Legacy Learning Systems – The Beginning of the End for Review Affiliate Marketing

We’ve all seen the testimonial advertisements on TV at 2 am and undoubtedly asked ourselves the burning question, “Does Alex Trebek really think Colonial Penn Life Insurance is that great?” All joking aside, it’s common sense and courtesy that an individual should only endorse products or services that they have actually used. As simple as that sounds, the Internet makes the issue much more complex by way of the well-known practice of “affiliate marketing.”
Affiliate programs, which are both legal and a major component of the e-commerce world, allow for individuals or entities to register as an “affiliate” of a company and earn commission based on generated web-traffic to the company’s site or “signing up” new customers for the company. Some programs utilize “reviewer affiliates” who promote the company’s products or services via online endorsements in exchange for some form of payment.
Although the FTC has previously reprimanded a handful of companies for affiliate program advertising issues, this week was the first action issued by the FTC that resulted in a fine. Tennessee-based Legacy Learning Systems, Inc. was recently slammed with a $250,000 fine (among other sanctions) for engaging in an affiliate relationship with reviewers who were not disclosing the relationship between the two entities, resulting in the FTC claiming the relevant reviews were deceptive ads and Legacy was on the hook for them.
Legacy sells guitar-lesson DVDs and employed an affiliate program to recruit and subsequently compensate “review ad” affiliates to promote the DVDs via various online forums. Based on this business model, the FTC accused Legacy of false advertising by misleading potential customers into believing the reviews written by its affiliates reflected the unbiased views of ordinary consumers, therefore violating the FTC Act. Pursuant to the FTC’s 2009 revised guidelines on endorsements and testimonials a positive review by a person connected to the seller (or someone who receives cash or in-kind payment to review a product or service) should disclose the material connection between the reviewer and the seller of the product or service. And the disclosure shouldn’t be buried deep in a set of legal terms, or invisible type in the footer of the page.
Probably recognizing that a battle against the FTC is no way to kick off 2011, Legacy agreed to an administrative settlement and must pay $250,000 while also implementing a comprehensive reporting procedure whereby Legacy must, on a monthly basis, review each of its top fifty (50) revenue-generating affiliate reviewer websites plus a random sample of fifty (50) additional affiliate reviewer websites to make sure that the required disclosures are being made. If the disclosures are not present, then Legacy must immediately terminate the affiliate. Furthermore, Legacy must provide all future and current affiliates with a copy of the Consent Order entered into with the FTC and a signed statement by the affiliate that it received the order and agrees to comply with the FTC requirements or risk being terminated by the affiliate program. Probably not the best way to introduce your company to a new affiliate.
David Vladeck, Director of the FTC’s Bureau of Consumer Protection was quoted as saying, “Whether they advertise directly or through affiliates, companies have an obligation to ensure that the advertising for their products is not deceptive […] Advertisers using affiliate marketers to promote their products would be wise to put in place a reasonable monitoring program to verify that those affiliates follow the principles of truth in advertising.”
When the FTC published its revised advertising guidelines it was pretty obvious (as with most attempts to regulate the Internet when you’ve been in a brick and mortar mentality since inception) that there was eventually going to be friction in the online world – but no one knew to what extent. We’re finally getting a taste of the enforceability of those guidelines and something tells me that affiliate program hosts were not expecting the enforcement to pack such a punch. That being said, sites that engage in any type of compensated review system as a form of advertising are going to feel the aftermath of this one. Affiliate programs, like most marketing tactics, are about the bottom line – when the only alternative to ridiculously impractical mandatory monitoring is the FTC breathing down your throat, it makes you wonder how long until review affiliate program operators cut their losses and just shut down these programs completely.

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