As previously blogged about here, software developers that are engaged to design lead generation management platforms for third-party use in conjunction with direct marketing campaigns, specifically, telemarketing, should be aware of a number of factors related to potential liability for the actions or inactions of their clients.

Consider that platform providers can potentially be held liable for Telephone Consumer Protection Act violations committed by platform users where the former “knowingly” allows clients to use the technology for unlawful purposes.  Importantly, in a 2015 order, the Federal Communications Commission stated that initiating a telephone call can apply to either the person or entity that takes the steps necessary to physically place a telephone call or the person or entity that is “so involved in the placing of a specific telephone call as to be deemed to have initiated it.”

The absence of actual knowledge, however, may not necessarily be a defense for platform developers.  For example, consider what a developer “should” reasonably know, and how active a role a developer plays in the creation, control, initiation and/or dissemination of promotional content (e.g., telephone calls).  Responsibility for the specifications, requirements and/or deliverables of the software may also be deemed relevant by a court when assessing whether platform provider liability is triggered.

Whether a platform developer can be held liable for providing the software used for direct marketing purposes is not always a black and white analysis.  Certainly, the totality of the specific facts and circumstances, including, the right to control and role in the underlying transmission, are relevant when assessing the identity of the “caller,” and legal responsibility for ensuring TCPA and Telemarketing Sales Rule compliance.

Applying the factors in the 2015 FCC order, the FCC and FTC have found dialing platform providers directly liable for violations of the TCPA and TSR. 

Recently, the FTC ordered a dialing platform provider to pay $75,000 and review all pre-recorded calls and to terminate relationships with clients that were using the dialing platform to make illegal calls. The court determined that the platform provider provided “substantial assistance” to clients that were using the technology to initiate unlawful telephone calls and that it r consciously avoided knowing that the platform was being used in an unlawful manner. 

In another recent decision, the FCC fined a dialing platform provider approximately $2.8M for permitting telemarketers to utilize its software to make robocalls to mobile phones without lawfully required consent.  This decision is particularly noteworthy because the fact that customers were required to agree to terms that included an obligation to comply with applicable legal regulations was not deemed exculpatory.

The 2015 FCC ruling makes clear that “a provider of auto-dialing services cannot blithely sit back and blame his customers for any TCPA violations that result from their use of his service.”

It is not difficult to imagine regulatory agencies and plaintiffs’ attorneys pursuing similar third-party accountability remedial approaches in the context of other forms of direct marketing.  Providers that simply assume they are passive conduits and immune from liability under the TCPA, the TSR or other applicable legal regulations when negotiating contracts, engaging in the development process and maintaining involvement in promotional campaigns may unknowingly be exposing themselves to extraordinary liability. 

Consult with experienced FTC defense lawyer to discuss liability mitigating steps designed to ensure platform users are not operating in a non-compliant manner, including, but not limited to, utilizing responsible and professionally drafted contracts; designing and implementing reasonable customer screening, vetting and due diligence protocols; implementing an appropriate certification process; and ensuring that appropriate remedial action is taken in the event unlawful conduct is known or reasonably should be known.

Richard B. Newman is an advertising and marketing practices attorney at Hinch Newman LLP. You can follow him on Twitter @FTC Defense Lawyer.

Informational purposes only. Not legal advice. May be considered advertising material.

Sometimes it takes a crisis to challenge conventional wisdom. Not long ago, an imaginary line separated brand marketing, with its focus on awareness and devotion to subjective “big ideas,” from direct response and its laser-focus on measurable outcomes like driving sales. Many firms either practiced one or the other, but not both. Or, if they did run both brand and direct response operations, they typically did so inside siloed marketing organizations. Today, the story is changing.

Across industries, DTC disruptors like Peloton, Casper Mattress, and Warby Parker have seized market share. Large CPG holding companies like Unilever and P&G have responded by acquiring DTC firms like Dollar Shave Club and Billie, respectively. But DTC acquisitions were only the start. Increasingly, even traditional CPG brands are turning to direct response, due to a confluence of trends that includes a greater emphasis on first-party data, better media attribution tactics, and the need to tie marketing to business outcomes. But above all, traditional CPG brands must embrace direct response because doing so brings them closer to their customers.

