Tech Transactions & Data Privacy 2022 Report

As seen in recent years, social media influencer marketing can lead to a meteoric rise in popularity for a company and its brand. 1 Potential claims under the Lanham Act for unfair competition are outside the scope of this article.

Whether an Instagram post by that famous family in Calabasas or a TikTok video from a micro-influencer, influencer marketing can do wonders to promote the visibility of a brand. As a result, it has grown into nearly a $14 billion industry according to Influencer Marketing Hub.

At its core, influencer marketing involves a company leveraging the popularity of an influencer (i.e., a social media personality with a loyal following) to promote its products or services. In exchange, the company compensates the influencer with payment, free goods, services or other benefits.

Influencer marketing extends well beyond celebrities who have millions of followers. Companies frequently engage ordinary people with a small following in a niche category. The industry generally categorizes influencers into four groups based on the size of their social media following: mega (>1 million followers), macro (100k-1M followers), micro (10k-100k followers) and nano (

While companies (i.e., advertisers) are drawn to influencer marketing for myriad reasons, including its lower cost and perceived ability to attract better customers, those engaged in influencer marketing should be cognizant of the legal and regulatory obligations that govern all parts of the ecosystem, including the advertisers, parties playing an intermediary role (e.g., marketing agencies) and the influencers themselves.

Legal and Regulatory Obligations

Currently, social media influencer marketing is primarily regulated by the Federal Trade Commission (FTC) pursuant to its authority under Section 5(a) of the FTC Act, which prohibits “unfair or deceptive acts or practices in or affecting commerce” (15 U.S.C. Sec. 45(a)(1)). The Food and Drug Administration (FDA) is also involved when marketing involves prescription drugs and certain medical devices (see e.g. 21 CFR 202.1).¹

Federal Trade Commission

In 2009, the FTC published Endorsement Guides (“the Guides”) to provide guidance to advertisers, intermediaries and endorsers (including influencers) regarding Section 5’s application to advertisements relying upon endorsements and/or testimonials and to give illustrations of best practices to facilitate compliance with Section 5’s requirements (see 16 CFR 255). The Guides consider an endorsement to be “any advertising message (including verbal statements, demonstrations, or depictions of the name, signature, likeness or other identifying personal characteristics of an individual or the name or seal of an organization) that consumers are likely to believe reflects the opinions, beliefs, findings, or experiences of a party other than the sponsoring advertiser, even if the views expressed by that party are identical to the sponsoring advertiser.” (16 CFR 255.0(b)). As more fully explained in the Guides, compliance with Section 5 of the FTC Act requires, in part:

• disclosure of a material connection between an influencer and the advertiser that could materially affect the weight or credibility of the endorsement;that endorsements reflect the influencer’s honest opinions and experiences;

• that an advertiser does not distort the influencer’s opinion or experience or present an endorsement out of context;

• that an influencer must have been a bona fide user of a product when the endorsement was given and the advertiser may continue to run an ad using such endorsement only if it has good reason to believe the influencer remains a bona fide user;

• that claims regarding the performance of a product or service have adequate substantiation, which may require competent scientific evidence;

• that claims regarding one or more influencers’ experience with a product or service are representative of what consumers generally can expect if they use such product or service; and

• if an influencer is held out to be an expert, their qualifications must actually give them the expertise they claim to possess and such expertise must have actually been exercised in evaluating the particular features of a product.

In addition to describing the requirements of Section 5 of the FTC Act, the Guides provide numerous examples of compliant and non-compliant behavior. Beyond the Guides, the FTC has brought numerous enforcement actions that further inform the steps that advertisers and influencers should take to avoid legal violations. By way of example, in March 2020, the FTC filed a false advertising lawsuit against Teami – a seller of tea and skincare products – alleging the company used false or unsubstantiated claims (including endorsements from social media influencers) about the efficacy of its products and failed to disclose a material connection with the influencers who provided endorsements. In its complaint, the FTC asserted that Teami’s advertising (including influencers’ social media posts) claimed:

• its tea product treats cancer, decreases migraines and reduces cholesterol; and

• its 30-day detox product results in an average of 5 to 20 pounds of weight loss, and that substantial weight loss could result from only drinking the tea.

The FTC asserted that these and other claims in the advertising were false or misleading or not substantiated when made. The FTC also alleged that Teami failed to adequately disclose that the influencers were paid to endorse the tea products. Teami and the FTC entered into a $15.2 million settlement (all but $1 million was suspended), which included an ongoing obligation to establish a program to monitor influencers and a 10-year compliance reporting obligation.

Notably, advertisers as well as intermediaries (i.e., marketing agencies) and the individual influencers can be liable for violations of Section 5. However, to date, the FTC has focused most of its enforcement actions on the advertisers, not the individual influencers.

In the above Teami case, while not bringing a claim against the influencers the FTC did send them warning letters advising that any endorsement must make obvious the financial or other relationship they have with the brand. In this instance, the FTC alerted the influencers that “clear and conspicuous” disclosure required that their Instagram posts include such disclosure where it can be seen by a consumer without having to click “more” to see the entirety of the post.

