U.S. digital advertising revenues rose 21 percent in 2017 to a record $88 billion and social media advertising revenues—including Facebook, Twitter, Instagram and YouTube—exploded over the same period, increasing 36 percent to $22.2 billion, according to the most recent report from the Interactive Advertising Bureau (IAB).

This is a heady time for advertisers working to use social media to win new brand loyalists, offering significant rewards for companies able to successfully navigate legal issues that arise when using new digital advertising formats. But it is also a frustrating time for advertisers whose competitors skirt the rules of truthful and accurate advertising in an attempt to win the advantage.

NAD's Efforts to Promote Digital Advertising Transparency

Generally, advertisers have an obligation to market their products in a truthful and non-misleading manner pursuant to §5 of the Federal Trade Commission (FTC) Act, which prohibits unfair or deceptive advertising. For nearly 50 years, the National Advertising Division (NAD), an investigative unit of the advertising industry's system of self-regulation, has evaluated advertising claims for truth and accuracy to protect consumers and promote fair competition. NAD and its body of case decisions apply time-honored standards to new advertising challenges, providing guidance for social media campaigns, as well as a dispute resolution forum for those seeking to uphold truth-in-advertising standards in digital advertising.

Influencer Marketing

Both the FTC and NAD require that connections between advertisers and endorsers be disclosed that materially impact the weight or credibility of the endorsement. NAD's decisions provide specific, context-based guidance on the application of this standard to influencer marketing campaigns.

For example, NAD reviewed Instagram posts by Kourtney Kardashian, Khloe Kardashian and Kylie Jenner endorsing the FitTea beverage. The Kardashians posted selfies describing FitTea as their “favorite” and a staple of their daily routine. However, the advertiser did not disclose that the Kardashians were paid to endorse the product. NAD found that consumers would likely weigh the Kardashians' opinion differently if they knew the Instagram posts represented paid endorsements. In connection with NAD's inquiry, FitTea voluntarily decided to disclose the material connections between FitTea and its endorsers.

Shell Oil Company recently faced a challenge from its competitor, BP Corporation North America, for using an influencer to promote Shell V-Power NiTRO+ Premium gasoline. The video, accessible on YouTube and on Shell's website, featured the host of the “Engineering Explained” YouTube channel, Jason Fenske, walking viewers through Shell's performance claims for its gasoline and the underlying testing. Adjacent to the video link on its website, Shell stated that it “hosted Jason Fenske at its labs in Houston, at race related events and at pre-launch events for Shell V-Power NiTRO+ Premium Gasoline.” Shell explained that it invited Mr. Fenske to sponsored events and covered his travel costs.

NAD determined the financial connection between Shell and Mr. Fenske required disclosure, as it could impact the weight consumers gave Mr. Fenske's opinion. Accordingly, the “hosted” language was not sufficiently transparent because consumers might understand that Shell invited Mr. Fenske for a demonstration or information session—not the all-expense paid trip Mr. Fenske received. The video itself also failed to disclose the material connection between Mr. Fenske and Shell. On appeal, NAD's appellate body, the National Advertising Review Board (NARB), ultimately recommended Shell disclose all material connections and post them directly in the video.

Native Advertising and Content Marketing

When advertisements convey to consumers that their content is independent, impartial or not from the sponsoring advertiser, the FTC and NAD typically find such advertising to be misleading. NAD has reviewed a number of cases challenging deceptively formatted ads.

In a case concerning digital projection and light technology, a competitor, HP, contested Epson America's use of two websites, 3lcd.com and colorlightoutput.com. While Epson included a small disclosure at the bottom of the websites revealing that it had created the content, the disclosures were not sufficiently prominent to notify consumers that the websites were Epson's native advertising promoting its digital projector technology. As a result, NAD recommended that Epson clearly and conspicuously disclose its connection to the websites at the top of the landing pages, as well as on each page within the websites, thus making the disclosures easy to notice, read and understand.

