Pursuant to an endorsement deal, an Instagram user with a large following—a so-called social media “influencer”— receives a new watch from a company, takes photos of herself wearing the wristwear, and posts about how much she loves the merchandise. The picture racks up hundreds of thousands of likes, generating sought-after impressions and exposure for both the company and its products. A successful advertising partnership is concluded.

Then, seemingly out of nowhere, the influencer receives a threatening letter from the Federal Trade Commission (FTC), warning that because the Instagram post did not reveal her financial interest in the sponsorship agreement between herself and the company, she may very well have run directly afoul of the FTC’s Endorsement Guidelines.

The foregoing is a typical predicament faced by many users of social media: While businesses are increasingly relying on relationships with influencers to advertise content and engender support for their brands, and influencers in turn are becoming more sophisticated and generating substantial revenue for themselves and such businesses, these relationships can and often do expose the parties to substantial legal risks.

The Endorsement Guidelines are laws promulgated by the FTC which mandate that anytime a “material connection”—for example, a business or family relationship, monetary payment, or gift of a free product—exists between a person endorsing a product and an advertiser, such a connection must be clearly and conspicuously disclosed. Merely saying “thanks” to a company in a post, stating how much one loves the product, or tagging the brand is insufficient.

While businesses and influencers undoubtedly want their advertisements to seem organic, the FTC seeks to protect consumers by ensuring they aren’t misled into thinking that paid sponsorships are unbiased testimonials.

In April 2017 the FTC sent 90 warning letters to individuals and brands, including singer-songwriter Akon, model Amber Rose, and actress Sofia Vergara. And in September, a second letter was sent by the FTC to 21 of those influencers. While the specific content of each letter varied, the FTC made clear that any celebrity or influencer who promotes a product on social media must disclose a “material connection” between the endorser and the product’s marketer, further insisting that the influencers detail their plans to ensure compliance with existing law moving forward.

The penalty for infractions under the Endorsement Guidelines can be steep: up to $16,000 per violation. Additionally, the FTC often directs influencers to take corrective action through settlement agreements. For example, the FTC has entered into high-profile settlements with several endorsers over the years, including with Trevor Martin and Thomas Cassell, two individuals who promoted the online gambling service CSGO Lotto but did not disclose that they owned the company. Settlements occasionally include financial penalties, but typically the most significant negative impact of a settlement is being subject to a 20-year consent order that requires legal compliance and FTC review of similar advertising and often obligates the influencer to share the existence of the settlement agreement with any future business partners.

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