Food and Drug Administration

Under the FDA’s regulations, advertisements may not (among other things) overstate a drug’s benefits, downplay risk information or make a claim that is not supported by adequate evidence. Although the FDA has not adopted formal influencer-specific guidelines like the FTC’s Guides, in 2014 the agency prepared a non-binding draft of certain guidance, titled “Internet/Social Media Platforms: Correcting Independent Third-Party Misinformation About Prescription Drugs and Medical Devices” (https://www.fda.gov/regulatory-information/search-fda-guidance-documents/internetsocial-media-platforms-correcting-independent-third-party-misinformation-about-prescription).

Like the FTC, the FDA so far has focused its enforcement actions on advertisers rather than the influencers. In one matter, the FDA sent a warning letter to the maker of Diclegis, a medication used for the treatment of nausea and vomiting during pregnancy. Kim Kardashian partnered with the company to promote the drug and posted favorable comments on Instagram. Although the post included a link to the company’s safety information, the FDA requires risks to be included with the promotion and not via a separate link. The FDA required the company to take remedial steps, which included issuing corrective messages through the same media channels. Following the FDA’s action against the company, Kardashian issued a subsequent Instagram post that included the drug’s risk disclosures.

Other Legal Risks

Influencers and companies that use their endorsements also should take precautions to avoid liability for infringing third-party intellectual property or publicity rights. While a celebrity mega influencer may well have a sophisticated team of advisors helping them craft endorsement messages, oft-used macro, micro and nano influencers may not be familiar with the legal implications of incorporating into social media posts any images, music, video or graphics that do not belong to them.

Similarly, the tenor of social media banter – while possibly a characteristic that endears influencers to their followers – could run afoul of libel laws or implicate individual rights of privacy (e.g., portrayal of someone in a false light).

Risk Mitigation

Influencer Contracts

When engaging an influencer for marketing services, there are several contractual provisions that can help ensure compliance with applicable legal and regulatory obligations and protect against inappropriate conduct. Generally, a company-favorable influencer agreement should include:

• An express obligation that the influencer comply with applicable laws (including, the FTC Guides). With micro and nano influencers, it may be advisable to include more prescriptive compliance requirements (such as the obligation to conspicuously disclose any material connection to the advertiser in clear language within the endorsing post), as these influencers may not be familiar with the applicable requirements.

• A right to audit the influencer posts for compliance and to require the influencer to modify or remove non-compliant posts.

• A morals clause prohibiting the influencer, their affiliates and family members from creating or partaking in content or conduct that may reflect negatively on the advertiser. The agreement should include the right to immediately terminate an influencer’s contract for breach of the morals clause.

• Clear language designating the influencer as an independent contractor, and not an employee or agent of the advertiser or intermediary. Note, however, that merely designating the influencer as an independent contractor will not control if the actual circumstances show that the influencer was treated as an employee. Although there is no bright-line test, the more control a company exerts over an influencer the more likely a court may find that an employment relationship exists. Also note, in some circumstances, advertisers can be liable for acts of influencers even though they operate as independent contractors.

• A clause obligating the influencer to cooperate with the company in connection with any investigation by a regulatory authority. Such clause should include language that obligates the influencer to take remedial actions directed by regulators, such as issuing corrective social media posts.

A word of caution: Exercising a level of oversight with respect to social media content posted by influencers can be a double-edged sword. On one hand, training and monitoring the content posted by an influencer can help keep a marketing campaign in compliance with regulatory and legal obligations. On the other hand, not only can exerting a high degree of control turn an intended independent contractor relationship into one that is deemed an employment relationship, but such control with respect to content can also risk the advertiser losing immunity that might otherwise apply under Section 230 of the Communications Decency Act. Careful analysis should be undertaken with respect to the terms of a social media influencer agreement.

Insurance for Influencer Marketing

Unlike the traditional, “Mad Men-esque”, style of marketing in which companies seek professional advertising firms to create grandiose, elaborate marketing campaigns distributed by the company, the influencer marketing style exists at an informal level with the campaign consisting of the influencer creating and distributing social media posts and brand mentions. Historically, commercial liability policies were created with the traditional style of marketing in mind and protected against losses attributable to a company’s direct marketing campaign. These traditional commercial policies may not cover damages attributable to influencer marketing. Prior to engaging an influencer for marketing services, the company should consider purchasing or upgrading its commercial liability insurance to protect against direct, consequential or incidental damages arising from an influencer marketing campaign. For additional protection, companies can also purchase director and officer liability insurance shielding the company, its directors and officers from third-party claims stemming from an endorsing post or an influencer’s conduct.

Conclusion

There is no question that influencer marketing can benefit brands, engage consumers and drive sales. However, as we have described in this article, requiring and enforcing influencer compliance with legal and regulatory obligations play a critical role in mitigating the risks associated with influencer campaigns and ensuring that the campaign does not backfire by causing liability or negative publicity. Because the influencer landscape is subject to a complex set of regulations, we recommend consulting legal advice prior to engaging influencers to promote a company’s products and services.

FOOTNOTE

1 Potential claims under the Lanham Act for unfair competition are outside the scope of this article.