Online Undercover Marketing
A Reminder of the FTC's Unique Position to Combat Deceptive Practices
Marla Pleyte | UC Davis School of Law
Posted Monday, May 1, 2006
6 U.C. Davis Bus. L.J. 14 (2006)

[1] Fake charities proliferated after Hurricane Katrina and other natural disasters, prompting news reporting organizations and consumer protection advocates to call these scams to the public's attention.[2] Every year, hundreds of thousands of consumers report purchases that are paid for but never received.[3] Money wiring and investment scam artists abound, preying on unsuspecting consumers.[4]

However, while Internet fraud is often regarded as the province of fly-by-night operations, even legitimate and well-known businesses present consumer protection challenges. False and unsubstantiated product claims,[5] hidden terms in online contracts,[6] and violations of consumer privacy[7] are but a few of the online practices that have been challenged by the FTC. Recently, a wholly different type of online business practice has emerged that is both pernicious and virtually undetectable.

Most commonly referred to as "undercover marketing," "buzz marketing," or "guerilla marketing,"[8] these practices consist of companies posing as objective consumers or members of a movement or fan base. These companies tout their products and services in a manner that would not lead consumers to suspect that the company itself is behind the message. A widely used online encyclopedia defines undercover viral marketing as follows:

A viral message is presented as a cool or unusual page, activity, or piece of news, without obvious incitements to link or pass-along. In Undercover Marketing, it is not immediately apparent that anything [is] being marketed. Particular effort is made to make the discovery of the item seem spontanous [sic] and informal, to encourage natural memetic behavior....Because of the large amount of unusual and entertaining content on the internet [sic], this can be the hardest type of viral to spot, especially as companies try to imitate the style and content of amateur websites and authentic underground movements.[9]

While promoters have used these techniques since well before the Internet existed, the Internet provides a new array of opportunities in which to apply them.

Buzz campaigns are now being initiated in chat rooms, where marketing representatives assume an identity appropriate to their target audience and pitch their product. Personal Web logs (blogs) are another popular media for electronic buzz marketing campaigns; advertisers seek out authors of the "right kind of blog" and trade product or currency for promotion. Instant messaging (IM) applications are also being looked at as a vehicle for carrying out buzz marketing campaigns with either humans or IM bots doing the pitching.[10]

Ad agencies specializing in undercover marketing have come into existence, particularly in large markets like New York and Los Angeles. According to these agencies, the primary benefit of undercover campaigns is that they are relatively inexpensive yet still successful in reaching consumers aged 18-34 who have become jaded to standard advertising techniques.[11] For example, one agency employs "chat-room 'cyber-reps' to spread hot, not-always-flattering gossip about client company recording artists" in order to generate publicity for its albums and tours.[12]

Regular ad agencies, including "some of the world's most authoritative marketers," are also creating buzz marketing units.[13] For example, Lee Jeans used online viral marketing to promote its products to a younger market. First, Lee selected 200,000 web surfers and emailed them "a trio of grainy video clips that were hilarious in their apparent naiveté."[14] As these individuals forwarded the messages to their friends, the viral marketing campaign took off. After a few months, Lee disclosed through a TV and radio blitz that this was really a promotion for a new video game and that in order to interact with the game at higher levels, players had to get "secret codes" off of Lee products.[15]

These undercover online practices have their roots in offline practices that have been used for years. For example, Sony Ericsson enlisted individuals to pose as tourists and ask other people to photograph them in front of tourist destinations.[16] In the course of this interaction, the phony tourists praised the camera phones and described their features and where they could be purchased. Similarly, companies such as Vespa, Hebrew National, Ford, and Hasbro have also enlisted "real people" to assist them in their marketing efforts.[17] For example, Vespa hired attractive and friendly motorbike riders to mingle with patrons at coffee shops and discuss their scooters.[18] Similar techniques have been used to promote liquor and flavored water at bars and gaming accessories at Starbucks.[19]

The growth and pervasiveness of these practices both offline and online suggest that their use will continue to increase. Paul Cernohaus of Coleman believes that viral marketing is the future.

[The goal is] getting to those people-those podcasters and bloggers-and having them say something really nice about Coach bags or Sony products…. most companies that have a strong brand are already doing stuff [in that area]. For instance, Coleman's brand is huge: We have 97% brand name awareness. We have people that do nothing more than go into chat rooms and chat about Coleman....We have to use everything possible, whether the Internet-where you're setting up fake chat rooms-or pods and stuff like this…Camping circles, camping blogs, whatever.[20]

Marketer Paul Spitzberg of Coach, Incorporated, is also considering the future impact of these practices on promotional strategies.

One of the things that eventually will need to be considered by our industry is how the move toward viral marketing will affect us, long after the Gen Xers. Let's go to the next set, where people aren't watching TV and aren't reading the newspapers and are getting all of their information online. How are we going to react to viral marketing and other new paradigms that are being developed today?[21]

The increasing use of undercover marketing raises obvious questions. How will consumer decision-making be affected by these practices? Will consumers become savvy to viral marketing or will they be deceived by increasingly sophisticated and subtle techniques? Is the current legal regime sufficient to address the competitive and consumer harms that may result from the use of these practices? This paper examines the state of the law in this area and its ability to address issues stemming from online undercover marketing. After analyzing common law solutions and state-level consumer protection regimes, this paper reaches the conclusion that the FTC is uniquely positioned to address these practices and should, at the very least, indicate publicly that such promotional techniques constitute a deceptive practice.

[22] As consumers have access to more information, they are able to make better purchasing decisions and improve the functioning of the relevant market. A related claim is that the new undercover techniques are necessary in order to effectively market products and services as consumers increasingly ignore conventional advertising.[23] Proponents further argue that using this type of marketing, because it is inexpensive compared to traditional TV, radio, or print advertising, lowers the direct costs of companies and thereby increases economic efficiency.

Opponents of undercover marketing argue that these efficiency arguments are overstated and ignore consumer harms associated with these practices. This view claims that undercover marketing increases consumer search costs rather than lowering them. When faced with both legitimate and advertiser-sponsored communications, consumers will have to perform additional research in order to decide which communications to trust. In response, consumers may choose to heavily discount all communications posted on the Internet except those from known sources.[24] As a result, even legitimate postings by objective past purchasers of a product may lose the informational quality that they currently provide.[25] A related concern is that undercover marketing will further erode the public's faith in large corporations and the marketplace.[26]

Another argument against undercover marketing is that it is likely to deceive and harm consumers. Consumers tend to discount messages they know are coming directly from sponsoring companies.[27] Existing legal doctrines, such as the acceptance of puffing as a permissible marketing technique, explicitly acknowledge consumers' ability and inclination to do so.[28] Entities using undercover marketing, however, do not reveal their sponsorship of the promotional messages that they plan and pay for because doing so would lessen the credence consumers give their claims. As a result, consumers are unable to take into account the bias that inevitably creeps into any communication sponsored by the advertiser because they do not know of the advertiser's relationship to the message. If the consumer mistakenly chooses to trust a message planted by an undercover advertiser, the message may serve as a source of disinformation that improperly influences the consumer's purchasing decisions.[29]

Efficiency arguments for allowing online undercover marketing to continue unabated assume that the information provided by such advertisers will be accurate and improve consumer decision-making. Given that deceptive advertising continues to be a problem even in traditional media, this assumption does not hold. Marketers that use deceptive practices in print or TV advertising will likely opt to employ similarly deceptive practices online. As a result, the risk of such messages containing misleading content and eroding consumers' ability to use the Internet as a reliable source of information outweighs any potential efficiency-enhancing increases in information provided by undercover marketing.

