"In re Word-of-Mouth Marketing"
______________________________________________________________________________ ______________________________________________________________________________ COMMENTS of the WASHINGTON LEGAL FOUNDATION to the FEDERAL TRADE COMMISSION Concerning WORD-OF-MOUTH (“BUZZ”) MARKETING Daniel J. Popeo David Price Washington Legal Foundation 2009 Massachusetts Ave., N.W. Washington, D.C. 20036 (202) 588-0302 February 2, 2006 ______________________________________________________________________________ ______________________________________________________________________________ WASHINGTON LEGAL FOUNDATION 2009 MASSACHUSETTS AVE., N.W. WASHINGTON, D.C. 20036 (202) 588-0302 February 2, 2006 Mr. Donald S. Clark Secretary U.S. Federal Trade Commission 600 Pennsylvania Ave., N.W. Washington, D.C. 20580 Re: Word-of-Mouth (“Buzz”) Marketing Dear Mr. Secretary: The Washington Legal Foundation (WLF) is submitting these comments in response to the October 18, 2005, letter from Commercial Alert seeking an investigation of word-of-mouth marketing programs, which Commercial Alert’s letter refers to as “buzz” marketing. For the reasons set out below, WLF believes that Commercial Alert’s letter improperly categorizes uncompensated word-of-mouth marketing programs and that its request for investigation should be rejected. I. Interests of WLF WLF is a public interest law and policy center with supporters nationwide. It devotes a substantial portion of its resources to advocating for reasonableness in government regulations, including in the areas of advertising and other avenues of commercial speech. WLF, founded in 1977, has participated as a party or as an amicus curiae in numerous cases involving commercial free speech, including Johanns v. Livestock Mktg. Ass’n, 125 S. Ct. 2055 (2005); Gerawan Farming, Inc. v. Kawamura, 90 P.3d 1179, 14 Cal. Rptr. 3d 14 (Cal. 2004); Nike, Inc. v. Kasky, Comments of Washington Legal Foundation February 2, 2006 Page 2 cert. dism’d, 539 U.S. 654 (2003); Fed'n of Adver. Indus. Representatives, Inc. v. City of Chicago, cert. denied, 540 U.S. 879 (2003); and Trans Union LLC v. FTC, 536 U.S. 915 (2002). WLF’s Legal Studies Division frequently publishes papers by expert practitioners on commercial speech issues; among the papers the WLF has recently published on commercial speech are The Hon. Timothy J. Muris, Commercial Speech: Essential For Health of Consumers and Free Enterprise (2005); The Hon. Dick Thornburgh, Floyd Abrams and Eric S. Sarner, Conversations With: Commercial Free Speech (2005); Ralph F. Hall, “Off-Label” Speech: Uncertainty Reigns For Device and Drug Makers (2005); and Glenn G. Lammi, Proposal Limiting Distribution of Health Care Information Infringes Free Speech Rights (2005). II. Background “Word-of-mouth” marketing is an umbrella term for various promotional methods ranging from those in which a company encourages customers or fans to spread the word about a product to family and friends, on one end of the spectrum, to those in which a company actually hires a spokesperson to tout the product to any bystander who may show an interest in it, on the other. One long-standing form of word-of-mouth marketing is the fan club or fan web site. For example, record labels may promote an artist with a web site that attempts to drive “buzz” by allowing fans to sign up for memberships that include access to free photos, videos, online discussion boards, and advance ticket purchase privileges for upcoming concerts. See, for example, the public web site and subscription-only web site for the group U2 at http://www.u2.com and http://www.u2.com/subscribe/ respectively. Comments of Washington Legal Foundation February 2, 2006 Page 3 Some word-of-mouth marketers go beyond such de minimis benefits. In the cases of those marketers that provide more than de minimis compensation to an agent and direct the agent as to what message to deliver, the result is in the nature of a commercial relationship. Many such marketers subscribe to a code developed by the Word of Mouth Marketing Association (WOMMA) requiring that agents disclose their relationship to the marketer.1 Consumer goods company Procter & Gamble Co. operates a word-of-mouth marketing program known as Tremor, which solicits opinions on products and campaigns from its teenage members and encourages members to talk about those products and campaigns with their peers if they so choose. For a member to advocate a product or idea, the member “must view the idea/product as worthy of his/her advocacy.”2 Tremor’s web site states: What does Tremor expect from its Members? We want our Members to help us create exciting marketing programs and share them with friends. Members do this by… • Sharing their opinions and feedback when they receive new ideas to rate online. Tremor shares their feedback directly with our clients. • Spreading the word to their friends … if Members think the Tremor