FTC Poised To Issue Sweeping Regulation Of Online Reviews

By Eric H. Karp, Esq., General Counsel To NCASEF

In June 2023 the United States Federal Trade Commission (FTC) issued a proposed rule which would prohibit certain practices regarding what it characterizes as deceptive or unfair consumer reviews and endorsement practices. This closely followed the FTC’s issuance of written guidelines concerning the use of endorsements and testimonials in advertising, which do not have the power of a regulation.

The FTC has broad powers to regulate commerce and in particular to protect consumers from unfair and deceptive acts and practices. This authority led to the issuance of a FTC Franchise Rule, first enacted in 1979, which requires a franchise disclosure document to be delivered to a prospective franchisee before that person signs an agreement or pays any money.

This proposed regulation comes in the context of the ubiquitous nature of online reviews in all businesses, including those that are franchised. Industry research shows that 95 percent of customers using online reviews state that negative reviews have influenced their decisions. More than half of all customers read at least four reviews before making a purchase, and half of all consumers trust online reviews as much as personal recommendations from friends or relatives.

The FTC posited $1.321 trillion in estimated sales of goods or services for which consumers incorporate reviews into their decision-making and that 10 percent of those sales were the product of review manipulation, yielding total consumer damages of more than $1 billion per year.

One commenter to the proposed rule, The Transparency Company, stated that 54 percent of consumers say that they would not buy a product if they suspected it to have fake reviews, and estimated that consumer injury from fake reviews could be as much as $5 billion per year.

This is, of course, quite relevant to all 7-Eleven franchisees because there are a variety of websites which feature reviews of both corporate and franchised locations. One such website that I consulted listed 10 7-Eleven locations in a particular community, which collectively had 330 reviews apparently written by customers with an average score of 3.6 stars out of 5. A review of SEI’s website listing corporate stores for sale yields similar scores.

The FTC website states: “Our proposed rule on fake reviews shows that we’re using all available means to attack deceptive advertising in the digital age,” said Samuel Levine, Director of the FTC’s Bureau of Consumer Protection. “The rule would trigger civil penalties for violators and should help level the playing field for honest companies.”

This proposed regulation has been moving through the rulemaking process at breakneck speed. That is unusual because the principal players in the industry that provide platforms for such views are in favor of regulation. The FTC reports that Trustpilot, Google, TripAdvisor and Amazon alone collectively removed more than 300 million reviews from their websites in a single year because they were fraudulent, fake, or violated their internal policies.

It is important to note that this regulation will govern businesses and not consumers.

The comment period for the proposed rule expired at the end of September 2023 and while there can be no assurance that a final rule will be issued, and if so, when it will be issued, the consensus seems to be that a final rule will be issued sooner rather than later.

While we don’t know what form the final rule will take, it appears quite likely that it will contain most or all of the following prohibitions.

1. Selling or obtaining fake consumer reviews and testimonials. A business may not sell or create reviews that report to be authored by individuals or entities that do not exist, did not patronize the business, or misrepresent their experience with the product.
2. Review hijacking. A business cannot take a positive review for a particular product and make it appear that it is a review of a substantially different product.
3. Buying positive or negative reviews. It would be an unfair and deceptive practice to provide compensation or any other incentive in exchange for the creation of a consumer review that expresses an opinion, whether negative or positive. For example, a business owner cannot pay or otherwise compensate their employees to write positive reviews for their business or negative reviews for a competitor.
4. Insider reviews and consumer testimonials. An officer or manager of a business must conspicuously disclose his or her relationship to a business for which he or she provides a consumer review. There must also be a similar disclosure of any instance in which an officer or manager solicitates or demands a consumer review from any employee of the business.
5. Company controlled review websites. If a business chooses to operate its own website, it cannot falsely state or imply that the website is independent of the business.
6. Illegal review suppression. A business cannot use an unjustified threat of legal action, or make a false accusation to prevent the creation of a consumer review or cause for removal of a review. And a business cannot suggest or imply that the reviews on its website represent all or most of the reviews submitted if reviews are being suppressed based on their ratings or negativity.
7. Selling fake social media indicators. Businesses cannot sell or purchase fake indicators of social media influence. This includes selling or purchasing followers, likes and reposts.

We are following these developments very carefully and once the final rule is issued, we will report on any changes or additional provisions that were not in the proposed rule.

 

This article is a general summary of a proposed new regulation and does not constitute legal advice. Each situation that might involve the subject matter of this article will be necessarily fact intensive and generalizations cannot and should not be made.