[30] Further, undercover marketing messages arguably engage in discussion of public issues that reaches well beyond the scope of traditional marketing messages. As a result, undercover marketing proponents argue that undercover marketing should enjoy more constitutional protection than other forms of advertising.[31], [32]

For example, Justice Breyer's analysis of certain company communications in Nike, Inc. v. Kasky suggests that some unconventional promotional messages intermingle commercial and non-commercial speech in such a way that the commercial elements of the message become more protected than they otherwise might be.[33] In analyzing Nike's letters to university presidents and athletic directors regarding the company's labor practices, Breyer found the less commercial elements of the letters to justify heightened scrutiny of the California Unfair Competition Law that proscribed them.[34] He focused on the fact that the letters were not in a traditional advertising format, did not propose a commercial transaction, and "provided 'information useful in discussions' with concerned faculty and students."[35]

Arguably, undercover marketing practices could be protected under these standards as well. Undercover marketers' communications are not in a traditional advertising format. In fact, because of their unconventional format and placement, it is usually impossible to discern that they are advertising messages at all. Further, they generally do not propose a commercial transaction, focusing instead on communicating the speaker's opinion or knowledge of the product.[36] Finally, undercover advertisements not only offer information that is useful in discussing the product, but are actually part of an ongoing dialogue between individuals.

What this argument ignores, however, is the role the content of the speech plays in determining the level of constitutional protection to which it is entitled. In the case of undercover marketing, the messages are focused on product features and performance. Undercover marketing campaigns that focus on "public matters in public debate" are rare.[37] Compare this to the content of the communications in Nike v. Kasky where the working conditions in Nike's factories were the subject of widespread controversy and national debate.

Rather than suggesting that undercover marketing practices are protected by the Constitution, Nike v. Kasky demonstrates the need for the development of a commercial speech doctrine that will effectively and predictably differentiate between speech entitled to First Amendment protection from deceptive and self-interested communications not involving important public issues. In the California Supreme Court's Nike v. Kasky decision, dissenting Justice Brown acknowledged the need for such development.

With the growth of commercialism, the politicization of commercial interests, and the increasing sophistication of commercial advertising over the past century, the gap between commercial and noncommercial speech is rapidly shrinking…. I believe the commercial speech doctrine, in its current form, fails to account for the realities of the modern world--a world in which personal, political, and commercial arenas no longer have sharply defined boundaries.[38]

In short, while language from recent decisions like Nike v. Kasky may be read to suggest that laws proscribing undercover marketing practices may be subject to heightened Constitutional scrutiny, this actually reflects the widely recognized need for evolution of First Amendment commercial speech jurisprudence rather than a determination that undercover marketing ought to be protected.

Current legislative, judicial, and public attitudes towards consumer welfare and business regulation suggest that deceptive undercover marketing will not be tolerated.[39] While these practices are in their infancy, they are becoming increasingly prevalent and sophisticated. As the media begins uncovering some of these practices, public attention will prompt debate, lawsuits, and possibly regulatory action.[40]

[41] In such a world, because consumers could readily determine the veracity of claims and compare these claims to those of competing products, deceptive practices would accomplish nothing. In fact, deceptive practices would actually backfire on advertisers because consumers would distrust and punish companies that acted deceptively.[42] This world, however, diverges from reality in several key respects.

First, consumers do not have perfect information. There are too many products, too many claims, and too little time for consumers to acquire all the information necessary to make truly optimal purchasing decisions. As a result, consumers must rely on advertising messages, the experience of friends, and media reports regarding product quality.[43] As the number of products and associated claims grows, consumers increasingly rely on informational shortcuts.[44] One of the most valuable of these shortcuts is the ability to give credence to claims promulgated by advertisers themselves.[45] Another critical source of information is accounts of other consumers' experiences with products. As a result, many potential purchasers turn to the Internet's special interest sites, where consumers with similar interests can gather and candidly discuss their experience with products.[46] This valuable source of information is diminished when online undercover marketers are allowed to surreptitiously infiltrate such sites and plant self-interested messages about their products.[47] These advertisers are well-funded and sophisticated enough to craft messages that are extremely believable and likely to induce consumer reliance. As a result, these practices turn a valuable source of information into a source of disinformation for consumers.

Second, consumers do not always act rationally and intelligently. In fact, undercover online marketing seeks to exploit this very phenomenon. As discussed in the Lee example above, undercover marketers attempt, whenever possible, to initially target influential members of a community or group who can then use their influence to disseminate the advertiser's message more broadly.[48] Marketers know the power that these individuals have to influence the decision-making and purchasing behavior of others.[49] Such messages do not appeal to rationality, but are instead aimed at exploiting a consumer's desire to be part of a community or "in-crowd." A true affiliation with a group, built on truthful messages and real interactions, provides a rational basis for consumers to trust and listen to messages emanating from such a group. The same is not true for communications artificially planted by marketers.

Currently, consumers can safely give some credence to both marketer and peer claims made in traditional and online media. This trust is the result of market forces acting in conjunction with extensive consumer protection regimes. These consumer protection regimes were enacted throughout the 20th century in response to evidence that consumers were being harmed by deceptive and unfair practices.[50] Had market discipline alone been sufficient to address these harms, it would have precluded the development and growth of consumer protection laws.[51] Nothing suggests that consumer protection laws are currently any less necessary. Statistics, particularly those regarding Internet fraud and deception, suggest that such regulation is even more necessary today.[52]

[53] According to this view, blanket consumer protection statutes are often divorced from actual harm to consumers and have less stringent pleading requirements.[54] This imposes substantial costs on sellers which are passed on to consumers in the form of higher prices. Instead of individual consumers determining whether the additional protection or information provided by these provisions is worth paying for, all consumers interested in the product must either buy it at its higher cost or forego its purchase altogether.

Critics of consumer protection laws argue that traditional tort and contract law provide sufficient consumer protection without imposing such high costs on sellers. Under contract law, a wronged party can either rescind the contract or receive specific performance or damages that fully compensate him for any loss.[55] The damages received by the wronged party must be proved and are limited by the harm actually suffered due to the breach.[56] As a result, the seller must pay for actual harm inflicted and disgorge any ill-gotten gains but is not forced to pay statutorily mandated fines or to conform with business practices that many of its consumers may not value. Under traditional tort causes of action like fraud, pleading requirements are much more stringent and generally limit damages to those harms actually inflicted on the complaining consumer.[57] As a result, companies can engage in an efficient level of precaution and disclosure in an attempt to balance up-front avoidance costs with back-end liability to consumers for failure to warn and disclose.[58]

Using tort or contract law makes sense in situations involving clear-cut and significant harm, such as cases related to personal injury or large financial losses. Tort and contract law is less effective, however, at combating the types of practices that many consumer protection statutes seek to regulate, such as false advertising or unfair practices. Many instances of consumer harm will pass undetected by consumers, resulting in no consequences to the offending seller. Even consumers aware of being wronged may choose not to pursue a contract or tort claim because of the time, cost, and uncertainty involved.[59] Especially for practices like online undercover advertising, consumers are unlikely to have access to the technology and resources necessary to prove the existence and effect of advertisers' deceptive practices.[60] As a result, advertisers will not have to bear the full cost of the harm their practices cause consumers and will have sub-optimal incentives to avoid making future deceptive or misleading claims.

Class actions are arguably a solution to the problems associated with bringing individual tort claims. In bringing together many individuals with similar harms, these lawsuits can achieve efficiencies that would make an otherwise uneconomic case worth pursuing.[61] However, while a class action may make sense for more tangible consumer injuries where a similar harm is caused by a finite number of defendants (such as health problems caused by tobacco use or exposure to asbestos),[62] such an action is unlikely to effectively address harms caused by online undercover marketing. First, the large number and varied types of advertisers, claims, and techniques makes proving these cases extremely difficult. Inquiries relating to reliance, reasonableness, causation, and harms are unlikely to be similar enough to allow these types of cases to be proven together. These cases also must be brought on a state-by-state basis to reflect applicable state law, resulting in further fragmentation of the claims. Finally, members of class action lawsuits often receive little money from such suits, leaving them only partially compensated for their harm.[63] As a result, while class actions might superficially appear to be a potential solution to the problem of online undercover marketing, even a brief analysis reveals their inadequacy.