program is worth talking about. In effect, Members create their own word-of-mouth marketing campaigns. • Participating in programs. This can involve trying out a new product sample, reading through inside scoop, providing feedback at a website, etc. • Staying up-to-date with Tremor by visiting Tremor.com once a week.3 The program offers teenagers benefits similar to those of a traditional fan club: 1 See http://www.womma.org/ethicscode.htm. 2 http://www.tremor.com/info/wordofmouth/rightmessage.asp. 3 “Tremor FAQ’s,” available for download at http://www.tremor.com/support/faq_answers.aspx. Comments of Washington Legal Foundation February 2, 2006 Page 4 As a Tremor Member you get to: Influence everything from music to fashion to movies Get exclusive access to special events & insider info Be the first to preview new products Meet other Tremor Members at Tremor.com.4 The activist group Commercial Alert sent a letter to the Commission dated October 18, 2005, styled “Request for Investigation of Companies That Engage in ‘Buzz Marketing.”5 The letter alleges that “some of these companies are perpetrating large-scale deception upon consumers by deploying buzz marketers who fail to disclose that they have been enlisted to promote products.” Commercial Alert appears to allege that any failure of a participant in a word-of-mouth marketing program to disclose his or her relationship with the marketer is a violation of 15 U.S.C. § 45(a)(1). The letter concludes by asking the Commission to investigate by “at a minimum” issuing subpoenas to executives of Procter & Gamble’s Tremor, and also requests that the FTC issue guidelines to govern word-of-mouth marketing. 4 Id. 5 Letter from Gary Ruskin, Executive Director, Commercial Alert to Donald Clark, Secretary, Federal Trade Commission, Oct. 18, 2005 at 1. Available for download at http://www.commercialalert.org/issues- article.php?article_id=807&subcategory_id=90&category=1. Comments of Washington Legal Foundation February 2, 2006 Page 5 III. Word-of-Mouth Programs Are Not Deceptive Where They Involve No More Than De Minimis Benefits and Where the Participants Make Their Own Decisions Whether to Advocate the Product The Commission is authorized to proscribe “[u]nfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce.” 15 U.S.C. § 45(a)(1). To justify a determination that an unfair or misleading practice is taking place, the Commission is required to employ a “rule of reason” analysis based on a thorough record of the facts and consequences surrounding the supposed illegal practice. Cal. Dental Assoc. v. FTC, 526 U.S. 759 (1999) (rejecting a “quick look” or “abbreviated” rule of reason analysis and remanded for a more thorough factual determination) (citing FTC v. Algoma Lumber Co., 291 U.S. 67, 79-80 (1934)). The FTC may prohibit not only those marketing practices that actually deceive, but also those that also are likely to deceive consumers. The U.S. Court of Appeals for the Ninth Circuit has set out a three-part standard for establishing deception in Southwest Sunsites, Inc. v. FTC, 785 F.2d 1431 (9th Cir.), cert. den. 479 U.S. 828 (1986). To demonstrate deception, the FTC (1) must show probable, not merely possible, deception, (2) must show potential deception of consumers acting reasonably in reasonable circumstances, and (3) consider as material deceptions only those that are likely to cause injury to reasonably relying consumers. 785 F.2d at 1435. This test superseded the earlier test that required only a “tendency or capacity to mislead,” and found a material deception whenever the consumer considered it important, whether or not there was reliance. Id. Comments of Washington Legal Foundation February 2, 2006 Page 6 What constitutes “injury” is not clearly defined, but case law suggests that it involves inducing a consumer to buy a product when it is likely he or she would not have done so had other information been disclosed. The D.C. Circuit has held that “a material claim [under 15 U.S.C. § 45] is one that involves information that is important to consumers and, hence, likely to affect their choice of or conduct regarding the product.” Novartis Corp. v. F.T.C., 223 F.3d 783, 787 (D.C. Cir. 2000). To prevail on a claim of material deception the “burden is on the plaintiff to show materially deceptive conduct on which they relied to their detriment.” Bildstein v. MasterCard Int’l, Inc., 329 F. Supp. 410 (S.D.N.Y. 2004). Commercial Alert contends that where “buzz marketers fail to disclose (1) that they are paid marketers and (2) by whom they are being paid, the Commission should consider this a material omission of information likely to mislead the reasonable consumer, and likely to affect a consumer’s decision to buy a product.” The label “paid marketers” cannot properly be applied in an undifferentiated fashion to all participants in word-of-mouth advertising programs, however. Fan club members, for example, may receive benefits