#Ad! — Lessons from the FTC’s First Case since the Release of its Enforcement Policy on Native Ads

As was widely reported here, here and here, the Federal Trade Commission entered into a settlement in March with Lord & Taylor over charges that the retailer allegedly deceived consumers through a native advertising campaign run on Instagram and an online fashion magazine in March of 2015.  The settlement is noteworthy because this is the first consent order entered into by the FTC in this area since issuing its December 2015 Enforcement Policy Statement on Deceptively Formatted Advertisements.  Along with the FTC’s Enforcement Policy, the staff issued detailed guidance on how and when to make disclosures in Native Advertising: A Guide for Businesses. We blogged about the Policy Statement the Guide in a two part post here and here.

What Happened with the Paisley Dress?

In March 2015, Lord & Taylor ran a social media and online magazine campaign centered on a paisley dress.  The first prong of the marketing effort involved native advertising — Lord & Taylor contracted with an online fashion magazine named Nylon to publish an article about the dress, as part of a feature on the department store’s new Design Lab product line. Lord & Taylor reviewed and approved the article but did not require a disclosure about the sponsored nature of the content. Nylon posted a photo of the dress on its Instagram page, also reviewed and approved by Lord & Taylor, again without any disclosure that Lord & Taylor paid for the posting.

In the second prong of the promotion, Lord & Taylor gave the paisley dress for free to 50 fashion influencers and paid them between $1000 and $4000 to post photos of themselves wearing the dress on Instagram. Lord & Taylor pre-approved each of the influencer’s posts, which were required to tag the @Lordandtaylor Instagram handle and include #DesignLab in the photo caption.  The contracts with the influencers did not require them to disclose that they had received the dress free of charge and were being paid for the posts, or that the posts were part of a Lord & Taylor ad campaign.

The promotional effort for the paisley dress reached eleven million Instagram users, resulting in 328,000 “brand engagements” and a sell-out of the dress. So as a commercial matter, the ad campaign was a smashing success. From a regulatory perspective, not so much.  The FTC filed a complaint charging Lord & Taylor with three separate violations: (1) falsely representing that the 50 Instagram posts were independent statements; (2) failure to disclose that the influencers were paid endorsers; and (3) falsely representing that the Nylon article and Instagram post reflected Nylon’s independent opinion about the DesignLab line.

In March of 2016, the FTC announced a settlement with Lord & Taylor after its investigation into the paisley dress campaign. While there was no monetary fine as part of the settlement agreement (likely because this was the first case since the Policy came out), Lord & Taylor is prohibited from misrepresenting that paid ads are from an independent source, and is required to ensure that its influencers clearly disclose when they have been compensated in exchange for their endorsements.  The agreement also prohibits the retailer from misrepresenting that any endorser is independent or an ordinary consumer, and requires Lord & Taylor to disclose any material connection between itself and any influencer or endorser that would not otherwise be readily apparent. Finally, the settlement established a monitoring and review program for Lord & Taylor’s endorsement campaigns.

What Can You Learn from L&S’s Fashion Faux Pas?

The lessons are not new or revolutionary, but they do bear repeating because native ads are only going to increase in popularity:

  1. Advertisers must require any paid or otherwise compensated influencers to disclose their material connection to an advertiser in situations where the consumer might not recognize the promotion as an ad. Think through the context and consider the ordinary consumer. If sponsorship arrangement is not clear, a disclosure is likely necessary. The responsibility for this exercise begins with the advertiser because the FTC has stated that primary responsibility for compliance falls on advertisers; that may explain why the influencers, Nylon Magazine and the ad agency were named in the investigation).  However, publishers, Instagrammers and agencies might not be spared in the future.
  1. Disclosures must be clear and conspicuous. Arguably, Lord & Taylor’s requirement that its influencers tag the @Lordandtaylor Instagram handle and include #DesignLab in all of their posts could have been deemed a disclosure that the posts were paid posts. Obviously, the FTC didn’t agree.  So how are you supposed to make that disclosure in such a small space on Instagram or other social media platforms? Well, we can all benefit from the compliance monitoring that the FTC settlement imposed on Lord & Taylor.   A quick search of Instagram revealed that the retailer’s influencers are now using #ad! and #ad in current DesignLab promotions.