The Federal Trade Commission (FTC or Commission) held an informal hearing on its proposed trade regulation rule prohibiting marketers from using fake consumer reviews and testimonials on February 13, 2024. Three parties who had requested to present their positions orally at the informal hearing in their written comments in response to the FTC’s Notice of Proposed Rulemaking (NPRM) made presentations at the hearing: Fake Review Watch, the Interactive Advertising Bureau (IAB) and a group of three market research professors at Brigham Young University, Penn State and Emory University. The Presiding Officer at the hearing was Carol Fox Foelak, an Administrative Law Judge for the Securities and Exchange Commission.
The proposed rule, titled Trade Regulation Rule on the Use of Consumer Reviews and Testimonials, would prohibit the creation, purchase, dissemination or sale of fake consumer reviews and testimonials; repurposing reviews for substantially different products; buying positive or negative reviews; using insider consumer reviews and testimonials without clear disclosure; misrepresenting company-controlled websites; suppressing negative reviews; and the sale, distribution or purchase of false indicators of social media influence. Our article “FTC’s Proposed New Rule Prohibiting Fake Reviews and Testimonials” summarized the proposed rule. Our article “What's Next for the FTC's Proposed Rule Banning Fake Reviews and Testimonials?” summarized the written comments received by the FTC on the proposed rule in response to the NPRM.
Disputed Issues of Material Fact
A major issue at the informal hearing was whether there are disputed issues of material fact regarding the proposed rule. If there are no disputed issues of material fact, an FTC rulemaking proceeding can proceed quickly (by federal rulemaking time standards). However, if there are disputed issues of material fact, the rulemaking process slows down.
A disputed issue of material fact is defined in the FTC’s Rules of Practice as “an issue of specific fact in contrast to legislative fact.” Under Section 18 of the FTC Act and the Rules of Practice, 16 C.F.R. 1.12(b)(1), if there are disputed issues of material fact, the presiding officer must allow examination of witnesses (including FTC staff), cross-examination, additional submissions including rebuttal submissions and additional oral submissions. The issues that “must” be considered for cross-examination or rebuttal are only those disputed issues of fact the Commission determines to be “material” and “necessary to resolve.” 16 C.F.R. 1.13(b)(1)(i). The Rules of Practice state: “A full and true disclosure with respect to the issue can be achieved only through cross-examination rather than through rebuttal submissions or the presentation of additional oral submissions.”
A full-blown hearing can add a great deal of material to the rulemaking record and make the proceeding substantially longer.
In its written comments to the FTC in response to the NPRM, IAB proposed three potential disputed issues of material fact for the FTC’s consideration:
- “Whether color, size, count, and flavor are the only attributes that would not confuse consumers when combined on a product page.”
- “Whether the compliance costs for businesses will be minimal, particularly if the ‘knew or should have known’ standard is finalized.”
- “Whether the Commission's finding that unintended consequences from the NPRM are unlikely [is correct] (e.g., for fear of violating the review suppression section, businesses will allow more fake reviews to stay up on their websites).”
IAB stated that it represents over 700 leading media companies, brand marketers, agencies and technology companies responsible for selling, delivering and optimizing digital advertising and marketing companies, and whose members account for 86% of online advertising expenditures in the United States.
In its notice announcing the informal hearing, the FTC took the first issue off the table. Section 465.3 of the proposed rule would have prohibited “review hijacking.” Marketers would have been prohibited from using or repurposing a consumer review written or created for one product so that it appears to have been written or created for a substantially different product. A “substantially different product” was defined as “a product that differs from another product in one or more material attributes other than color, size, count, or flavor.” IAB argued in its written comments that the record did not contain evidence as to whether there are product attributes other than color, size, count or flavor that can be combined on a product page without misleading consumers. IAB and other commenters asserted that there are numerous other ways in which reviews of products with certain differences other than those listed in the proposed rule could be combined which would not be deceptive, and gave examples. These included reviews of a book offered as a paperback, e-book, audiobook and hard cover; a crew neck versus a v-neck T-shirt; individual golf clubs of the same set; a ceramic bowl without or without a handle; and scents of soap.
In its notice of the informal hearing, the FTC stated that it “has decided to not proceed at this time with proposed § 465.3. It is therefore not necessary to address IAB's proposed disputed issue of material fact relating to the proposed definition of ‘substantially different product.’” (The FTC can still take action against deceptive review hijacking under Section 5 of the FTC Act.) In addition, the FTC found that there are no disputed issues of material fact to resolve at the hearing and no need for cross-examination or rebuttal submissions.
Fake Review Watch
Kathryn Dean of Fake Review Watch made the first presentation at the hearing. Fake Review Watch identified itself in its written comments as an entity that “has been investigating online review fraud for over five years and has produced over 80 videos documenting the scope of the problem across multiple third-party review platforms.”