from taking part in the program and might even be encouraged to spread the word about the band, movie, or other subject of the fan club – but it has never been thought that messages emanating from fan club members are deceptive in the absence of disclosure of fan club membership.6 Other word-of-mouth marketing programs providing only de minimis benefits and imposing no dictates on the member’s advocacy – programs that may be considered voluntary 6 Our electronic searches of Commission decisions and consent decrees have not identified any Commission action ever grounded on such a theory. Comments of Washington Legal Foundation February 2, 2006 Page 7 word-of-mouth programs – likewise involve no material omission of information. Unlike the contexts cited by Commercial Alert in which the Commission has required disclosure (“infomercials, misleading formats in magazines and newspapers, and search engines”), a statement by a participant in a voluntary word-of-mouth marketing program represents that individual’s bona fide opinion, not one contingent on the receipt of compensation nor one directed by an employer or contracting company. IV. Word-of-Mouth Programs Should Not Be Treated as “Endorsements” Where They Involve No More Than De Minimis Benefits and Where the Participants Make Their Own Decisions Whether to Advocate the Product The Commission has promulgated rules on commercial “endorsements” in 16 C.F.R. § 255. Although not addressed by Commercial Alert, it may be helpful to analyze voluntary word-of-mouth marketing programs under § 255. The Commission defines an endorsement as “any advertising message (including verbal statements [and] demonstrations . . .) which consumers are likely to believe reflects the opinions, beliefs, findings or experience of a party other than the sponsoring advertiser.” § 255.0(b). Whether or not the consumer is likely to view an advertisement as an endorsement is based on a reasonable perception standard. § 255.5. A statement by a participant in a voluntary word-of-mouth program is not an endorsement within § 255 because it is not an “advertising message” and the sponsor of the program is not a “sponsoring advertiser.” In this regard, the relationship between a participant in a voluntary word-of-mouth program and the program’s sponsor is no different from that between a member of the press and the sponsor of a public relations campaign: Positive coverage in the Comments of Washington Legal Foundation February 2, 2006 Page 8 press on account of a public relations campaign is not an “endorsement” under § 255 because the journalists or commentators have made an independent decision about whether to cover a product and what, if anything, to say about it. Participants in a voluntary word-of-mouth program are on the same footing. Even if § 255 were stretched to cover such situations, the Commission’s regulations do not mandate disclosure. Disclosure is required for communications qualifying as “endorsements” under § 255 “[w]hen there exists a connection between the endorser and the seller of the advertised product which might materially affect the weight or credibility of the endorsement (i.e., the connection is not reasonably expected by the audience).” § 255.5. The Commission has properly recognized, however, that not every “connection” between the “endorser” and the “seller” is material for this purpose. Example 1 accompanying § 255.5 illustrates circumstances in which a paid endorsement need not be disclosed as such, in view of the role of the endorser’s independent decision-making: A drug company commissions research on its product by a well-known research organization. The drug company pays a substantial share of the expenses of the research project, but the test design is under the control of the research organization. A subsequent advertisement by the drug company mentions the research results as the “findings” of the well-known research organization. The advertiser's payment of expenses to the research organization need not be disclosed in this advertisement. Application of the standards set by Guides 3 and 4 provides sufficient assurance that the advertiser's payment will not affect the weight or credibility of the endorsement. In the case of a voluntary word-of-mouth program, in which there is no “payment” at all, it is at least equally reasonable to rely on the role of the participant’s independent judgment, and to assume that this independent decision-making is sufficient to assure that the connection with Comments of Washington Legal Foundation February 2, 2006 Page 9 the word-of-mouth program will not affect the “weight or credibility” of the participant’s statements. CONCLUSION The Washington Legal Foundation respectfully requests that the Commission decline Commercial Alert’s petition. Respectfully submitted, Daniel J. Popeo David Price Washington Legal Foundation 2009 Massachusetts Ave., N.W. Washington, D.C. 20036 (202) 588-0302