[64] Consumers holding stocks that have decreased in value because of insider trading may not be aware of the reason behind the decline, but securities law protects them nonetheless.[65] Similarly, consumer protection laws assume that a harm does not need to be recognized by the victim to make the conduct subject to sanction and the victim entitled to compensation.

In conclusion, while market discipline and state tort and contract law potentially play some role in protecting consumers from harm associated with online undercover marketing, they are incapable of adequately addressing all types of consumer deception. This demonstrates the need for a regulatory framework that explicitly addresses deceptive yet difficult to detect practices such as online undercover marketing.

[66] Under a traditional contract cause of action, courts look at the parties' mutual expectations and whether the terms of the contract between them were breached.[67] Under a consumer protection regime, however, a company may be in violation of the law even though the consumer received precisely what he thought he was bargaining for. Further, a consumer may have suffered no injury yet be entitled to statutory damages or attorneys fees and costs. As a result, sellers must comply with the terms of consumer protection statutes even when some consumers do not value these additional features or disclosures.

While this argument has merit, it ignores the fact that consumer protection laws are aimed at improving overall consumer welfare. A particularly savvy, well-informed, or risk-preferring consumer is unlikely to benefit from consumer protection laws and may well be harmed by them in the form of higher prices or the unavailability of a particular good. Our society has made a judgment, however, that protecting the average consumer is important and that any resulting harm to other members of society is a price that must be paid.[68]

Another oft-levied criticism of consumer protection laws is that they lull consumers into a false sense of security and discourage consumers from reading contract terms or carefully researching intended purchases.[69] This results in consumers actually becoming more vulnerable to fraud or susceptible to deception in derogation of the very goals that consumer protection laws are intended to achieve. While this argument makes some sense in the context of laws that protect consumers from conceivably knowable harms (like unconscionable contract terms), it makes very little sense in the context of harms that the consumer is incapable of recognizing even when alerted to their existence.

Consider the situation where a consumer has the opportunity to review a contract and decide whether or not to sign it. Where there are strong consumer protection regulations limiting the rate of interest, forbidding confusing language, or barring certain practices altogether, some consumers may be less inclined to review the contract terms to ensure that they reflect the parties' agreement accurately. As a result of the assurances provided by consumer protection laws, some consumers actually become less likely to scrutinize the transactions into which they enter. It is arguable that such a consumer has the ability, if he chooses, to review the contract prior to signing it in order to avoid potential harm from a previously undisclosed provision or material limitation. That is, assuming away consumer protection laws, a good consumer should be able to avoid harm by reviewing and rejecting a flawed contract. While this argument makes some sense, it makes unrealistic assumptions about the average consumer's abilities and ignores the beneficial impact consumer protection laws have on consumer confidence and purchasing behaviors.

In the case of undercover marketing, however, even the most astute consumer has little ability to avoid the deceptive practices of advertisers posing as normal Internet participants. If consumers were aware and came to expect that that advertisers were regularly engaging in this behavior, consumers would necessarily begin discounting all postings from unknown users. This would dramatically reduce the amount of valuable information available to these consumers via the Internet.[70] There is a key distinction between this situation and the hypothetical contract situation discussed above. Even if consumers are alert to undercover marketing practices and try to guard against them, it would still be virtually impossible for them to avoid being influenced by deceptive messages short of ignoring all communications from unknown users.

Consumers are likely to employ this strategy if online undercover marketing continues unabated because of the way advertisers use these practices. According to these marketers, the major reason for using undercover communications is that consumers have become inured to regular hard-sell advertising.[71] As a result, they argue, it is necessary to employ new and unexpected techniques to reach potential consumers and achieve the desired marketing results. While these marketers may be able to achieve their promotional objectives in the short run, these undercover practices are likely to lose their efficacy as consumers become more cynical and cautious.[72] Over time, these advertisers will seriously undermine the trust Internet users have in widely used and valuable information sharing forums like chatrooms and blogs.

While criticisms of consumer protection laws have some merit, they are inapposite to laws protecting consumers from practices like undercover online marketing. Undercover online marketing is a type of fraud that is undetectable and unavoidable by the consumer. As a result, concerns regarding impinging on the freedom of contract or lulling consumers into poorly informed shopping decisions are unwarranted. Having established the need for consumer protection laws to appropriately deter advertisers from using deceptive online undercover marketing practices, it becomes necessary to determine whether this regulation best takes place at the state or federal level or under a dual regulatory regime.

[73] Some are written and interpreted similarly to Section 5 of the FTC Act while others diverge from the language and interpretation of the federal statute.[74] Some state laws provide only for Attorney General or state agency enforcement while others also provide private causes of action as well.[75] Many jurisdictions have enacted broad unfair business practices or unfair competition laws that provide far more protection against deceptive practices than does Section 5.[76], [77] Critics argue that such statutes are "too broad and unfairly benefit consumer-plaintiffs."[78] For example, Marc Kasky, the plaintiff in the series of Nike cases discussed above, had standing to sue under California's Unfair Competition Law even though he claimed no personal deception or harm.[79] There is no evidence on the public record, however, suggesting that state statutes have been used to unfairly benefit consumers deceived by online undercover marketing.[80]

There is great variation among the states regarding the protection and remedies available to consumers harmed by deceptive or unfair practices like online undercover marketing. While such variation has traditionally been considered a positive aspect of our judicial system,[81] variation in regulation of deceptive practices with national reach makes less sense. State Little FTC Acts and unfair competition laws traditionally applied to practices primarily impacting consumers within a given state. As a result, each state made and applied its own laws, incorporating its particular experience with and views of the practices at issue. Allowing variation across jurisdictions meant that states could evaluate their laws against those of other states, contributing to the development of consumer protection jurisprudence. Now, however, as costs of trade and communication over large geographical distances decrease, the distinction between local and interstate practices is disappearing.[82] As a result, arguments in support of state-by-state regulation no longer apply with the same force, particularly to practices with a national reach like online undercover marketing.

While state laws may provide supplemental relief to consumers harmed by deceptive marketing, they are not sufficient to ensure consistent and efficient development of the law in this area. Without guidance, some states may provide too much protection for consumers, overdeterring advertising and decreasing overall social welfare.[83] Other states may provide too little protection and leave consumers without redress. A clear national standard would provide marketers with a consistent standard and would ensure that consumers throughout the country are treated similarly and fairly.

Courts have acknowledged the appropriateness of federal regulation of Internet commerce.[84] Any advertising or content on the Internet is available to any consumer anywhere in the world. Unlike traditional advertising or even in-person undercover marketing, companies using such techniques have little ability to control who accesses their advertising communications. As a result, federal regulation is the natural choice for providing companies that do business on the Internet with a consistent standard by which to measure the legality of their practices.[85]

As discussed in Part IV, infra, federal agencies and courts have expertise in dealing with deceptive advertising practices. The FTC in particular has experience in consumer protection and could effectively regulate online advertising practices. If the FTC sets forth standards to analyze undercover marketing practices, states could use them as a model for their own laws. Where business practices and related law are in their infancy, as in the case of undercover marketing, state courts may be especially receptive to federal guidance. A clear federal policy based on sound reasoning will likely establish a semblance of uniformity in state laws' treatment of online undercover marketing.