Fake Review Watch stated that fake consumer reviews are prevalent, and that the FTC’s proposed rule is a step in the right direction and hopefully will deter many people from engaging in this fraud. However, according to Fake Review Watch, the proposed rule fails dramatically in one key way: it will not apply to third-party review platforms unless they purchase the reviews or the reviews concern their own products, services or businesses. Fake Review Watch stated that these platforms do not take sufficient action to prevent fake reviews.
Fake Review Watch noted that third-party review platforms assert immunity under Section 230 of the Communications Decency Act, which makes online forums not responsible for the content others publish on them. If the FTC believes that Section 230 prevents it from holding third party review platforms responsible for fake reviews, it could instead require them to be more transparent, including by giving consumers access to all reviews for a business, even those that have been removed by the platforms. Fake Review Watch argued that the fact that a business has had fake reviews removed, is valuable information to consumers. The FTC could require third-party review platforms to show users the number of fake reviews removed, give access to all reviews removed, provide the geographic location of reviewers and link to a reviewer’s other reviews.
IAB
Lartease M. Tiffith of IAB made the second presentation at the hearing. He stated that IAB supports the proposed rule, but that some of its language is overbroad and will lead to the suppression of honest reviews. According to IAB, the lack of clarity will stop businesses, especially small businesses, from displaying consumer reviews to avoid liability.
IAB reiterated and expanded on the arguments it made in its written comments, that there are disputed issues of material fact regarding the proposed rule:
- IAB believes that some provisions of the proposed rule are so vague and overbroad that compliance costs will be high. For example, the proposed rule would impose liability on a business that “disseminate[s] or cause[s] the dissemination” of a testimonial or “procure[s] a consumer review” that the business knew or should have known was fake or false. IAB asserted that these terms are vague and require clarification to avoid sweeping in companies, such as online retailers, that host consumer reviews and testimonials and engage in activities such as organizing, moderating, aggregating and prompting the submission of reviews and testimonials. The FTC’s commentary in its NPRM acknowledges that this provision would not apply to “any reviews that a platform simply publishes and that it did not purchase,” or to “businesses, like third-party review platforms, that disseminate consumer reviews that are not of their products, services, or businesses,” but it does not expressly acknowledge that this same reasoning applies to online retailers that allow reviews and testimonials to be hosted on their websites.
- IAB also believes that the rule will have unintended consequences by censoring honest consumer reviews. IAB contended that under the proposed rule, the FTC can pursue civil penalties for violations of the rule even when a business does not know that a consumer review is false. If the FTC attempts to regulate review hosting, IAB recommended that the Commission adopt an actual knowledge standard and create a safe harbor for review hosting when the company has reasonable processes in place to identify and remove fake reviews. IAB argued that if the Commission rejects this argument and imposes a “should have known” standard, the Commission must provide greater clarity about what sorts of indicators of inauthenticity would provide companies with sufficient notice to trigger liability.
IAB also argued that the FTC has failed to show that it has “reason to believe that the unfair or deceptive acts or practices which are the subject of the proposed rulemaking are prevalent.” According to the NPRM, the specific “unfair or deceptive acts or practices” prohibited by this rule are defined as reviews and testimonials: (1) by someone who “does not exist”; (2) by someone who “did not use or otherwise have experience with the product, service or business that is the subject of the review or testimonial”; or (3) that “materially misrepresents, expressly or by implication, the reviewer’s or testimonialist’s experience with the product, service, or business that is the subject of the review or testimonial.” IAB’s concerns specifically relate to the third category of prohibited practices, which covers any material misrepresentation (explicit or implicit) of the author’s experience. According to IAB, the rulemaking record does not establish that this specific conduct is “prevalent.”
In addition, IAB argued that the rule violates the First Amendment because it has provisions that are overbroad and vague.
Market Research Professors
Ben Beck, a professor at Brigham Young University, made the third presentation on behalf of himself and the professors at Penn State and Emory University. In their written comments, the professors stated that they “have studied how online review platforms can earn consumer trust by taking specific actions against firms and reviewers who write and propagate fake reviews.” They wrote: “We agree with the Commission’s declaration that consumer welfare is improved by mitigating online review fakery. The problem of consumer mistrust on online review platforms is significant; as the Commission indicates in section VII.A.1.A of the proposed rule, up to $15.85 billion in annual welfare gains may be recognized by consumers if review opportunism can be curbed.”
At the hearing, Professor Beck stated that consumers increasingly rely on consumer reviews when purchasing products, and fake reviews reduce consumer trust in in online reviews. “As consumers rely more than ever on user reviews for consumption activities, the dangers that arise from fakery, misinformation, and fictitious word of mouth increases.”
