approved some of the videos and were deemed to bear responsibility for the influencers' failure to disclose. Microsoft and Starcom staved off FTC action because the FTC stated that the failures occurred "in spite of, and not in the absence of, policies and procedures designed to present such lapses." The FTC cited Microsoft's relevant training concerning the Endorsement Guides made available to its employees, vendors, and Starcom. Once Microsoft and Starcom learned that Machinima had paid the influencers and that no disclosure had been made, Microsoft and Starcom immediately took action to require that Machinima insert disclosures. Microsoft also adopted additional safeguards regarding sponsored endorsements, including specifically requiring employees to monitor influencer campaigns conducted by subcontractors in the future.
As the Machinima case shows, all advertisers who market their products and services through endorsements, either directly or indirectly, must have policies and training designed to keep their advertising compliant with the FTC's Endorsement Guides and that any endorsements made on the advertiser's behalf be constantly monitored for compliance.
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