Finally, those wishing to stop deceptive online undercover marketing face substantial challenges that further corroborate the need for federal involvement. One of the primary obstacles is the difficulty in determining legitimate messages from sponsored ones. This is because the effectiveness of such advertising depends on the inability of consumers to differentiate between legitimate and sponsored postings. Even if a consumer is suspicious that a posting is sponsored, it is difficult to confirm this suspicion. Most online undercover marketing is done anonymously, and it is hard to uncover the true author of a given message. Compounding this difficulty, Internet Service Providers ("ISPs") are immunized from liability based on third party postings and have no duty to assist in tracing questionable communications. [86] It is unclear whether individuals interested in pursuing legal action against an undercover marketer will be successful in obtaining needed evidence from ISPs.[87]

Given these problems, it is unlikely an undercover marketer will be identified unless its practices are leaked, a 'smoking gun' is discovered, or a comprehensive national investigation is undertaken. While media leaks and occasional mistakes are likely to result in liability for a few offenders, only a real threat of liability is likely to provide any real protection for consumers. This corroborates the need for federal treatment of this issue - any effective investigation and punishment of this sort of practice will require substantial resources, coordination, and federal power.

B. Limitations on the Use of the Lanham Act to Challenge Online Undercover Marketing

While consumers have attempted to use Section 43(a) of the Lanham Act to challenge misleading advertising, courts have widely held that only competitors of the offending advertiser have standing under 43(a).[88] Under the Lanham Act, a competitor may seek compensatory damages or a permanent injunction enjoining the practices at issue.[89] The Lanham Act has been used to combat certain types of deceptive online marketing practices, such as unauthorized pop-up advertising, as in the Washingtonpost Newsweek Interactive Company v. Gator Corporation case discussed below. It is unclear, however, that competitor use of the Lanham Act will sufficiently protect consumers from practices that are difficult to identify and prove like online undercover marketing.

In 2002, sixteen publication industry leaders (including the Washington Post and New York Times) sued Gator Corporation for causing unauthorized pop-up advertisements to appear on the plaintiffs' websites, resulting in consumer frustration and diluting the effectiveness of the websites' authorized advertisements.[90] The plaintiffs claimed that Gator's practices constituted, among other things, trademark infringement, unfair competition, and trademark dilution because they negatively impacted the "integrity and value of their websites" by creating a false impression that the ads were in cooperation with and originated from their websites.[91]

These publishers raised concerns parallel to those voiced by opponents of online undercover marketing. Much like undercover marketers' tainting of product information online will reduce consumer willingness to rely on informational sources such as chatrooms and blogs, Gator's continued unauthorized advertising on the publishers' websites would have impaired consumer willingness to rely on the publishers' websites as sources of information. This, in turn, would have reduced the publishers' ability to continue selling advertisements to authorized marketers who actually paid for the right to advertise.[92] While the suit against Gator eventually settled, prior to settlement the district court granted the publishers' motion for a preliminary injunction, enjoining Gator from engaging in several practices relating to its pop-up advertisements.[93]

While Gator shows that the Lanham Act may provide redress for some harms to competition caused by advertisers utilizing deceptive online practices, it also demonstrates a key limitation to the effectiveness of the Lanham Act. Because only competitors can bring claims under the Lanham Act, a whole spectrum of consumer harms remain unaddressed. Only when a competitor's economic interests are substantially impaired is a competitor likely to bring an action under the Lanham Act. This is likely to require a readily identifiable practice, such as pop-up advertising, and a direct threat to the competitor's sales or reputation. In undercover marketing, the practices are difficult to identify and prove. Further, the harm caused by such practices is difficult to quantify. As a result, a competitor with knowledge of an advertiser's undercover promotional techniques may find it more effective and less expensive to simply deploy undercover practices of its own rather than seeking injunctive relief or damages under the Lanham Act.

[94] Section 5 of the FTC Act gives the FTC authority to regulate deceptive or unfair practices.[95] The FTC has explained that this mandate is not limited to a particular medium, but also includes "protecting consumers from unfair or deceptive acts or practices…[such as] advertising, marketing, and sales online."[96] In fact, the FTC published a booklet describing how businesses should develop online advertisements to ensure that they comply with the law[97] and actively investigates and regulates many different types of deceptive and unfair practices online.[98] In addition, it is well established that the FTC has great flexibility in applying Section 5 to address new and innovative business practices that were beyond the contemplation of Congress at the time of its passing.[99]

The FTC also has great flexibility in choosing how to address a business practice of concern. It can file formal complaints and seek civil penalties or damages on behalf of consumers.[100] The FTC can also pursue public or nonpublic investigations and may employ a number of corrective measures, including pursuing injunctions, entering into consent agreements, and issuing industry guides, policy statements, and trade regulation rules.[101] As a result, the FTC has the ability to publicize its position on a particular practice without needing to file a formal complaint and prove a case against a particular actor.

A recent example of informal, yet effective, action was the FTC's response to search engines' practice of displaying paid listings alongside listings sorted by relevance without distinguishing between the two. The FTC found that this practice was deceptive because consumers mistakenly believed that the paid listings were listed so highly because of their relevance. Instead of filing a formal complaint and seeking adjudication of the matter, the FTC instead issued a letter to the major search engines suggesting formatting changes that could be used to avoid deception. [102] In response to this FTC communication, most search engines, including the major ones, changed their websites' appearances in order to comply with the standards set forth by the FTC.[103]

Thus, the FTC can influence business behavior substantially even if it lacks the resources or evidence to pursue a formal complaint. In the case of online undercover advertising, this is potentially the FTC's best option, at least as an initial measure. It would put companies on notice that online undercover marketing is considered a deceptive practice and would likely dissuade many advertisers from engaging in these practices. If this approach did not sufficiently deter undercover practices in the future, the FTC could then target specific undercover marketers in order to reach a consent agreement having the force of law and binding on all others utilizing similar techniques.

While the FTC has the authority to regulate both unfair and deceptive acts or practices, this paper focuses on how the FTC can use its deception standard to combat harm stemming from online undercover marketing. While such promotional techniques might constitute an unfair practice, it is more difficult to make the showing of substantial consumer injury required for such claims.[104] Because online undercover marketing so clearly meets the standards for deception, it makes sense for the FTC to charge deception, which does not require a showing of substantial consumer injury, instead of unfairness.

[105] According to the Policy Statement and subsequent case law, a practice is deceptive within the meaning of Section 5 when three requirements are met. First, there must be a representation, practice, or omission that is likely to mislead consumers. Second, the consumer must be interpreting the message reasonably under the circumstances. Third, the practice must be likely to affect the consumer's conduct or decision with regard to a product or service.[106] In applying these standards to online undercover marketing, it is clear that most, if not all, of such practices would constitute deception.

In the case of online undercover marketing, the relevant representation is actually an omission of the fact that the message or posting is authored by a sponsoring company and not an objective purchaser. The FTC Policy Statement on Deception states that "[a] misleading omission occurs when qualifying information necessary to prevent a practice, claim, representation, or reasonable expectation or belief from being misleading is not disclosed."[107] Consumers use websites and chatrooms as a way of exchanging information with their peers. As a result, potential purchasers expect the information to be objective and based on the communicator's actual experience, not motivated by a marketer's desire to sell goods. Consumers have become accustomed to advertisements being designated as such, particularly when the advertisements use simulated customer testimonials to attempt to emulate print journalism or a television show.[108] As a result, omitting information regarding sponsorship of the message constitutes a representation likely to mislead consumers.

