Advertising Regulation In The Web 2.0 World

Tuesday, November 2, 2010 - 01:00

Use of social media websites - sites such as Facebook, MySpace and LinkedIn - has grown dramatically over the past two years. According to the Pew Research Center, 46 percent of American adults who use the Internet logged onto a social networking site in 2009, which is up from 8 percent in 2005.1Today, nearly three quarters (73 percent) of online teens and an equal number (72 percent) of young adults use social network sites.2This phenomenon is not limited to the young: social networking use among Internet users ages 50 and older nearly doubled - from 22 percent in April 2009 to 42 percent in May 2010.3These collaborative sites, which reflect the movement of the World Wide Web from static webpages to dynamic and shareable content and social networking, have commonly come to be known as "Web 2.0" applications.

The power of the leading social networking sites is staggering. Facebook has more than 500 million active users (as of July 2010), MySpace has more than 122 million monthly active users (as of June 2010), and Twitter (as of April 2010) has over 105 million registered users and is signing up new users at the rate of 300,000 a day. Facebook is the second most popular website in the world (eclipsed only by Google).4Advertisements on Facebook reach 62 percent of Americans online.5Brand owners Dell and JetBlue each operate Twitter pages with over 1.5 million followers. Starbucks and Coca-Cola each have over fifteen million fans on Facebook.

The growth of this sector has not been lost on advertisers and marketers. An August 2010 survey by Duke University's Fuqua School of Business found that survey respondents were devoting 5.6 percent of their marketing budget to social media, with the amount expected to grow to 18 percent in the next five years.6U.S. advertisers will spend an estimated $1.7 billion in advertisements on social networks in 2010, a more than 20 percent increase over 2009.7The social media marketing programs created by advertisers provide content that readers share within their social networks. In addition, social networking sites offer multiple different iterations of traditional pay per click models in which advertisements appear on user pages. Advertisers are attracted to social media campaigns because they are relatively inexpensive, capable of being targeted to very specific markets and audiences, and can result in brand owners receiving direct feedback from their customers and targeted markets.

The interactive nature of Web 2.0 applications poses unique challenges for regulatory authorities, particularly in the field of advertising. In the past year, at least three different regulatory bodies, the Food and Drug Administration ("FDA"), the Financial Industry Regulatory Authority ("FINRA"), and the Federal Trade Commission ("FTC"), have addressed the issue of Web 2.0 advertising. As the social media phenomenon continues to gather steam, the advertisers flocking to this medium will be guided by these emerging regulations.

Food And Drug Administration

The FDA seeks to protect the public health by assuring that promotional messages of the industries it regulates (human and veterinary drugs, vaccines and other biological products, medical devices, food, cosmetics, and dietary supplements) are truthful, balanced and accurately communicated. Under the Federal Food, Drug, and Cosmetic Act, the FDA is responsible for regulating the labeling and advertising of prescription drugs and restricted medical devices.8Advertisements for such drugs must include the product's established name and quantitative composition, as well as a "true statement" relating to side effects, contraindications and effectiveness of the advertised product.9

The FDA does not presently have guidelines for Internet advertising, though it does have a history of applying its regulations to on-line advertising and promotion. Most recently, in March 2009 the FDA issued warning letters to 14 major pharmaceutical companies addressing sponsored links generated when a consumer typed a disease or product name into a search engine. The agency warned that such promotions were misleading because they did not include risk information. Thereafter, expressly acknowledging the emergence of Web 2.0 marketing, the agency in November 2009 held a public hearing to discuss potential new rules concerning social media and FDA-regulated products, and solicited written comments on the issue through February 2010. According to the FDA, these actions were taken to assist the agency in its evaluation of how the statutory provisions, regulations, and policies concerning advertising and promotional labeling should be applied to product-related information on the Internet and newer technologies.10

Following the hearing, the FDA announced that it would address the issue of the promotion of prescription drug products using social media tools through a guidance document slated to be issued in 2010.11It is anticipated that the guidance document will address concerns expressed to the FDA about manufacturer accountability for third-party online communications, fulfilling regulatory requirements within the space limitations of social media (tweets on Twitter, for example, are limited to 140 characters) and the use of links to get additional information about a product. The guidance from the FDA, when it issues, will have a profound impact on the marketing and advertising of prescription drug products in the Web 2.0 era.

Financial Industry Regulatory Authority

FINRA is the largest self-regulatory organization in the securities industry in the United States. It is a membership-based organization that creates and enforces rules for members based on the federal securities laws, and was created in 2007 through the consolidation of NASD and the member regulation, enforcement and arbitration functions of the NYSE. FINRA touches virtually every aspect of the securities business - from registering and educating industry participants to examining securities firms; writing rules; enforcing those rules and the federal securities laws; informing and educating the investing public; providing trade reporting and other industry utilities; and administering the largest dispute resolution forum for investors and registered firms.12

NASD Rule 2210, as enforced by FINRA, provides that all member communications with the public "shall be based on principles of fair dealing and good faith," and that "no member may make any false, exaggerated, unwarranted or misleading statement or claim in any communication with the public."13NASD rules provide that a member recommending a security to a customer must have reasonable grounds for believing that the recommendation is suitable for such customer.14The advertising rules enforced by FINRA require a determination of whether or not a communication properly constitutes an "advertisement": if so, this triggers considerations of a broker-dealer's prior approval of the communication, record keeping responsibilities, and possibly the requirement to file the advertisement with the NASD's Advertising Regulation Department.

