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The Price Intelligence Sweet Spot: Safe Data Exchange Standards to Keep You in the “Safety Zone”

Bombay Hair tools, Daniel Wellington watches, FabFitFun boxes, HelloFresh meal kits, SugarBearHair vitamins, and more. Spend any time on Instagram and chances are you will encounter influencers promoting these products, occasionally with a #ad or #sponsored hashtag in a caption or within a video, and often with a discount code. Such “influencer marketing” occurs when an individual with a large social media following – typically a reality star, supermodel, or other celebrity – is paid, or given something of value, to promote a product or service on their social media account. Influencer marketing has grown exponentially in recent years. It is currently a multibillion-dollar industry and is projected to generate as much as $10 billion by 2020.1 For context, Kylie Jenner of Kardashian fame makes an estimated $1 million per sponsored Instagram post.2

As influencer marketing has taken over social media and become a permanent part of corporate marketing campaigns, the Federal Trade Commission (FTC) has provided guidelines for how influencers and brands should disclose their partnerships to prevent fraudulent, deceptive, and unfair business practices in violation of Section 5 of the FTC Act (15 U.S.C. § 45). In March 2017, the FTC sent notice letters to more than 90 influencers and brands, informing them of the then-little-known FTC’s Endorsement Guides and calling out specific Instagram posts for failing to meet the regulations.3 The FTC’s Endorsement Guides are straightforward: “When there exists a connection between the endorser and the seller of the advertised product that might materially affect the weight or credibility of the endorsement (i.e., the connection is not reasonably expected by the audience), such connection must be fully disclosed.”4 Among the many influencers put on notice were Scott Disick, Vanessa Hudgens, Lindsay Lohan, Jennifer Lopez, and Emily Ratajkowski.5 The FTC’s notice letter blitz received significant media attention, because it was the first time the agency had reached out directly to educate influencers.6 The agency subsequently sent 21 follow-up letters in September 2017.7 Nevertheless, nearly two years later, the industry remains largely unregulated, with influencers committing legal and potential ethical violations alike. Given the growth of influencer marketing, and heightened regulatory activity, this article explores examples of missteps as well as the best practices for influencers making sponsored posts on Instagram.

Fyre Fraud: the Supermodels and Influencers

Thanks to Netflix and Hulu, most people have now heard of the failed Fyre Festival, the luxury music festival that never was. Fyre Festival was founded by William “Billy” McFarland, CEO of Fyre Media Inc., and rapper Jeffrey Atkins p/k/a Ja Rule.8 The festival was scheduled to take place from April 28–30 and May 5–7, 2017, in the Bahamas, with ticket prices ranging from $1,000 to $250,000.9 But the much-hyped festival was abruptly cancelled the morning of the first (and, as it turned out, final) day, after would-be partygoers had already arrived, due to inadequate infrastructure, poor planning, insufficient funds, and sheer inexperience.10 In the weeks following the festival’s collapse, the U.S. Attorney’s Office and the FBI began investigating the circumstances surrounding the Fyre Festival, and over a dozen civil lawsuits seeking millions in damages were filed against Fyre Media, McFarland, and Ja Rule.11 

The organizers of Fyre Festival, however, were not the only individuals facing liability as a result of the festival. In Chinery et al. v. Fyre Media, Inc. et al., Case No. BC659938, a putative class action filed on May 2, 2017, in Los Angeles Superior Court on behalf of three festival attendees, the complaint named the organizers of the festival as well as 100 unknown “Does” as defendants.12 Such “Does” refer to the supermodels and influencers – such as Hailey Baldwin, Bella Hadid, and Kendall Jenner – who were core to the festival’s marketing campaign and whose purported attendance was credited for the festival being sold-out.13 Kendall Jenner, for example, was reportedly paid $250,000 for a single Instagram post endorsing Fyre Festival.14  The complaint alleged that the aforementioned influencers, among others, promoted the festival on social media in direct violation of the FTC’s Endorsement Guides.15 Specifically, “[s]ocial media ‘influencers’ made no attempt to disclose to consumers that they were being compensated for promoting the Fyre Festival.”16 Indeed, there was next to no use of a #ad or #sponsored hashtag by the influencers promoting the Fyre Festival.17 The Chinery case was subsequently dismissed without prejudice on February 15, 2018, upon the request of plaintiffs’ counsel.18 At this time, no other claim has been made against the influencers. While the FTC has not taken action against individual influencers involved in promoting Fyre Festival, the agency has signaled a growing commitment to enforcing regulations on social media. Kendall Jenner may have escaped liability this time, but she may want to consider adding a #ad or #sponsored hashtag the next time she’s paid $250,000 to make an Instagram post. 