The professors identified five mechanisms that can be used by online review platforms to mitigate fake reviews and increase consumer trust by the platforms: (1) monitoring – evaluating reviews for authenticity; (2) exposure – exposing marketers propagating fake review; (3) community building – enabling consumer and review interactions; (4) status endowment – recognizing credible and helpful reviews; and (5) identity disclosure – having reviewers share identifying details.
The professors conducted studies with a total of 1,325 consumers to evaluate how these practices affect consumer trust, are perceived by consumers, may influence the performance of the online platform and build trust beyond the characteristics of the reviews. They found that each of the five practices increase platform trust. The most impactful ones are the firm-oriented practices – monitoring and exposure, and status endowment and community building also help increase platform trust. According to the professors, even though identity disclosure also increases platform trust, it has the weakest impact of the five practices (and identity disclosure is a contested practice because of privacy-related concerns such as identity theft). The professors noted that when reviewers have to reveal their identities, they are less likely to write negative reviews out of fear of retaliation by the reviewed business.
Professor Beck stated that the FTC should require online review platforms to adopt the four mechanisms that increase trust in the platforms the most, excluding identity disclosure by reviewers due to the negative consequences. He submitted a PowerPoint after the conclusion of the hearing.
Next Steps
After the hearing, the Presiding Officer issued an order stating that any comments in response to the proposed disputed issues of material fact are due on February 20. She “invited further submissions concerning such issues, including citing specific evidence that shows a material issue of fact is disputed.” If another informal hearing is needed, that will take place on or about February 26. No additional informal hearing was held on February 26.
On February 20, the FTC’s Bureau of Consumer Protection staff filed comments responding to IAB’s arguments that there are disputed issues of material facts. They continued to argue that there are no disputed issues of material fact.
On the same day, IAB filed its comments. According to IAB, “to provide ‘specific evidence’ showing that its proposed issues of material fact are disputed, IAB surveyed its member companies to learn more about the anticipated impact of the proposed rule on their review moderation and compliance costs. Eighteen member companies responded.” IAB argued that the survey results “demonstrate that there are two disputed issues of material fact at issue in this rulemaking that require further development through cross-examination” at another hearing.
In support of IAB’s first proposed disputed issue of material fact, “whether the compliance costs for businesses will be minimal, particularly if the ‘new or should have known’ standard is finalized,” IAB stated that more that 55% of the members who responded estimated that their initial compliance costs would be at least $1,000, which is more than double what the FTC estimated for large companies. The FTC’s Preliminary Regulatory Analysis posits that in a “heightened compliance review” scenario, large companies will spend approximately $492 “conducting a one-time review of the proposed Rule and notifying employees whose role involves creating new product pages, managing the company’s social media presence, and any other relevant practices covered by the proposed Rule.” (The NPRM states: “With heightened compliance review, the NPRM assumes lawyers at large companies, whose time is valued at $61.54 per hour, will spend eight hours conducting a one-time review of the proposed Rule and notifying employees whose role involves creating new product pages, managing the company's social media presence, and any other relevant practices covered by the proposed Rule.” That estimate seems rather low.)
IAB stated that the survey shows that approximately 20% of respondents estimated initial compliance costs would be over $50,000, which is over 100 times the FTC estimate.
In support of IAB’s second proposed issue, “whether the Commission’s finding that unintended consequences from the NPRM are unlikely [is correct] (e.g., for fear of violating the review suppression section, businesses will allow more fake reviews to stay up on their websites),” IAB stated that the survey results illustrate the negative consequences that will flow from the proposed rule as well as the tension between the proposed requirements. For instance, IAB stated that over half of respondents stated they would be somewhat or very likely to “change [their] current review process to delete, suppress, or otherwise display fewer consumer reviews,” in light of proposed Section 465.2’s imposition of liability on businesses that purchase or procure a review or disseminate a testimonial that the business knew or should have known was false or misleading.
IAB argued: “These survey results constitute affirmative evidence showing these two proposed issues are disputed, and that IAB as well as other interested persons should have the opportunity to further develop the record relating to these two issues by cross-examining witnesses.”
Why It Matters
The proposed rule is highly significant. If it becomes final, the FTC would be able to seek civil penalties against marketers who violate the rule. Violations of a trade regulation rule enable the FTC to seek civil penalties, which have increased from $50,120 last year to $51,744 this year. The FTC could take the position that each fake review or testimonial is a separate violation. The FTC will also be able to seek monetary redress for consumers and others injured by fake reviews and testimonials. Without the rule, the FTC is only able to obtain injunctive relief when challenging fake reviews and testimonials.
Section 18 of the FTC Act authorizes the FTC to issue trade regulation rules to address practices that are “prevalent,” and the FTC is likely to find that fake consumer reviews and testimonials are prevalent. The FTC is also likely to finalize the proposed rule, most likely with revisions based on the comments it received (which will probably not be substantial).
With these considerations in mind, marketers should carefully review their consumer review and testimonial practices to make sure that they are in compliance with the proposed rule.