The Federal Trade Commission's decision to crack down on Lord & Taylor today for failing to reveal its relationships with paid promoters may change native ads and influencer-driven social media marketing as we know it.
In short, social media no longer translates to a free lunch. Ron Urbach, chairman of Davis & Gilbert LLP, summarized the central challenge: "Advertisers need to remember that they cannot delegate their responsibility to publishers or other parties," he told Adweek. "It is the advertiser who must ensure compliance. How does an advertiser comply in a world of real-time social and digital advertising?"
Lord & Taylor just learned the answer to that question the hard way. In March 2015, it scored a social media coup after 50 Instagram stars wore the same dress on the same day, and the item in question quickly sold out.
Closer examination, however, revealed that none of those influencers disclosed the fact that the brand had paid them to wear the dress as part of a coordinated effort to promote its spring line. Nylon magazine even ran a full article and an Instagram post featuring the item, leading Adweek to question whether the campaign had blatantly thumbed its nose at FTC disclosure rules regarding sponsored content.
The answer was a resounding yes. Today, the FTC brought its regulatory hammer down on Lord & Taylor, settling charges it brought against the company for deceiving customers in the first enforcement action under its new native advertising guidelines, which went into effect in December 2015.
Mary Engle, the FTC's associate director for advertising practices, told Adweek, "Like you, we saw the buzz in the media about how Lord & Taylor had run this campaign and paid influencers without disclosing that this was advertising, so we investigated."
"There was no indication that this was paid content in Nylon," Engle said, adding that the FTC wants to make sure businesses understand that its 2009 endorsement guidelines also apply to paid social media campaigns.
As senior attorney Lesley Fair wrote in a blog post, "Under the terms of the proposed settlement, Lord & Taylor can't falsely claim – expressly or by implication – that an endorser is an independent user or ordinary consumer."
UPDATE: Lord & Taylor provided a statement to Adweek regarding the FTC's decision. In it, the company writes, "Lord & Taylor is deeply committed to our customers and we never sought to deceive them in any way, nor would we ever. In the FTC's consent order announced today, there is no finding of wrongdoing whatsoever." Lord & Taylor claims that it took "immediate action" when observers raised concerns about the campaign in question, adding, "We cooperated fully with the FTC's inquiry into the marketing of this dress and have of course agreed to uphold the current version of the guidelines."
Experts believe the decision will weigh heavily on the future of native ads. "This was the perfect storm for the FTC in that it encompassed the two hottest issues in social media: compliance with endorsement guides and the newly issued native advertising guide," said Linda Goldstein, chair of the advertising, marketing and media division at New York law firm Manatt Phelps & Phillips.
"From the FTC's perspective," she added, "it was a good case to bring in that it was not about how or where disclosures were made but the fact that they were not made at all."
The company will now be forced to launch an internal monitoring program. Engle said Lord & Taylor "has to submit a report to the FTC that demonstrates how they're complying with the order."
"The commission can periodically ask for additional evidence," she added.
"This action sends a very clear message to the marketing industry that the FTC is watching native ads and will pursue enforcement actions where necessary disclosures are not made," Goldstein said. She called the news "a warning sign" and noted that companies like Lord & Taylor may face significant fines if they repeat such offenses.
"I would not minimize the impact of the order on Lord & Taylor or any other business because it does operate as something of a noose around the neck of the business," she said. "They will have to be uber compliant in the future in ensuring that their campaigns comply with the provisions."
Urbach said, "With native advertising becoming even more important, I predict that this case is the first of more to come."
Engle agreed, saying, "I think we will continue to be active in this space. We have had a steady stream of investigations. For example, we handled a case with Deutsch L.A. working for Sony, which had employees tweet about the Sony Playstation that they were promoting without disclosing that they were paid employees."
Most such cases end without the FTC taking formal action, but the specter of possible punishment remains. Goldstein said, "This is a wake-up call to the industry and all players in the native advertising ecosystem. Having to implement a comprehensive monitoring program along the lines set forth in the order in a world of social media, which by its nature is difficult to control, can be a challenging task for a company."
Urbach said, "Marketers have to be wary because this proves the point: The FTC is out there and watching."
"Perhaps at some point we will have a good level of compliance so we don't have to take such actions," said Engle. But as all brands, advertisers and publishers know, we do not live in such a perfect world.