Given that the entire point of online undercover advertising is to trick the consumer into believing that the posting is not sponsored by the marketer, it is reasonable that consumers do, in fact, interpret such messages as those of their peers. Many Internet users perceive the chatrooms, websites, blogs, and other online sites that they frequent as communities that are focused on the exchange of non-commercially motivated information and beliefs. While users are likely to view exceptionally positive or canned endorsements skeptically, marketers are extremely effective in crafting messages that are indiscernible from legitimate postings.[109]

Finally, these omissions are likely to affect the conduct or decisions regarding the marketed product or service. Many undercover marketing campaigns initially target influential members of a community in order to use these individuals' influence to encourage purchase of the marketers' products.[110] Even campaigns that operate solely by posting information on the web under the guise of a normal consumer review will influence the purchasing behavior of at least some consumers.

Despite the fact that undercover online advertising fits within Section 5's definition of a deceptive practice, the FTC has taken no meaningful action against advertisers utilizing either online or offline undercover marketing techniques.[111] Further, despite the evidence of its pervasiveness and harm, it is not clear that the FTC considers this practice particularly problematic.[112] Most attention regarding undercover marketing comes from the media and is focused on describing the nature and growth of offline undercover marketing practices.[113]

Recently, however, Commercial Alert, a consumer advocacy group founded by Ralph Nader and Gary Ruskin, requested that the FTC investigate whether stealth campaigns violate rules against deceptive advertising. In its letter to the FTC, Commercial Alert explicitly mentioned the use of online undercover marketing and its potential to mislead.[114] Much as Commercial Alert's 2001 complaint regarding search engine listing practices prompted FTC action, perhaps Commercial Alert's complaint regarding undercover marketing will do the same.[115] While offline undercover practices are of concern because of their potential to deceive, online practices are even more problematic. In an in-person exchange of information, there are many more clues that a consumer can use to determine that they are the subject of a sales pitch. In the case of online marketing, however, a user is limited to the actual message and the context of the message. As a result, the likelihood of deception is even greater than it would be if the interaction took place in person.

[116] Any relationship that might affect the weight or credibility of statements is considered material.[117] When a company posts a message regarding its products, the fact that the company is behind the message must be disclosed. The FTC has issued endorsement-specific regulations in the FTC Guides Concerning the Use of Endorsements and Testimonials in Advertisements.[118] Endorsements are defined as "any advertising message . . . [that] consumers are likely to believe reflects the opinions, beliefs, findings, or experience of a party other than the sponsoring advertiser."[119] Under these guidelines, failure to disclose that endorsers are paid is also deemed a deceptive practice.[120] The FTC has explicitly stated that these Guides apply to online advertisements. "The Guides refer to advertising without limiting the media in which it is disseminated, and therefore, encompass online ads."[121]

In undercover marketing, the messages posted by advertisers posing as normal consumers clearly constitute endorsements. Not only do the consumers viewing such messages believe that they reflect the opinions of the people posting them, the consumers are not even aware that the message is an advertisement. The fact that the consumer is not aware that the message is an advertisement does not change the promotional nature of the message. Much like infomercials posing as talk shows, this an even stronger case for requiring disclosure of the "material connection" between the speaker and the advertising company.[122]

Also, if an undercover advertiser gives an endorsement that is not representative of the performance that consumers can generally expect to achieve with a product, the advertiser must disclose this fact so that consumers are not misled.[123] Thus, even if the undercover marketers were able to convince the FTC or courts that the very nature of their promotional efforts was not deceptive, the FTC could still rely on the content of the messages within the advertisements as being deceptive.

[124] While most undercover marketing messages seek to emulate statements that a normal consumer would make and avoid overly specific or formal claims regarding the products that they are promoting, some may make more specific claims. Under the Advertising Substantiation Statement, where an advertiser makes a claim without a reasonable basis for doing so, the statement may be considered deceptive.[125] Thus, for the limited number of undercover marketing messages that make claims that a product will achieve a specific result or perform in a specific manner, lack of compliance with substantiation requirements will provide the FTC with an alternate means of proving deception.

[126] In a series of decisions, the FTC held that presenting infomercials as either independent radio programs[127] or independent television advertising[128] constituted a deceptive practice that violated the FTC Act. The FTC has implemented a policy of strictly regulating infomercials, attempting to force advertisers to alert viewers of such programs that they are watching or listening to paid programming and not an objective talk show.[129] According to the FTC, "advertisers should make sure that…infomercials [do not] deceptively mimic the format of news reports, talk shows, or other independent programming."[130] Therefore, advertisers should similarly ensure that advertisements do not deceptively mimic the format of objective consumer testimonials.

The FTC also emphasizes the application of the Guides Concerning the Use of Testimonials and Endorsements to infomercials utilizing testimonials from consumers.[131] Given that an online undercover advertisement is nothing more than a marketer's message dressed up as a testimonial, it follows that the Guides should apply to undercover advertisements as they do to infomercials. Further, the FTC has enjoined advertisers from making deceptive claims about paid endorsers.[132] As discussed above, failure to disclose that an endorser is paid constitutes a deceptive act.[133] In short, because of the strong parallels between infomercials and undercover marketing, the FTC can use case law relating to infomercials as precedent in its battle against undercover marketing.

[1]According to the National Consumers League (NCL), "during the first six months of 2005 consumer losses to telemarketing and Internet scams more than doubled from the average losses reported last year. From January through June 2005, consumer reports to NCL's National Fraud Information Center/Internet Fraud Watch program indicated that telemarketing fraud victims lost an average of $4,107, compared to $1,974 in 2004. In Internet fraud, the increase was even higher: the average loss rose from $895 in 2004 to $2,579 in the first six months of this year." National Consumers League, Mid-year Fraud Stats Reveal Alarming Trends in Telemarketing, Internet Scams, ¶1, NCL News, (Aug. 11, 2005). Similarly, the Internet Crime Complaint Center, in a report prepared by the National White Collar Crime Center and the Federal Bureau of Investigation, reported a 66.6% increase in complaints (from 124,509 to 207,449) from 2003 to 2004. National White Collar Crime Center, IC3 2004 Internet Fraud - Crime Report, January 1, 2004-December 31, 2004, at 3, (last visited Nov. 20, 2005).

[2] See, e.g., FTC, Tips on Helping Victims of the Earthquake in South Asia, FTC Consumer Alert, (Oct. 14, 2005).

[3] See, e.g., National White Collar Crime Center, supra note 1, at 6.

[4] Id. See also Department of Justice, Internet Fraud, (May 15, 2001).

[5] See, e.g., FTC, FTC Stops Bogus Ads for "Bio Trim" and Other Weight-loss Products, FTC Consumer Alert, (Nov. 7, 2005).

[6] See, e.g., FTC, FTC Seeks to Halt Illegal Spyware Operation, FTC Consumer Alert, (Oct. 5, 2005).

[7] See, e.g., FTC, FTC Testifies on Spyware, FTC Consumer Alert, (Oct. 5, 2005).

[8] Undercover marketing is also referred to as "avalanche marketing,…cascading style, marketing, centrifugal marketing, exponential marketing, fission marketing, grass roots marketing, organic marketing, propagation marketing, referral marketing (borrowing a term long used in marketing prior to the Web), ripple marketing, self-perpetuation marketing, self-propagation marketing, and wildfire marketing.", "viral marketing",,,sid11_gci213514,00.html (last visited Nov. 20, 2005).

[9] Wikipedia, "undercover viral marketing", (last visited Nov. 20, 2005).

[10], "buzz marketing",,,sid11_gci939341,00.html (last visited Nov. 20, 2005).

[11] Vickie Maye, You're Roach Bait to Marketing Spies, Sun Herald, Aug. 19, 2001, at 42 (explaining that undercover marketers utilize these promotional techniques because is the most effective way to reach consumers ages 12 to 34 who are "too savvy to fall for traditional advertising methods").

