By Kristin A. Mendoza
For e-commerce businesses, or any business with an online presence, online reviews continue to grow in importance for attracting new customers. An industry study released earlier this year indicated that up to 93% of customers say that online reviews influenced their purchase decisions and that four out of five consumers changed their minds about a recommended purchase after reading negative online reviews. The study also determined that 3.3 is the minimum star rating of a business that a consumer will consider engaging with for a purchase.
This reliance on online reviews has been developing for a long time. A 2016 Harvard Business Review article determined that a one-star decrease in a Yelp rating for a local business could lead to a 5-9% decrease in revenue. More studies are now showing that positive and negative customer reviews even factor into a business’s search engine rankings on Google and other search sites. While taking the advice of a perfect stranger would ordinarily seem suspect, there is no escaping the fact that online customer reviews are viewed as trusted sources by most online purchasers who make buying decisions accordingly.
Recognizing this, savvy online businesses not only pay attention to posted customer reviews but will often times solicit customers to leave reviews on Google, Yelp and other sites. Savvy marketers have created a cottage industry of online marketing tools and connections to personalities to generate consumer reviews and assist their business clients in having as robust an online customer review rating as possible. If the rise of ‘social media influencer’ as a profession and source of income tells us nothing else, it is that online reviews, endorsements and testimonial are of tremendous importance to online businesses and therefore can be worth big money.
It is precisely because of this industry drive for generating more and more online reviews and endorsements, and the growing incidence of fake reviews and misleading endorsements, that in late October 2021, the Federal Trade Commission (FTC) issued a Notice of Penalty Offense to more than 700 U.S. companies including leading retailers and advertisers, such as Amazon and Facebook, to remind those companies of the FTC’s rules and regulations on the use of deceptive endorsements and to warn them of sizeable civil penalties if those rules are broken.
The FTC revived its use of its Penalty Offense Authority, which had largely been dormant since the 1980s, after the U.S. Supreme Court’s April 2021 decision in AMG Capital Management, LLC v. FTC, 141 S.Ct. 1341, which limited the agency’s authority under Section 13(b) of the FTC Act to seek monetary relief for unfair or deceptive conduct. The Penalty Offense Authority, found in Section 5(m)(1)(B) of the FTC Act, allows the Commission to seek civil penalties if it proves that (1) the company knew the conduct was unfair or deceptive in violation of the FTC Act and (2) the Commission had already issued a written decision that such conduct is unfair or deceptive.
The Notice of Penalty Offenses is the tool to meet the first factor for seeking civil penalties under the Penalty Offense Authority as it puts the recipient on notice that certain conduct violates the FTC Act. In this recent round of notices in October, the Notice of Penalty Offenses concerning endorsements lists the following seven endorsement-related acts or practices that have been found through administrative decisions to violate the FTC Act:
- Fake reviews (or claiming directly or by implication that a third party has endorsed a product or service when that is not the case);
- Misrepresenting that an endorsement reflects the experience, views or opinions of users of a product or service;
- Misrepresenting that an endorser is an actual, current, or recent user of the product;
- Continuing to advertise an endorsement unless the advertiser has good reason to believe the endorser continues to subscribe to the views presented in the endorsement;
- Using testimonials to make false or deceptive performance claims – even if the testimonial is genuine;
- Failing to disclose a connection between an endorser and seller of product if that connection might materially affect the weight or credibility of the endorsement or review, and if consumers wouldn’t reasonably expect that connection; and
- Misrepresenting, either explicitly or implicitly, that the experience of an endorser represents the typical or ordinary experience of users of the product.
Applying these practices to today’s world of online review and endorsements, one can quickly identify several areas that require action. The first item is the fake online review. While the canned, bulk reviews from offshore posters are fairly easy to identify and avoid, internal marketing and sales personnel need to be warned against posting favorable early reviews for new products under their own or their friends’ personal user names in an effort to try to prime the pump for generating new customer reviews.
Second, businesses need to be checking the dates of when comments were posted. If the post is several years old, can a business still have a good reason to believe that the reviewer maintains the same views as expressed in the review? A good marketing policy and practice should consider unpublishing or deleting comments that extend beyond a reasonable period of use for a purchased product or service.
Third, for some online retailers, especially in the fashion and beauty space, engagement of social media influencers will need to be more transparent. Sending an item to a social media influencer which they then use and keep without purchase will need disclosure.
Finally, over-the-top reviews by endorsers that set unrealistic expectations about the use or experience with a product will need to be unpublished or at least flagged by the business in some way to allow others to know that the results were not typical.
While the FTC’s warning to 700 businesses seems like a lot, and certainly targets the sources of many online reviews, smaller and mid-sized businesses need to pay attention to the FTC’s new focus on online marketing behaviors and should be updating their business practices accordingly.
Kristin Mendoza is the founder and principal of Abridge Law PLLC, a boutique business law firm serving startups and businesses in New Hampshire and Massachusetts.