If You Can't Tell Whether Something Is An Ad, It's Now An FTC Violation

In response to PayPerPost’s continuing lack of disclosure policy, I wrote, “if you can’t tell whether something is an ad, that’s deception.” It appears that the Federal Trade Commission agrees (via The Washington Post).

The Federal Trade Commission yesterday said that companies engaging in word-of-mouth marketing, in which people are compensated to promote products to their peers, must disclose those relationships.

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Word-of-mouth advertising is already covered under existing FTC regulations that govern commercial endorsements. What the FTC sought to do yesterday in its staff opinion was to note that such marketing could be deceptive if consumers were more likely to trust the product’s endorser “based on their assumed independence from the marketer.”

“The petition to us did raise a question about compliance with the FTC act,” said Mary K. Engle, FTC associate director for advertising practices. “We wanted to make clear . . . if you’re being paid, you should disclose that.”

The FTC said it would investigate cases where there is a relationship between the endorser of a product and the seller that is not disclosed and could affect the endorsement. The FTC staff said it would go after violators on a case-by-case basis. Consequences could include a cease-and-desist order, fines and civil penalties ranging from thousands of dollars to millions of dollars. Engle said the agency had not brought any cases against word-of-mouth marketers.

Markets may be “conversations,” but if you can’t tell who’s carrying on the conversation, that’s now a finable offense. This is also a bucket of cold water on the use of social networks like MySpace and Facebook to engineer “viral” product recommendations and other such word-of-mouth marketing schemes. Tony Hung has some interesting observations on how this might affect affiliate marketing.

Jason Calacanis’ effort to uncover instances of payola on Digg may have gotten more interesting as those may now be construed as violating the FCT regulations — which raises an interesting question about the liability for word-of-mouth channels like social news sites.

Just when you thought it was safe to “monetize” everything “social”…