Last week, the FTC announced yet another settlement with a company regarding its customer review practices. This case involved a popular cosmetics brand that retailed at Sephora—Sunday Riley. According to the FTC, Sunday Riley’s managers and Chief Executive Officer ordered employees and interns to create fake Sephora accounts and submit reviews for their products. The FTC had obtained multiple company emails showing the lengths Sunday Riley went to drive positive customer reviews, including evading Sephora’s detection by manipulating IP addresses.
Sunday Riley and its CEO settled with the FTC. In the settlement, the company and CEO did not admit fault, which is standard in these settlements. Similar to other recent settlements relating to “fake” customer reviews, the parties agreed on a go-forward basis to not make misrepresentations about the status of an endorser or customer review and to disclose material connections in endorsements and reviews.
In a dissent filed by Commissioner Rohit Chopra, and joined by Commissioner Rebecca Kelly Slaughter, Commissioner Chopra criticized the settlement for not being harsh enough:
Today’s proposed settlement includes no redress, no disgorgement of ill-gotten gains, no notice to consumers, and no admission of wrongdoing… Unfortunately, the proposed settlement is unlikely to deter other would-be wrongdoers. Consider the cost-benefit analysis that a firm might undertake in considering whether to engage in review fraud. The potential benefits are substantial: higher ratings, more buzz, better positioning relative to competitors, and higher sales. The direct costs of generating reviews are minimal, certainly, far less expensive than traditional advertising. The biggest potential cost is if the wrongdoer is caught, but it is unlikely that the vast majority of fake review fraud goes undetected. Even fake reviews that are detected may simply be removed with no sanction against the creator.
While Commissioner Chopra is right to call out the growing problem of fake reviews and how it can distort markets, his criticism of “no-money, no-fault” orders is overstated. Companies that enter into these orders are subject to strict reporting and recordkeeping obligations. For example, Sunday Riley must maintain for five years all records that “tend to show lack of compliance” with the order and copies of each ad that includes product reviews or social media endorsements, among other records (this obligation will last until the year 2039). The FTC imposes these reporting and recordkeeping requirements because its Division of Enforcement closely monitors companies’ compliance with such consent orders. Under the FTC Act, the FTC has the authority to assess extraordinary penalties if a party violates an order (or violates a rule properly promulgated by the FTC). The FTC Act was deliberately designed that way, and, based on our experience counseling clients in this space, the threat of an enforcement action and steep civil penalties have both a specific and general deterrent effect.