[12] Gerry Khermouch and Jeff Green, Buzz Marketing: Suddenly This Stealth Strategy Is Hot--but It's Still Fraught with Risk, ¶10, BusinessWeek Online, (July 30, 2001).

[13] Alf Nucifora, The Latest Buzz on Buzz Marketing, ¶2, San Diego Daily Transcript, (Nov. 20, 2002).

[14] The videos were produced to resemble low budget movies and drew viewers to visit Web sites of three fictional characters, such as "open-shirted Curry, a 23-year-old race-car driver." Khermouch, supra note 12, ¶23.

[15] Id. ¶25.

[16] See, e.g., Nucifora, supra note 13, ¶5.

[17] Khermouch, supra note 12.

[18] Khermouch, supra note 12, ¶1.

[19] See Brooke E. Crescenti, Undercover Marketing: If Omission is the Mission, Where is the Federal Trade Commission?, 13 J.L. & Pol'y 699, 720-722 (2005); Deborah J. La Fetra, Kick it up a Notch: First Amendment Protection for Commercial Speech, 54 Case W. Res. 1205, 1234 (Summer, 2004); Nucifora, supra note 13.

[20] Paul Cernohous, Interview with Potentials Magazine, Potentials Magazine, ¶34, 36 (Oct. 1, 2005), Mr. Cernohaus is the Director of Sales, Special Markets for The Coleman Company.

[21] Paul Spitzberg, Interview with Potentials Magazine, Potentials Magazine, ¶31 (Oct. 1, 2005), (Oct. 1, 2005). Mr. Spitzberg is the Vice President of Special Markets for Coach and the Executive Vice President of the Incentive Marketing Association.

[22] "[T]he free flow of commercial speech allows advertisers and consumers to economize their time and effort in deciding how to allocate their resources." La Fetra, supra note 19, at 1226.

[23] "Expensive, conventional approaches such as network-TV ads seem less and less [effective] … particularly when it comes to younger consumers, who because they are still forming their brand preferences, are coveted by marketers." Khermouch, supra note 12, ¶17.

[24] "[T]he existence of false advertising causes consumers to become skeptical of advertisements in general or a particular class of goods or advertisements." Dennis Crouch, The Social Welfare of Advertising to Children, 9 U. Chi. L. Sch. Roundtable 179, 188 (2002).

[25] "[S]kepticism leads to marketing inefficiency because the truthful content within advertisements is no longer trusted, leaving consumers without the information they need." Id. The author goes on to note, however, that some level of deceptive advertising might be efficient. "Although consumer skepticism creates inefficiencies, it could be optimal to have some level of consumer skepticism rather than going to the expense of eliminating all false or misleading advertising." Id. at 188-89. This suggests that the proper goal of any agency action or legislation addressing online undercover marketing is not necessarily to entirely eradicate these practices, but to ensure that they are being utilized at an efficient level.

[26] According to Kalle Lasn, editor of Adbusters magazine, "It's a much more insidious kind of development, because now, all of a sudden, marketers are creating culture on the grassroots level, on the streets and in the places people live." Khermouch, supra note 12, ¶11.

[27] "Consumers are wary whenever they discern that the self-interest of the advertiser would be served by their own uncritical belief in what the advertiser asserts." Lillian R. BeVier, Competitor Suits for False Advertising under Section 43(a) of the Lanham Act: A Puzzle in the Law of Deception, 78 Va. L. Rev. 1, 8 (1992).

[28] Puffery is defined as an "exaggerated advertising, blustering, and boasting upon which no reasonable [person] would rely. Southland Sod Farms v. Stover Seed Co., 108 F.3d 1134, 1145 (9th Cir. 1997) (quoting 3 J. Thomas McCarthy, McCarthy on Trademarks and Unfair Competition 27.04[4][d] (3d ed. 1994)). Statements of this kind are considered "so general in nature . . . and exaggerated in content that no reasonable person would rely [on] them." Fed. Express Corp. v. U.S. Postal Serv., 40 F. Supp. 2d 943, 954 (W.D. Tenn. 1999).

[29] "If advertising that provides valuable information for the consumer increases the efficiency of the market, deceptive advertising correspondingly decreases market efficiency by taking information away from the consumer. When a consumer is misled, his search costs needed to find the good he desires may increase and he may purchase goods for prices above his utility or alter his behavior from what it would have been without the deceptive advertising." Crouch, supra note 24, at 187-88.

[30] For example, undercover viral marketing can create communities and 'in-groups' centered around products. David Lubars, President of ad agency Fallon McElligott, explained the effectiveness of one viral marketing program, "[W]e created a little community: You either knew about it or not." Khermouch, supra note 12, ¶23.

[31] Commentators have acknowledged that new forms of advertising pose difficult constitutional questions. "With greater frequency and subtlety, new technologies and innovative marketing strategies introduce corporate profit-motive into what otherwise would be fully-protected speech. The current commercial speech doctrine cannot predictably resolve disputes resulting from these new modes of expression." La Fetra, supra note 19, at 1207.

[32] Another argument in favor of increased Constitutional protection for undercover marketing is that it is necessary to protect the freedom of speech of those individuals actually posting the advertising messages. In some cases, these individuals may not be financially compensated by the company or may be being paid to post information about beliefs that they actually hold independent of any association with the sponsoring company. While these cases do pose more difficult Constitutional questions, evidence suggests that the vast majority of undercover marketing communications come from paid employees of the sponsoring company, making the company the speaker for First Amendment purposes.

[33] In Kasky v. Nike, the California Supreme Court reversed the state trial and appellate courts' decisions, creating an expansive definition of commercial speech in holding that Nike's communications in response to attacks on its labor practices were not entitled to heightened First Amendment protection. 45 P.3d 243 (Cal. 2002). The United States Supreme Court agreed to review the decision but later, after full briefing and oral argument, dismissed the case as improvidently granted. Nike, Inc. v. Kasky, 537 U.S. 1099 (2003), cert. granted, 123 S.Ct. 2554 (2003), dismissed (Breyer, J. dissenting). Justice Breyer, with Justice O'Connor joining, argued that the case should have been decided on the merits. Id. at 2559.

[34] Cal. Bus. & Prof. Code §§ 17200-209 (2005). This law prohibits "any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising." § 17200.

[35] Nike, Inc. v. Kasky, 123 S. Ct. 2554, 2565-66 (2003) (Breyer, J., concurring).

[36] Although in some cases, the speaker also includes information useful in procuring the product, including information about where the product can be purchased. Khermouch, supra note 12, ¶1.

[37] Nike, Inc. v. Kasky, 123 S. Ct. 2554, 2560 (2003) (Breyer, J., concurring).

[38] Kasky v. Nike, Inc., 45 P.3d 243, 269 (Cal. 2002) (Brown, J., dissenting).

[39] The Department of Justice, Federal Bureau of Investigation, and a number of consumer watchgroups are involved in collecting data regarding deceptive and fraudulent practices on the internet, suggesting increased attention in this area. See supra note 1.

[40] See infra note 132 and accompanying text, discussing Commercial Alert's letter to the FTC requesting investigation of undercover marketing practices.

[41] "In a truly efficient or perfect market, all consumers would have perfect information… Information allows rational consumers to maximize their utility by selecting goods being sold at or below their marginal utility." Crouch, supra note 24, at 186.

[42] "The disincentives to falsely advertise are based on the notion that an advertiser who is caught misleading the public will lose sales either directly or indirectly through a loss of good will." Id. at 190-91.

[43] "Consumer information is available from many sources.… Some common sources of information include magazines, advertising, warranties, product labeling, seller-provided information, and educational materials.… Information is also available from a variety of other sources, such as the Better Business Bureau, friends and acquaintances, computer data networks, books, and newspapers." Joyce Jones, Consumer Choice: Using Information n Purchasing Decisions, at 2, Cooperative Extension Service, Kansas State University, (May, 1989).

