This week, a federal court in California issued an 80-page opinion that painstakingly walks through claims made against several celebrities who had promoted the Ethereum Max (EMAX) cryptocurrency, also called tokens.
The lawsuit was filed last year against Kim Kardashian, Floyd Mayweather, and former professional basketball player Paul Pierce, challenging their EMAX endorsements and social media posts. Since then, the plaintiffs have amended the complaint multiple times.
Among other issues it addressed, this week’s court decision provided a helpful reference point showing where a court aligned with and diverged from the Federal Trade Commission’s Endorsement Guides.
First, the court found that the “#AD” disclaimer in the following post made clear that Kardashian was being paid, even though it appeared toward the bottom of the post.
The court held that because “#AD” appeared before the swipe-up banner, “any reasonable consumer would inevitably see the hashtags before swiping up to purchase the Tokens.” It observed that Kardashian is a well-known influencer who is paid for many of her social media posts, and therefore, “it should not come as a surprise to any reasonable consumer that she was paid” for the post, given that it included the “#AD” disclaimer. The court dismissed the plaintiffs’ challenge to the disclosure and concluded it was clear that the post was sponsored advertising.
The decision demonstrates that courts will look at social posts in context to determine whether reasonable consumers understand that a post is sponsored. It also appears to diverge from the FTC’s position in the Endorsement Guides: What People Are Asking, where the agency writes, “if #ad is mixed in with links or other hashtags at the end, some readers may just skip over all of that stuff.”
Second, the court weighed in on a so-called dark pattern (though thankfully it did not use the phrase). In her post, Kardashian also wrote that EMAX “burned…literally 50% of their admin wallet…,” which the court said created a false sense of scarcity. It found that “[t]he only possible reason that a business would pay someone to tell millions of followers that its product was rapidly being ‘burned’ is to create an impression of scarcity. . . Advertising that conveys messages concerning limited supply or limited time offers are meant to create a sense of urgency and will inevitably be material to consumers who want the product or price offered.” However, it is possible that the nature of the challenge—a cryptocurrency where scarcity and timing hugely impact the price and value—played into the court’s reasoning.
Next, the court held that Mayweather’s statement at the “Bitcoin 2021” conference that “I believe there’s gonna be another cryptocurrency just as large as Bitcoin someday,” while wearing a t-shirt with “EthereumMax” emblazoned across the chest, was “clearly puffery, upon which no reasonable consumer could rely.” The court noted that it was a statement of opinion about the prospects for the future, not a measurable, objective statement of fact. Similarly, the court rejected the plaintiffs’ argument that Mayweather had a duty to disclose that he was being paid by EMAX’s founders when he wore certain articles of EMAX clothing and allowed EMAX to exploit his name and likeness.
However, the court found that a “fraud by omission” claim required plaintiffs to allege specifically where and how the disclosure should have been made. Thus, it suggested that it might agree with the plaintiffs if they amend their complaint to allege more detailed facts in the complaint. Whether the court will ultimately agree with the plaintiff (and the FTC’s position on the matter) remains to be seen.
Interestingly, the defendants argued that plaintiffs could have avoided the losses by refraining from investing or doing more research before investing. The court rejected this argument, noting it is “significant that the social media posts and promotions were specifically aimed at the celebrities’ already-dedicated followers” and “by definition such ‘followers’ are inevitably predisposed to place significance on what the celebrities they follow are doing and saying.” As a result, it held that “the celebrities’ own followers are particularly vulnerable to the messages conveyed to them, perhaps suggesting that such consumers should not bear all the risk.”
The court went one step further, observing that the relevant information (i.e., that the celebrities were promoting the tokens in exchange for a commission as opposed to an honest belief in the soundness of the investment) was not disclosed anywhere by anyone, and even if consumers could have suspected that the celebrities were being paid to promote the tokens, there was nothing they could do to confirm or dispel that belief.
Finally, when determining consumer injury, the court looked at the FTC’s Data Spotlight: “Reports show scammers cashing in on crypto craze,” when determining whether consumers suffered harm from the defendants’ marketing. It acknowledged that the report did not specifically address or name any of the defendants in the case, but it nevertheless found it plausible that the defendants “engaged in the exact kind of bogus crypto ‘investment opportunity’ scam that the FTC Data Spotlight reported on as causing hundreds of millions (and rising) of dollars of damage to investors.”
The decision suggests that courts will follow the FTC’s guidance in many circumstances, and even look to the agency’s reports when analyzing consumer harm. However, the opinion signals that (as with all advertising), influencers’ social media posts and endorsements should be viewed in context. The Ethereum Max plaintiffs have one more opportunity to amend the complaint, where we expect these issues to continue to play out. Stay tuned.