CPG brands can go direct, but they need to proceed with common sense

A few years ago, Coca-Cola ran a direct response experiment with its “Share a Coke” campaign. The idea was a good one—create a more personal relationship with consumers and inspire shared moments of happiness. But the payoff (your name on a Coke) was more gimmick than game plan. That is, Coca-Cola gave consumers a wow-factor, but none of the marketing, sales, or distribution infrastructure the company created to pull off the stunt brought them closer to becoming a direct marketing brand.

Of course, the soda wars are nothing if not symmetrical. Recently, Pepsi did direct response too, but instead of personalizing the product, the brand personalized the sale via DTC websites. Yes, Pepsi products are still largely bought through retailers and at venues and restaurants, but in the midst of a pandemic, Pepsi has also created viable marketing, sales, and distribution infrastructure that serves as a direct conduit from brand to consumer.

This trend is playing out broadly across CPG brands. For the most part, however, brands have turned to various platforms such as Instacart, Pinterest, and Instagram in order to pull off a DTC pivot. But shifting online and minimizing the number of middlemen between brand and customers isn’t exactly the same thing as “owning” the customer relationship. In the short-run, this strategy might be a good hedge against consolidated power in the e-commerce space, but as CPG brands push toward a closer relationship with consumers, they must remember the lesson of Amazon—those that fulfill the customer’s order, know the customer better than they know themselves.

 It’s about sales, but it’s really about relevance

Brands with first-party data are the haves of marketing, and those without are the have-nots. But instead of building the customer relationships that yield data, many have-nots,  including CPG brands, continue to rely on third-party data to improve media targeting and drive revenue.

That’s one reason why PayPal spent $4 billion to acquire a shopping coupon plug-in called Honey. As Business Insider put it, “[the] business model where businesses are paid for driving transactions is unequivocally the model of the future.” Brands that outsource the key aspects of that model do so at their long-term peril because they ignore a fundamental law of business: know your customer.

Direct response brands are many things to many people, but their common denominator is that they know their customers better than anyone else. To achieve that knowledge, direct response brands have to be incredibly sales-driven. But sales-driven isn’t a shorthand for tunnel vision or a bottom-line mentality, despite what some brand marketers may think. In fact, sales is a meme that describes relevance.

In good times, that hyper-focus on relevance informs every decision, from product, to marketing, to distribution. Direct response brands miss the mark sometimes, but they miss small and adjust quickly because their DNA is coded to seek out relevance. And it’s that hyper-focus on relevance that pays dividends when a massive disruption like a pandemic creates widespread uncertainty. Consider the early, chaotic months of the pandemic. Brand marketing was largely criticized for either going dark or pushing out tone deaf messages. In contrast, most direct response brands didn’t go dark or appear tone deaf, because they knew precisely where to meet consumers, even at a moment when consumer behavior was changing by the hour.

 There is no going back

For all the talk of “getting back to normal,” there’s no reason CPG brands should reverse course on the progress they’ve made on the direct marketing front. Why would the brand give up the data-rich consumer relationship? Why would the business forgo the flexibility and resiliency of an alternative conduit to the consumer? And why would the consumer forgo the convenience and savings of going direct?

The answers should be obvious—there is no going back. But that doesn’t mean marketers have done a mental reset yet, nor have marketing organizations had the time restructure themselves. Nevertheless, CPG brands have glimpsed the future in this moment. They should build on whatever DTC initiatives they’ve run by embracing direct response as their marketing engine, not a sideshow. Because those CPG firms that use direct response to drive operations are also the same brands that can truly say they know their customers better than anyone else.

An increasing number of celebrities and social media personalities are endorsing the use of cannabidiol (CBD) products through social media. Many of these “influencers,” however, fail to take into account and comply with the complex regulatory environment surrounding CBD advertisements, which can have consequences for CBD companies themselves. In the United States, the Federal Trade Commission (FTC) and the Food and Drug Administration (FDA) both limit the use of certain language in CBD endorsements. As these advertisements attempt to reach the broadest possible audience, possible violations are especially noticeable to regulators, who have stepped up their enforcement efforts in this area.