NAD also considered a competitor challenge alleging that JumpSport, a trampoline manufacturer, owned and operated the website www.TrampolineSafety.com, which reviewed and ranked trampolines for performance and safety. Perhaps unsurprisingly, the top ranked trampolines on the website were all manufactured by JumpSport. NAD determined that the website was misleading because consumers had no way of knowing it was advertising and recommended the website's format be discontinued.

While NAD recommended changes to these website formats, a federal district court denied similar relief in a false advertising case brought under §43(a) of the Lanham Act. Casper, a popular mattress company, brought suit against Mattress Nerd, an online mattress review site, asserting that the site “misleads consumers to believe that The Mattress Nerd reviews are independent and unbiased” when in fact, the site's creator collects sales commissions through affiliate marketing relationships with many of Casper's competitors. The court dismissed the claim stating that “the Lanham Act does not impose an affirmative duty of disclosure” and cited precedent that “a failure to inform consumers of something, even something that they should know, is not a per se misrepresentation actionable under [] the Lanham Act.” Though the Lanham Act's purpose is to address competitive harms and may not require affirmative disclosures, §5 of the FTC Act aims to protect consumers and FTC guidance imposes an affirmative duty to disclose material connections that consumers would not expect. Notably, NAD's self-regulatory forum considers both consumer and competitive harms, and, as a result, its door stands open for similarly situated cases to be heard and resolved.

Consumer Reviews on Brand Websites

Consumers increasingly rely on product reviews to make purchasing decisions. NAD looked at the advertising for VitaPulse, a dietary supplement, which claimed to receive an average customer star rating of 4.5 out of 5 on its product website. Below this average star rating, the advertiser seemingly posted all of the customer reviews of the dietary supplement, without any filters or restrictions. In reality, though, the advertiser had only posted hand-picked, 5 star reviews. According to NAD, consumer product reviews included on a website should be what they appear to be—authentic reviews, representative of the range reactions, and reflective of the actual opinions of consumers. Following NAD's inquiry, VitaPulse agreed to halt the practice of appearing to include all product reviews on its website, but only posting the best reviews.

Price Transparency

NAD has also examined issues of online price transparency. In StubHub, the online ticket reseller displayed an initial ticket price to consumers, but then added on service fees, ranging anywhere from 24 percent to 29 percent of the ticket cost, at the tail end of the transaction. According to the FTC, when advertising and selling are combined on a website or mobile application, disclosures should be provided before the consumer makes the decision to buy online, e.g., before clicking on an “order now” button or a link that says “add to shopping cart,” as material information must be clearly and conspicuously disclosed in close proximity to the claim it qualifies. Consequently, NAD recommended that StubHub modify its advertising to clearly and conspicuously disclose its service fees next to the initial ticket prices on its website. StubHub declined to adhere to NAD's recommendation, so the matter was referred to the FTC pursuant to NAD's procedures.

How Does NAD Work?

NAD's guidance can be applied across companies and industries and its forum can help ensure a level playing field for brands in highly competitive markets. Founded in 1971, NAD is an independent self-regulatory organization charged with promoting truthful and accurate advertising practices. Staffed by a team of attorneys dedicated solely to reviewing advertising claims and substantiation, NAD reviews national or broadly regional advertising and offers a fast, fair and cost-effective forum for adjudicating advertising disputes.

NAD monitors advertising in all mediums, but most NAD cases are filed by parties who “challenge” a competitor's claims. The challenger and the advertiser adhere to a briefing and meeting schedule outlined in NAD's procedures. The review process and all submission are non-public.

At the close of each case, NAD issues a decision stating its findings and any recommendations that an advertiser modify or discontinue claims. Decisions are published in an online, subscription-based archive and a press release is distributed. Advertisers have an automatic right to appeal decisions to a peer-review panel of the NARB.

While participation in self-regulatory proceedings is voluntary, more than 90 percent of advertisers who appear before NAD and NARB choose to comply with recommendations. When advertisers decline to participate or fail to comply with NAD or NARB's recommendations, the claims at issue are referred to the appropriate federal or state law enforcement agency, most often the FTC.

Robyn Lewis is a staff attorney at NAD. Previously, she was a litigator at Weil, Gotshal & Manges and represented clients in a wide variety of complex commercial matters.