[44] "Consumers may use general guidelines or rules-which are sometimes, but not always, valid-to limit the amount of information search prior to purchasing." Id. at 3.

[45] See generally Phillip Nelson, The Economic Consequences of Advertising, 48 J. Bus. 213 (1975).

[46] See e.g. Nancy K. McGuire, A Web of Support: Health Care Sites Offer Access to Reference Material and Clinical Trials as Well as Support Groups, Modern Drug Discovery, (March, 2003). "Internet sites have evolved beyond their beginnings as online reference libraries, and they now provide bulletin boards and chat groups, question-and-answer sessions with experts, news items, and even humor-in short, a virtual community." Id. at ¶1.

[47] Scott Bourne, an award-winning and published photographer, commented on the impact undercover marketing has had on online discussion forums related to photography. "Occasionally, the PR agents act as 'shills' who pretend to be a regular users. They try to water down or deflate negative posts.....When the PR agent tries to negate that truth, there is a problem.…Shills have infested some forums. There is a large, well-known camera store back east that deals exclusively in gray market items. A person who either works for the store or has some other relationship with them constantly posts messages to several forums defending the store and attacking their competition." Editorial - Can You Really Learn Anything From Internet Discussion Forums, Photofocus, (2004).

[48] Khermouch, supra note 12, ¶23.

[49] "'The clutter in the marketplace, people feeling like they're marketed to all the time, that kind of message for this demographic doesn't work. [T]hey're not interested. They want to know about it from a friend of theirs that's in the know, that keeps up with the trends. And that way, it's very subtle.'" CBS, Undercover Marketing Uncovered, ¶34, 60 Minutes, (Jul. 25, 2004) quoting David Elias, CEO of a marketing company called Soulkool.

[50] See generally Gesner de Oliveira and Sergio Goldbaum, Symposium: Relations Between Regulation, Competition Policy and Consumer Protection in Telecommunications, Electricity and Water Supply, 27 Brooklyn J. Int'l L. 65 (2001).

[51] Id.

[52] See, e.g., National White Collar Crime Center, supra note 1, at 6.

[53] "Common law terms and doctrines, from 'nuisance' to 'unconscionable' and, for that matter, 'injury' are sufficiently nebulous to sustain varying social and economic arrangements….That openness creates a potential for efficient adaptation…At the end of the day, the common law embodies reciprocity relations that are real, not some theoretical construct….At some level, a common law judge must care about activity levels as well as harms; about production values as well as consumption; about over- as well as under-deterrence." Michael S. Greve, Consumer Law, Class Actions, and the Common Law, 7 Chap. L. Rev. 155, 172-73 (Spring, 2004).

[54] "[W]here tort law required an actual injury as an essential element of a cause of action; consumer law dispenses with that requirement and others like it, such as inducement and detrimental reliance." Id. at 156.

[55] Restatement (Second) of Contracts §§ 345, 357 (1981).

[56] Restatement (Second) of Contracts § 347 (1981).

[57] Punitive damages are an exception to this rule, however, common law regimes have developed guiding principles that tend to protect defendants from excessive liability. In recent years, however, large punitive damages awards have prompted proposals for tort reforms and limitations on punitive damages. While this implies that the fairness and actual harm arguments in favor of common law torts may not be as compelling, in the case of online undercover advertising, punitive damages awards are unlikely to play as large of a role in individual actions. See generally The Harvard Law Review Association, "Common Sense" Legislation: The Birth of Neoclassical Tort Reform, 109 Harv. L. Rev. 1765 (May, 1996).

[58] See generally Robert Cooter, Unity in Tort, Contract, and Property: The Model of Precaution, 73 Cal. L. Rev. 1 (1985).

[59] This is particularly likely to be true for breach of contract and fraudulent inducement claims. Most consumer transactions involve relatively small amounts of money. As a result, for all but the largest purchases, it simply will not be worth consumers' time to pursue legal action.

[60] See, infra note 87, describing technical requirements for discovering the true identity of undercover marketers posting messages online.

[61] "[T]he modern class action performs two important functions: first, it provides individuals with injuries insufficient to justify the cost of a lawsuit an economically feasible avenue of redress; second, it helps relieve the burden on court dockets, which have been overwhelmed with large numbers of claims arising, for example, from mass torts associated with asbestos and tobacco. The class action rectifies these problems by providing more individuals with access to the courts, thus enhancing the procedural fairness of the legal system, and by allowing all individuals to aggregate mass tort claims, thus increasing judicial efficiency." The Harvard Law Review Association, Developments in the Law -- The Paths of Civil Litigation: IV. Class Action Reform: An Assessment of Recent Judicial Decisions and Legislative Initiatives, 113 Harv. L. Rev. 1806, 1806-7 (May, 2000).

[62] Id. at 1807.

[63] Id. at 1811.

[64] See, e.g. The Clean Air Act of 1990, 42 U.S.C. §§ 7401-7671 (2005).

[65] See, e.g. Securities Act of 1933, 15 U.S.C. §§ 77a-77aa (2005); Securities Exchange Act of 1934, 15 U.S.C. §§ 78a-78kk (2005).

[66] "Consumer protection laws…impos[e] affirmative disclosure obligations through outright prohibitions on abusive, extortionate, or unconscionable sales practices, or through mandatory cooling-off or revocation periods." Greve, supra note 53, at 157 citing the Truth in Lending Act, 15 U.S.C. 1635 (1998), as an example.

[67] Restatement (Second) of Contracts §§ 344 (1981).

[68] "The Federal Trade Commission Act…was not 'made for the protection of experts, but for the public - that vast multitude which includes the ignorant, the unthinking and the credulous.'" Charles of The Ritz Distributors Corp. v. Federal Trade Com., 143 F.2d 676, 679 (2d Cir. 1944) citing Florence Mfg. Co. v. J. C. Dowd & Co., 2 Cir., 178 F. 73, 75 (2d Cir. 1910).

[69] "When the government prevents false advertising, consumers tend to be less skeptical about advertising because they believe the government is stopping all the false advertising…. As a whole, consumers are more gullible." Crouch, supra note 24, at 189.

[70] One of the most valuable functions of the internet is to bring users together in ways that allow them to exchange information rapidly and inexpensively. If advertisers are able to infiltrate every aspect of the internet, unfettered by the threat of liability or other regulatory action, the utility of the internet to the average user will decrease. In a social welfare analysis, it is unlikely that the advertisers' interest in being able to promote their goods through online internet marketing is sufficient to compensate society for the corresponding harm inflicted on consumers.

[71] Maye, supra note 11, at 42 (explaining that undercover marketers utilize these promotional techniques because they are the most effective way to reach consumers ages 12 to 34 who are "too savvy to fall for traditional advertising methods"). "[O]nline advertising has become increasingly influential. . . [S]ixty percent of business decision-makers report that the Internet is the best way for advertisers to reach them and that they are influenced more by online advertising than any other advertising medium, including television." Kristen M. Beystehner, See Ya Later, Gator: Assessing Whether Placing Pop-Up Advertisements on Another Company's Website Violates Trademark Law, 11 J. Intell. Prop. L. 87, 96 (2003).

[72] "When consumers become skeptics, advertising in general becomes less valuable." Greve, supra note 53, at 188.

[73] "In the late 1950s, state legislatures began granting to state agencies…great discretion to prevent consumer deception. More recently, most states -- in an effort further to discourage inappropriate trade practices and to compensate injured consumers -- have extended to private consumers the right to sue for deceptive and, in some states, unfair trade practices." Jeff Sovern, Private Actions Under the Deceptive Trade Practices Acts: Reconsidering the FTC Act as Rule Model, 52 Ohio St. L.J. 437 (Spring, 1991).