Nevertheless, bankruptcy trustee Gregory Messer, who is overseeing the liquidation of Fyre Festival LLC, was recently granted permission to subpoena Kendall Jenner Inc., DNA Model Management, and IMG Models LLC to investigate payments of $250,000, $299,000, and $1.2 million, respectively, made to the supermodels and influencers in the months leading up to the festival.19 No hashtag would have prevented such an order. Rather, the choice by Kendall Jenner and others to endorse the Fyre Festival resulted in such subpoenas (#DoYourResearch).

Undisclosed Payments: Floyd Mayweather, DJ Khaled, and the SEC

The FTC is not the only federal agency monitoring influencers’ Instagram activity. One of the more prominent legal actions came last year when the SEC announced a settlement with Floyd Mayweather Jr. and Khaled Khaled p/k/a DJ Khaled for “failing to disclose payments they received for promoting investments in Initial Coin Offerings (ICOs).”20 Mayweather and Khaled were charged with promoting Centra Tech Inc.’s cryptocurrency on Instagram, Twitter, and other social media platforms without disclosing that they were paid. Mayweather, for example, posted the following on Instagram with no disclosure of the fact that he had been paid or how much “Champion Predictions: I’m gonna make a $hit t$n of money on August 26th. I’m gonna make a $hit t$n of money on August 2nd on the Stox.com ICO. #TMT #STOX #MAYWEATHER #TBE #CRYPTO #CRYPTOCURRENCY #BLOCKCHAIN #ETHEREUM #BITCOIN.”21 Neither individual admitted wrongdoing, but they agreed to pay a combined $767,500 in disgorgement, penalties, and prejudgment interest.22 Moreover, Mayweather and Khaled agreed not to promote any securities for, respectively, three years and two years. 

This marked the first time that the SEC charged touting violations involving ICOs.23 SEC Enforcement Division Co-Director Stephanie Avakian noted: “With no disclosure about the payments, Mayweather and Khaled’s ICO promotions may have appeared to be unbiased, rather than paid endorsements.”24 Co-Director Steven Peikin further noted: “Social media influencers are often paid promoters, not investment professionals, and the securities they’re touting, regardless of whether they are issued using traditional certificates or on the blockchain, could be frauds.”25 As with the FTC’s Endorsement Guides, Section 17(b) of the Securities Act also requires certain disclosures by influencers. Section 17(b) provides that it shall be unlawful for any person to promote the sale of a security “without fully disclosing the receipt, whether past or prospective, of [any] such consideration [received] and the amount thereof.”26 That is, even if Mayweather had added a #ad or #sponsored hashtag to his post, it would still not comply with the Securities Act. Indeed, an influencer’s post that may be compliant or merely misleading under the Endorsement Guides may be deemed fraudulent under the Securities Act when the endorsement concerns a security. Although proper disclosures by influencers have been an area of concern for the FTC for the past few years, the Mayweather and Khaled settlement indicates that the SEC is just as interested in regulating influencers.

Detox Teas: Brewing Up Controversy

However, is a hashtag or dollar amount enough? As it is, many influencers fail to add the required #ad or #sponsored hashtag in sponsored Instagram posts that promote detox teas. But even when influencers use such hashtags, legal and ethical issues remain. 

