Endorsements, including testimonials and product reviews, are valuable marketing tools. This is true especially within the cannabis industry due to state and federal laws that prohibit cannabis companies from utilizing traditional marketing methods and channels.
However, cannabis companies should be aware that recent federal enforcement action warns that a prosecutorial “sweep” of illegal endorsements is on the horizon. Read on to learn what the law requires, the crackdown federal authorities are planning, and how to avoid federal prosecution.
I. What Action did the FTC Take?
Less than two weeks ago, the Federal Trade Commission (FTC) issued more than 700 warning letters to companies utilizing illegal “endorsements” – including both testimonials and product reviews – in the marketing and advertising of their products. This enforcement action explicitly signals that the FTC is preparing for a prosecutorial “sweep” of companies improperly employing endorsements, particularly on social media.
II. When are Statements “Endorsements” Under Federal Law?
The threshold inquiry is to determine whether federal advertising laws and regulations applicable to “endorsements” apply to particular advertising, marketing, and branding activities.
If statements made by a third party are properly considered endorsements, the advertiser (read: the cannabis manufacturer, distributor, seller, etc.) is subject to liability for the content of, or omission of required information from, the advertising message. The reason federal law imposes this liability on the company– and not the speaker themselves– is because the FTC has determined that advertisers who employ these means of marketing have assumed the risk that an endorser may engage in law-violative behavior, such as failing to disclose a material connection or misrepresenting a product.
Endorsements are defined under federal law as “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 […].” (See, 16 CFR § 255.0)
III. General Advertising Requirements Applicable to Endorsements
All companies which utilize endorsements, as defined above, are liable for an endorser’s statements (or omissions). While the FTC regulates many aspects of this commercial speech, three of the predominant areas of regulation affecting cannabis businesses include misleading advertising, substantiation, and claims and disclosures. Each is discussed briefly below:
(a) Advertising must be truthful and not misleading
Endorsements must be honest and true; plainly fake reviews are prohibited under federal law. If a statement is not the honest belief or experience of the customer, companies should not utilize that customer review.
In addition to plainly fake reviews, advertising is also considered deceptive if it contains a message or omits information that is likely to a) mislead consumers who are acting reasonably under the circumstances and b) is material or important to a consumer’s decision to buy or use the product.
Not only can advertising be misleading because of the inclusion of a particular message, but advertising can also be misleading because of the omission of particular language. For example, a company’s failure to include the disclosures and notices required by federal law in connection with the making of certain advertising statements (such as health claims) will render advertising misleading in violation of federal law. This law equally applies when it is the third-party endorser who makes the misleading statement or omits required language, not the advertiser or brand directly.
(b) Substantiation: Advertisers must have evidence to back up their claims
Before disseminating an advertisement, advertisers must have reasonable support for all express and implied objective claims that the ad conveys to consumers. If an advertiser cannot accurately state what consumers can generally expect from its product, the FTC recommends that the brand or product manufacturer could conduct research into scientific and empirical testing publications to track and gather potential substantiation evidence or utilize other methods for determining a basis of typicality.
If endorsements reflect an experience that cannot be substantiated to the satisfaction of the federal authorities (such as those related to marijuana, CBD, and other cannabinoids and derivatives), a disclaimer of typicality must be used. Specific language is required to be used, and failure to utilize these disclosures will render the advertisement misleading and in violation of federal law. Cannabis businesses are well-advised to contact an attorney experienced in these nuanced areas of federal law as soon as possible to conduct an audit of their advertising and marketing messages and, where necessary, develop and assist in remedying any potential violations of federal law.
(c) Claims and Disclosures
In order to comply with the claims and disclosure requirements under federal law, including those imposed by the U.S. Food and Drug Administration, all advertisers must first identify the message(s) – including but not limited to express and implied claims, affiliation of speaker and sponsor, and more – which their ads convey to consumers. In doing so, companies should not focus solely on phrases or statements but must consider the advertisement as a whole, including the text, product name, visual depictions, and more.
It is the advertisers’ responsibility to then determine which aspects of their advertising messaging require qualification (such as typicality disclosures, explained in the previous section) and what information must be provided in the relevant disclosure(s). Federal law also governs the presentation of these disclosures, and failure to properly display the disclosure(s) will cause the advertisement to be in violation of federal law.
IV. What if the Endorsements Are Made by a Third Party I Don’t Know?
Federal law regarding endorsements can apply to statements made by third parties even if you never asked the third party to review your product.
The recent FTC action indicates that it expects companies to police their own social media presence, including testimonials, product reviews, and other endorsements – including those being made by unknown third parties. The FTC explains its motivation for this recent action: “The rise of social media has blurred the line between authentic content and advertising, leading to an explosion in deceptive endorsements across the marketplace.” Thus, it is important for brands to understand the far-reaching impacts of the FTC enforcement action and begin developing internal procedures to ensure compliance in this area of law.
V. How do I Comply With the Federal Laws that Regulate Endorsements
The first steps that all companies, bloggers, or individuals who post about brands or products on social media would be well-advised to immediately take are:
(a) review the existing advertising messages that currently exist online, including on social media, regarding your brand and products;
(b) identify the potential for liability with respect to the same;
(c) employ strategies to properly qualify or, where necessary, remove the advertising message before you receive a federal enforcement letter;
(d) review your company’s business and marketing plans and operations that utilize endorsements; and
(e) develop and employ strategies to ensure compliance with this area of federal law in all advertising messaging moving forward.
VI. “Welcome to Cannabis, Now Lawyer Up”
The FTC is primed to prosecute these violations of federal law. Further, the warning letters indicate the federal agency’s intent to impose civil penalties in the amount of nearly $45,000.00 for each violation, in addition to the other remedies available to it as a federal enforcement agency.
Do not let your company suffer a federal prosecution and the resulting (and completely avoidable, with proper legal advice) penalties.