What is CBD?

With the passage of the 2018 U.S. Farm Bill, hemp-based CBD products were removed from the Drug Enforcement Administration’s list of scheduled substances, thereby decriminalizing the possession of such CBD products. The Farm Bill defines hemp as a strain of the Cannabis sativa plant species that does not contain more than 0.3% of the psychoactive component tetrahydrocannabinol (THC). Instead, hemp has significantly higher concentrations of CBD. The legalization of recreational and medicinal marijuana in certain states refers to the cannabis plant containing high levels of THC, which may also contain some CBD. Certain states, such as California, have stringent requirements regarding advertising cannabis products, but these rules do not apply to hemp-based CBD products.

Direct versus Affiliate Marketing

Advertising through social media falls into two broad categories: direct advertisements and affiliate marketing. Direct advertisements are paid by the company to appear in a customer’s feed with the term “Advertisement” somewhere in the post. These direct advertisements are most similar to traditional commercials in other forms of media. Affiliate marketing, which is the centerpiece of this article, occurs when an influencer earns a commission for referring his or her followers to a brand or site. These referrals usually happen through affiliate links (e.g. brand.com/influencer) or promotional codes (e.g. typing “Influencer Name” as a promotional code during checkout).

Social Media Giants: The Main Affiliate Marketing Platforms

Social media companies have disparate views regarding the ability to promote CBD products on their platforms in the United States. The two main social media giants are the primary websites celebrities and influencers use to promote products. Other social media platforms, such as Twitter, allow direct advertisements for CBD products. However, more CBD companies use affiliate marketing through these social media giants than direct advertisements.

Despite not having explicit rules against direct advertisements for CBD products, the primary social media platforms have repeatedly taken down such advertisements. As a result of these practices by these social media platforms, influencers have gained prominence as a method for CBD companies to improve traction in the increasingly-crowded space. With influencers earning up to $50,000 for a single sponsored post, affiliate marketing provides influencers with a lucrative business opportunity and CBD companies with a method to reach millions of people. As sponsored posts become more prevalent, the FTC and FDA have taken more of an interest to regulate advertising infractions.

CBD Advertising Regulations: The FTC and FDA

The FTC and FDA are leading the federal regulation of CBD products and advertising, and the agencies collaborate to prevent unlawful activity, including through social media platforms.

FTC

In 2009, the FTC issued guidelines concerning the use of endorsements and testimonials, which seek to prevent companies from using these marketing tools to circumvent advertising laws. In addition to providing detailed examples, the guidelines state that if paid testimonials or endorsements are false or misleading, the company itself can be held responsible. Additionally, all cases of a “material connection,” including paid relationships and free products, between the endorser and advertiser must be “clearly and conspicuously” disclosed in the sponsored post. For example, an influencer promoting a product must state the disclosure without the viewer needing to click “more” in the caption. In 2017, the FTC provided updated FAQs regarding such disclosures and other endorsement claims.

In more recent news, the FTC filed its first lawsuit involving COVID-19 related claims. The FTC sought injunctive relief in federal court and simultaneously filed an administrative action against a defendant who had marketed its CBD products as able to treat and prevent COVID-19. The defendant had also been the recipient of a warning letter from the FDA regarding illegal marketing of its CBD products. This lawsuit demonstrates the FTC’s ability to quickly investigate and respond to unsubstantiated health claims and as discussed further below, the FTC will act swiftly for egregious CBD advertisements. FTC Commissioners have made clear that deceptive influencer marketing is a top priority for the agency.

FDA

Congress specifically preserved the FDA’s authority to regulate products containing CBD under the Federal Food, Drug, and Cosmetic Act (FD&C Act) and Section 351 of the Public Health Service Act. One of the FDA’s main concerns is the “proliferation of egregious medical claims being made about products asserting to contain CBD that haven’t been approved by the FDA.”

