FTC Fines Company For Bogus Online Reviews

The Federal Trade Commission published guidelines back in 2009 making clear that many of the rules that apply to advertising and testimonials in the print world are still going to carry weight in the sometimes confusing and chaotic world of blogs and other new media. Now we’re starting to get a sense of what kind of enforcement might be taking place. A Tennessee company called Legacy Learning Systems, Inc., has been hit with a $250,000 fine and other sanctions for hiring affiliate marketers to sing the praises of their DVD series by writing glowing reviews on websites. But because those affiliates didn’t disclose they were getting paid for the praise they heaped on the educational DVD series, called “Learn and Master Guitar,” the FTC said the ads were deceptive and illegal. The Legacy Learning case is one of a handful of cases that give a sense of what federal enforcement of advertising laws will look like in the Web 2.0 era.

The affiliates of Legacy Learning Systems appear to have received a cut of all sales they directed to the parent company’s website, a similar system to how affiliate sales programs are run for major companies like Amazon (NSDQ: AMZN). According to the FTC, the problem was that Legacy Learning and its owner, Lester Smith, said that the affiliate endorsements “reflected the views of ordinary consumers or ‘independent’ reviewers, without disclosing that the affiliates were paid for every sale they generated. The paid-for reviews led to about $5 million in sales for Legacy Learning, according to the FTC (which makes $250,000 look like a pretty minimal fine.) The legal documents include examples of the offending reviews [PDF].

The FTC’s head of consumer protection, David Vladeck, said that other companies that use affiliates would do well to make sure their advertising isn’t deceptive, adding: “”Advertisers using affiliate marketers to promote their products would be wise to put in place a reasonable monitoring program to verify that those affiliates follow the principles of truth in advertising.”

Fake consumer reviews have likely been around since the beginning of the web, but there have only been a handful of legal actions in this space, and this appears to be the first action by federal authorities that included a fine. As noted by Venkat Balasubramani, a Seattle attorney who follows online marketing cases, the FTC reached a settlement in October with Reverb Communications, a PR firm accused of posting bugs reviews, but that settlement did not include a fine. The agency also issued a warning to Ann Taylor over the company’s gifts to bloggers, but closed the investigation without taking action. Before that, cosmetic surgery company Lifestyle Lift reached a settlement with the New York Attorney General.

Other cases like this may well be in the pipeline. The FTC is barred by law from announcing investigations while they’re underway, and the agency’s investigations tend to be lengthy. For example, the agency just announced its first settlement over online tracking, an area it has been monitoring since 2009-about the same time frame it began taking a closer look at online testimonials.

Correction appended: When originally published, this article incorrectly identified the company that settled with the FTC as “Lending Learning Systems.” The Tennessee-based company’s correct name is Legacy Learning Systems.