by Benjamin Stein

Last week, New York’s Attorney General’s Office announced that it had entered into settlements with nineteen companies, totaling more than $350,000 in fines, based on those companies’ involvement in producing fake online reviews for businesses around the state.  Though the conduct at issue in this case appears particularly egregious, the settlements serve as an important reminder to mainstream businesses of the need to disclose payments and other material connections between the business and any party reviewing its products or services. The settlements were the result of a year-long investigation by the AG into “astroturfing” online.  Astroturfing is the practice of drafting and disseminating biased or deceptive reviews in a manner that makes them appear to be the disinterested opinions of neutral third parties.

Posing as a Brooklyn yogurt shop, the AG conducted an undercover investigation into search-engine-optimization (“SEO”) companies that offered to write or procure fake reviews for their clients.  These SEO companies devised complex regimes to avoid having their fraudulent reviews detected, including spoofing the IP addresses from which reviews are posted and establishing hundreds of dummy accounts on consumer-review sites.  They also employed a network of overseas reviewers and posted less-than-surreptitious ads on public job-solicitation boards seeking additional freelance reviewers. The AG’s investigation also targeted small businesses in New York that used these SEO companies, their own employees or friends, or freelancers to generate fake reviews online.

In exchange for their positive reviews, reviewers would receive payments, gift certificates, or free or discounted goods/services from the reviewed merchants.  However, to further the ruse, these payments and incentives were not disclosed in the reviews.

The AG claimed that this conduct violates state laws on false advertising and deceptive business practices (N.Y. Gen. Bus. Laws §§ 349 & 350), among others, and secured Assurances of Discontinuance from nineteen companies in total, with fines ranging from $2,500 to $100,000. The New York Attorney General’s press release on this action can be found here.

Though the FTC was not involved in this action, the conduct at issue here would likely have been considered a violation of § 5 of the FTC Act, which prohibits unfair or deceptive practices.  Indeed, the FTC’s Guides Concerning the Use of Endorsements and Testimonials in Advertising (“Endorsement Guides”) speak directly to the issues addressed by the New York AG in these settlements.  Among other requirements, the Endorsement Guides require that an endorsement reflect the honest opinion and experience of the endorser. They also require that any material connection between the endorser and the endorsed party be disclosed where such connection is not reasonably expected by the audience.  For example, where a celebrity endorses a product in a traditional advertisement, no disclosure is necessary as the audience reasonably presumes that the celebrity is being compensated to appear. Conversely, if an influential blogger receives a free product from its manufacturer and posts a review of that product, the blogger must disclose that he or she received the item for free since the connection would not otherwise be obvious to the audience.

Here, the crux of the complaint by the New York AG was not the failure to disclose a material connection, but the fact that the reviews themselves were fake.  However, even if the reviews had been a genuine reflection of the respective reviewer’s personal experience, they would have nonetheless have been problematic under the Endorsement Guides.  Because members of the public reasonably presume that reviewers on a consumer review site are not being compensated by the reviewed business, failure to disclose the compensation provided to these reviewers would contradict the FTC’s guidance and therefore potentially be considered a violation of § 5 of the FTC Act.

(For further coverage by ILG on the requirements of the Endorsement Guides, please click here.)

Companies that make an effort to better their reputation online – or that contract third parties to do the same – need to make sure that they and their service providers are doing so in accordance with applicable law and a good place to start is with a review of the FTC’s Endorsement Guides.