Recognizing the significant growth in the use of social media sites by businesses to communicate with customers, FINRA in January 2010 issued a Regulatory Notice (10-06) entitled "Social Media Web Sites." The Notice expressly concludes that the NASD rules regarding suitability (NASD Rule 2310) apply to a firm or its personnel recommending a security through a social media site, and the recommendation must be suitable to every investor to whom it is made (i.e. anyone accessing that social media site). According to FINRA, posts on sites such as Twitter and Facebook are considered communications on an "interactive electronic forum" (as opposed to an "advertisement") and thus do not require prior principal approval. However, firms are required to supervise their associated persons who participate in social media sites for business purposes to ensure that these communications do not violate FINRA or SEC rules, and do not present undue risks to investors.15Finally, the Regulatory Notice makes it clear that FINRA does not consider third-party content on a social media site established by a member firm to be the firm's communication with the public (under NASD Rule 2210) unless the firm or its personnel either is entangled with the preparation of the third-party post or has adopted its content. FINRA will consider a third-party post to be a communication with the public by the firm under the adoption theory if, after the content is posted, the firm or its personnel explicitly or implicitly endorses or approves the post. 16

Federal Trade Commission

The FTC, which identifies itself as the nation's consumer protection agency, polices anticompetitive practices, administers a wide variety of consumer protection laws, and adopts industry-wide trade regulation rules. The basic consumer protection statute enforced by the FTC is Section 5(a) of the FTC Act, which provides that "unfair or deceptive acts or practices in or affecting commerce ... are ... declared unlawful."17

Expressly focusing on the Internet marketing and blogging industry, the FTC last year (effective December 2009) issued revised Guides Concerning the Use of Endorsements and Testimonials in Advertising (the "Guides"). The Guides, issued in 1972 and last revised in 1980, address the application of Section 5 of the FTC Act (15 U.S.C. 45) to the use of endorsements and testimonials in advertising. While the Guides are not rules or regulations, they represent predictions of how the FTC would view the types of claims subject thereof. The revised Guides, according to an FAQ issued in June 2010 by the FTC, reflect three basic principles: (1) endorsements must be truthful and not misleading; (2) if the advertiser doesn't have proof that the endorser's experience represents what consumers will achieve by using the product, the ad must clearly and conspicuously disclose the generally expected results in the depicted circumstances; and (3) if there's a connection between the endorser and the marketer of the product that would affect how people evaluate the endorsement, it should be disclosed.18

The FTC's changes to the Guides expressly apply the Guides to a company's marketing of its products or services through social networks. The FTC has made it clear that the Guides in certain circumstances can apply to consumer-generated content, even though the advertiser does not necessarily have control over the content of what is being said. As such, a blogger on Twitter with a "material connection" to an advertiser (which is no longer limited to payment of money or compensation but rather, in certain circumstances, can include simply providing free product samples to bloggers or the consumers who are part of a social marketing network) is subject to the Guides. Any claim by such blogger will be attributable to the advertiser and must be substantiated. Ultimately, the Guides mandate that if there is a connection between the endorser and the marketer of the product that would affect how consumers evaluate the endorsement, that connection should be disclosed.19 1Pew Research Center, "The Democratization of Online Social Networks" (Oct. 8, 2009).

2Pew Research Center, "Social Media and Young Adults" (February 3, 2010).

3Pew Research Center, "Older Adults and Social Media" (August 27, 2010).

4Alexa Traffic Rank, October 21, 2010.

5comScore Ad Metrix, September 2010.

6The CMO Survey, August 2010.

7eMarketer, August 16, 2010.

821 U.S.C. 352.

974 Fed. Reg. 48083 at 48084 (September 21, 2009).

10 See 74 Fed. Reg. 48083 (September 21, 2009).

11http://www.fda.gov/downloads/Drugs/GuidanceComplianceRegulatoryInformation/ Guidances/ucm079647.pdf.

12http://www.finra.org/AboutFINRA/index.htm.

13NASD Rule 2210.

14NASD Rule 2310.

15Regulatory Notice 10-06.

16 Id.

1715 U.S.C. Sec. 45(a)(1)

18 See "The FTC's Revised Endorsement Guides: What People Are Asking" at http://www.ftc.gov/bcp/ edu/pubs/business/adv/bus71.shtm.

19 Id.

Paul W. Garrity is a Partner in the Intellectual Property Practice Group in the firm's New York office.

Please email the author at pgarrity@sheppardmullin.com with questions about this article.