Flat Tummy Tea, perhaps one of the most well-known of the detox teas, is nothing more than a combination of senna leaf, peppermint leaf, cassia chamaecrista pods, liquorice root, caraway seed, dandelion root, and rhubarb root.27 It provides laxative-like effects from the senna leaf and dandelion root, which are known natural diuretics.28 And although the company states in its FAQs that its teas are “not some fad weight loss tea that makes crazy weight loss promises,”29 a look at Instagram shows that the company and influencers are sending precisely the opposite message of immediate weight loss. Even the company name, Flat Tummy Co., implies such results. But should influencers be held legally accountable for promoting detox teas and the like to their millions of followers? The FTC certainly has the authority to do so.30 The FTC’s Endorsement Guides provide that an endorsement has to represent the honest experience and opinion of the endorser.31 Thus, if Khloé Kardashian posts: “The flat tummy bundle by @flattummyco is definitely helping to keep my weight from fluctuating,”32 such a representation would need to be accurate pursuant to the FTC’s Endorsement Guides. That is, she would need to have actually taken Flat Tummy products and believed that her weight was not fluctuating as a result. While the FTC could bring Section 5 charges against her and other influencers for not representing their accurate experience and opinion, it has not yet filed any such actions. It may, however, just be a matter of time.

There are ethical considerations as well. While influencers have been promoting detox teas for years, they have recently started facing public criticism for endorsing such products. Jameela Jamil, of The Good Place, has started to take on influencers and the detox tea industry. Jamil commented under one of Khloé Kardashian’s posts promoting Flat Tummy products:

If you’re too irresponsible to: a) own up to the fact that you have a personal trainer, nutritionist, probable chef, and a surgeon to achieve your aesthetic, rather than this laxative product... And b) tell them the side effects of this NON-FDA approved product, that most doctors are saying aren’t healthy […] Then I guess I have to.33 

She more recently commented that “[the Kardashian’s] pockets are lined with the blood and diarrhea of teenage girls….”34 Even fans of The Bachelor franchise have taken to calling out “prominent [Bachelor Nation] members” on The Bachelor subreddit that are “advertising shit / detox / flat tummy teas.”35 Such criticism raises the question: What are influencers’ ethical responsibilities? Should influencers like Khloé Kardashian, with millions of young, impressionable followers, advertise laxative-like detox teas that promote weight loss in an unhealthy way?

Best Practices for Sponsored Instagram Posts

Per the FTC’s Endorsement Guides and other regulations, the following is a non-exhaustive list of factors that influencers must take into consideration in order to avoid claims of fraudulent, deceptive, and unfair business practices. 

First, an influencer must use a #ad or #sponsored hashtag to indicate that a social media post is sponsored. A #ambassador, #sp, #spon, or #partner hashtag or a “thanks [brand]” is not sufficient to indicate to consumers that a post is sponsored.36 

Second, the hashtag must be “easily noticed and understood.” The FTC recommends that such hashtags be placed at the beginning of a post and not combined with other words. That is, the following is not likely to be deemed a sufficient disclosure of an endorsement: “Question – who wants to lose weight in 2019? #310Shake is the perfect junk food replacement. @310Nutrition has awesome New Year’s resolution deals right now & you can use the code “310ERA” to get FREE shipping! #weightloss #diet #310ad #health #fitness #jennacooperfit.”37 While a #ad or #sponsored hashtag placed at the end of a post may be sufficient for disclosure, placing the hashtag after the “more” button to reveal additional text on Instagram or Facebook is not considered “easily noticed and understood” by the FTC.38 

Third, Instagram’s and other social media platforms’ built-in tools for branded content may not provide sufficient disclosure. For example, the subhead tools to label posts and videos on Instagram may not attract consumers’ attention nor provide sufficient brand information.39 

Fourth, an influencer’s post about a product or service the influencer received for free is still covered by the FTC Act and thus the requisite disclosures must still be made (e.g., #ad or #sponsored). 

Fifth, if an influencer is promoting the sale of a security, the influencer must also disclose how much money the influencer received to make such a post.40 

Sixth, an influencer cannot make claims about a product or service that would require proof the advertiser-company does not have. An influencer needs to confirm with companies whether there is substantiation for claims the influencer intends to make concerning products and services that are being endorsed.41 

And seventh, an influencer’s endorsement has to represent the influencer’s honest experience and opinion. Influencers cannot post about their experience with a product or service if they have not tried it, and cannot claim it was effective or great when it was in fact not.42

As influencer marketing continues to grow and expand, the FTC, SEC, and other regulatory agencies may be gearing up to respond to public complaints and take on influencers. Influencers are thus advised to consider the factors listed above and, at a minimum, familiarize themselves with the FTC’s Endorsement Guides and Section 17(b) of the Securities Act.


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