A maker of popular guitar-lesson DVDs has agreed to pay $250,000 to settle a Federal Trade Commission complaint about sock puppetry, with the agency saying the DVD maker deceived customers by paying marketers to post glowing online reviews of its products while posing as consumers.
The FTC's complaint against Lester Gabriel Smith and his Nashville, Tennessee-based Legacy Learning Systems Inc. is part of an ongoing FTC effort to combat deceptive advertising in print and online. The company's Learn and Master Guitar program is marketed to beginners and intermediate players who want to learn the guitar at home through instructional DVDs.According to the FTC's complaint, Legacy Learning advertised its guitar course via a program which recruited "Review Ad" affiliates to promote its products through online endorsements in articles, blog posts and other forums. These bogus testimonials were then conveniently placed next to links to Legacy's website.
The FTC accused Legacy of false advertising by misleading potential customers into believing the online reviews written by its marketing affiliates reflected the unbiased views of ordinary consumers or "independent" reviewers -- a fact the company did not disclose.
Legacy, the FTC charged, kicked back "substantial commissions" to its affiliates for the sale of each product – which retails for $249 – resulting from their reviews. These phony endorsements, the FTC says, generated more than $5 million in sales for Legacy.
The FTC's guidelines on endorsements and testimonials, issued in 2009, spell out in general terms which types of endorsements or testimonials constitute unfair or deceptive advertising. Under these guidelines, a positive review by someone connected to the seller – or someone who receives cash or an in-kind payment – must disclose the relationship.
"Whether they advertise directly or through affiliates, companies have an obligation to ensure that the advertising for their products is not deceptive," David Vladeck, Director of the FTC's Bureau of Consumer Protection, said in a statement. "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."
Under the proposed settlement, Legacy Learning and Smith will pay a $250,000 penalty for engaging in deceptive advertising. In addition, they're required to monitor and submit monthly reports on their top 50 revenue-generating affiliate marketers. Legacy must also make sure these marketers fully disclose the fact they earn commissions on sales and no longer misrepresent themselves as ordinary consumers or independent reviewers.
The settlement also required Legacy to monitor a random sampling of another 50 of its affiliate marketers and submit monthly reports to the FTC on the same criteria.
Last July, the public relations agency working for a video game developer settled similar FTC charges after it was caught posting fake reviews on the iTunes store to boost clients' sales.
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