The FDA also has significant safety concerns regarding the use of CBD in foods and dietary supplements due to potential liver damage issues. Because of the FDA’s approval of an anti‑seizure medication called Epidiolex® and the substantial clinical trials related to Sativex®, the FDA’s present position is that CBD products cannot be marketed as food or dietary supplements. In its recent report to Congress, the FDA has specifically indicated the questionable safety of CBD products and contemplated whether they meet the necessary safety standards to market CBD as a food or dietary ingredient. The FDA has stated that it has not received sufficient information to confirm that CBD meets this standard. With that said, the FDA has generally used its discretion enforcing these restrictions in regard to the CBD products on the market as long as the products do not contain claims about the treatment of diseases, as described in further detail below.

The FDA has an entire webpage dedicated to regulatory resources, FDA communications, and FAQs regarding the use of CBD in various products. The FDA has previously suggested it is open to developing a regulatory framework if it can be shown that CBD meets the regulatory standards. Given its recent report to Congress, it is unlikely anything will be released in the near future.

Last year, the FTC and FDA sent joint warning letters to CBD companies that claimed their products could treat Alzheimer’s, cancer, and other serious diseases. The agencies asserted that the touted health benefits were unsubstantiated health and efficacy claims and that, given these claims, the products at issue would fall under the classification of a “drug” under the FDA’s statutes. A few of the companies that received the warning letters had attempted to categorize the CBD products as “dietary supplements,” which would preclude them from categorization as a drug and related regulation, but the FDA concluded that CBD products are excluded from the definition of a “dietary supplement.”

The FDA has indicated that its enforcement actions will focus on situations in which a product developer makes unproven claims to treat serious diseases, as “patients may be misled to forgo otherwise effective, available therapy and opt instead for a product that has no proven value or may cause them serious harm.” With that said, the FDA has also stated the addition of CBD to cosmetic products is lawful. These products, however, cannot make claims that the product cure, treat, or prevent any disease or health-related condition, including aches and pains which are classified as topical external analgesic drug products.

Drafting or Reviewing Social Media Posts

Due to the regulatory issues surrounding CBD advertisements, CBD companies should include in their influencer contracts that the company has the right to review, or even write, the social media post. Profile posts, rather than disappearing stories, are the easiest to review, since the CBD company has plenty of time to review prior to publication. Although the disappearing stories can be saved to the influencer’s profile, profile posts allow for a scripted statement and therefore reduces the risk of unintended language.

How to Advertise CBD Products: Tips for Influencers and CBD Companies

Below is a quick list of practical tips for both influencers and CBD companies when entering into a CBD affiliate marketing contract:

Celebrities/Influencers

• Do not state that the CBD product could treat, mitigate, cure, or prevent diseases, including aches and pains.
• Do not state that CBD products are lawfully marketed in all 50 states. For instance, powerful lobbying groups have successfully stalled legislation in California regarding CBD.
• Work with the CBD company to preview the post prior to publication or receive help writing the post.
• Review the FTC’s Endorsement Guides and FAQs describing disclosure rules and examples of properly promoting products through social media.
• If receiving a free product or payment for a sponsored post, ensure such disclosure is “clear and conspicuous.”

CBD Companies

• Contract for specific language to write or review the influencer’s post prior to publication.
• Utilize posts, rather than disappearing stories, to ease review and to reduce the influencer’s ability to go “off-script” during a live broadcast.
• Be aware of the Consumer Review Fairness Act, which prohibits companies from using contract provisions to restrict consumers’ ability to honestly review products and services or to threaten or penalize consumers for posting negative reviews or complaints, including through affiliate marketing in social media platforms.
• Be aware that advertisements for subscription or auto-renewal programs face an additional level of scrutiny. Subscription programs must provide additional disclosures, including clear information that the customer is enrolling in an auto-renewing program.

The passage of the 2018 U.S. Farm Bill decriminalized hemp-based CBD, which has led to an influx of CBD products. As CBD companies are prohibited from direct advertising through many social media and traditional marketing platforms, an increasing number of them are turning to celebrities and social media influencers for affiliate advertising. Given the risk to marketers, companies should avoid working with an influencer that does not follow the regulations and guidelines. With the CBD market expected to grow up to $23 billion in 2023, CBD companies will increasingly look towards influencers as a way to promote their products. The FTC and FDA have increased their focus and scrutiny towards influencer marketing and CBD advertisements, so both CBD companies and influencers need to fully understand the CBD advertising rules and regulations.