[74] Jon Mize, Fencing of the Path of Least Resistance: Re-examining the Role of Little FTC Act Actions in the Law of False Advertising, 72 Tenn. L. Rev. 653, 659-60 (Winter, 2005).

[75] See generally Sovern, supra note 73.

[76] See supra note 73.

[77] "Some consumer-plaintiffs are beginning to recognize that state consumer fraud statutes, commonly referred to as 'Little FTC Acts,' provide an easier and more lucrative path to recovery for false advertising." Mize, supra note 74, at 653.

[78] Id.

[79] See supra notes 33-38 and accompanying text.

[80] Based on Westlaw and Lexis Nexis searches of relevant case law as of Nov. 20, 2005.

[81] Many legal scholars believe that variation in laws across states allows for experimentation and development of better law. "It is one of the happy incidents of the federal system that a single courageous State may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country." New State Ice Co., v. Liebmann, 285 U.S. 262, 311 (1932) (Brandeis, J., dissenting.)

[82] "Unlike land use - which is stationary and bounded by geographic limitations - and some aspects of social welfare policy, the Internet transcends the borders of any state. Hence, any state-specific policy experiment will inevitably taint the 'laboratories' of other state to the extent that Internet activities are subject to regulation in that state." Peter S. Menell, Regulating "Spyware": The Limitations of State "Laboratories" and the Case for Federal Preemption of State Unfair Competition Laws, 20 Berkeley Tech. L.J. 1363, 1375 (Summer, 2005).

[83] Commentators have noted the impact that state-by-state regulation is likely to have on the behavior of companies utilizing the internet. "Due to the ubiquity of the Internet and the relatively low threshold for personal jurisdiction, state-by-state regulation creates an environment in which prudent Internet-related businesses must conform to every state unfair competition law, producing in effect a national policy based on the standards of the most restrictive state." Menell, supra note 82, at 1371-72.

[84] "The Internet…requires a cohesive national scheme of regulation so that users are reasonably able to determine their obligations. Regulation on a local level, by contrast, will leave users lost in a welter of inconsistent laws, imposed by different states with different priorities." American Libraries Ass'n v. Pataki, 969 F. Supp. 160 (D.N.Y. 1997).

[85] Some commentators have even argued that federal preemption makes sense in the context of regulating some aspects of the internet. "Given the uncertain contours of state unfair competition law, a federal preemptive regulatory approach provides a better climate than decentralized state regimes for both regulating spyware and encouraging business and software innovation." Menell, supra note 82, at 1372. While this paper does not suggest that federal preemption of consumer protection laws governing online undercover marketing is desirable, the fact that these views exist in the context of internet regulation suggests that the internet may require deviation from the traditional scheme of state and federal regulation.

[86] Section 230 of the Communications Decency Act of 1996 ("CDA") provides that "[n]o provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider." 47 U.S.C. § 230 (2000). However, courts have interpreted the CDA more broadly, holding that the CDA "creates a federal immunity to any cause of action that would make service providers liable for information originating with a third-party user of the service." Zeran v. AOL, 129 F.3d 327, 330 (4th Cir. 1997). Section 230 has provided immunity for ISPs in a number of contexts. See Ben Ezra, Weinstein & Co. v. America Online, 206 F.3d 980, 984-985 (10th Cir. 2000) (posting of false stock information), Carafano v., 339 F.3d 1119 (9th Cir. 2003) (submission of a false internet dating profile), and Blumenthal v. Drudge, 982 F. Supp. 44, 49-53 (D.D.C. 1998) (publishing of content of independent contractor's news reports).

[87] Some scholars urge that this legal regime is inefficient because ISPs are "generally in a superior position to determine whether on online scam artist falsified a transmission path, used open proxies to disguise the origin of e-mail messages, or used false contact information to carry out a fraudulent scheme." Michael L. Rustad & Thomas H. Koenig, Rebooting Cybertort Law, 80 Wash. L. Rev. 335, 416, (May, 2005). However, ISP regulation of content, particularly content related to undercover marketing, would be extremely burdensome on ISPs and would unacceptably chill free speech on the internet. As a result, this paper focuses on the liability of online advertisers and does not explore issues relating to ISP or other third party liability for online undercover advertising.

[88] Lanham Act 43(a), 15 U.S.C. § 1125(a) (2005). See e.g. Barrus v. Sylvania, 55 F.3d 468, 470 (9th Cir. 1995); Serbin v. Ziebert Int'l Corp., 11 F.3d 1163, 1169-80 (3d Cir. 1993).

[89] 15 U.S.C. § 1125(c)(2) (2005).

[90] Complaint at 10-14, Washingtonpost.Newsweek Interactive Co. v. Gator Corp., No 02-909-A (E.D. Va. June 25, 2002).

[91] Complaint, supra note 90, at 28-29.

[92] Id. at 28.

[93] Washingtonpost.Newsweek Interactive Co. v. Gator Corp., No. 02-909-A, 2002 WL 31356645, at *1 (E.D. Va. 2002).

[94] 15 U.S.C. § 41 (2005).

[95] 15 U.S.C. § 45 (2005). The relevant language provides that "[u]nfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce, are hereby declared unlawful." 15 U.S.C. § 45(a)(1).

[96] FTC, Information About Online Advertising, Part II, ¶1, Dot Com Disclosures, (last visited Nov. 20, 2005).

[97] See generally id.

[98] "[S]ince 1994, the Commission has brought over 100 law enforcement actions to stop fraud and deception online." Id. Part II, ¶1.

[99] See Federal Trade Commission v. Motion Picture Advertising Service Co., 344 U.S. 392, 394 (1953); H.R. Conf. Rep. No. 63-1142, at 19 (1914); FTC v. Colgate-Palmolive Co., 380 U.S. 374, 385 (1965).

[100] "The Commission may seek civil penalties from any person or company that violates a rule 'with actual knowledge or knowledge fairly implied on the basis of objective circumstances that such act is unfair or deceptive and is prohibited by such rule.' 15 U.S.C. § 45(m)(1)(A). The Commission also may seek redress for consumers. 15 U.S.C. § 57b(a)(1)." FTC, at n.5, supra note 96.

[101] "The Commission issues rules pursuant to Section 5 of the FTC Act when it has reason to believe that certain unfair or deceptive acts or practices are prevalent in an industry. 15 U.S.C. § 57a(a)(1)(B).… In addition, the Commission promulgates rules pursuant to specific statutes, which are designed to further particular policy goals. The remedies available to enforce these rules vary.… Guides are 'administrative interpretations of the laws administered by the Commission.' 16 C.F.R. § 1.5. Although the guides do not have the force and effect of law, the Commission may bring an enforcement action if a person or company fails to comply with a guide and engages in an unfair or deceptive practice in violation of the FTC Act." Id. at n.5-6. See also, FTC, Ch. 3, FTC Operating Manual, available at (last visited Nov. 10, 2005).

[102] "The FTC…sent letters to the major search engines….The letter recommended that search engine companies review their websites and make changes to ensure that: "any paid ranking search results are distinguished from non-paid results with clear and conspicuous disclosures; the use of paid inclusion is clearly and conspicuously explained and disclosed; and no affirmative statement is made that might mislead consumers as to the basis on which a search result is generated." Andrew Sinclair, Regulation of Paid Listings in Internet Search Engines: A Proposal for FTC Action, 10 B.U. J. Sci. & Tech. L. 353, 356 (Summer, 2004) citing Letter from Heather Hippsley, Acting Associate Dir., F.T.C. Division of Advertising Practices, to [search engine company].

[103] See generally id.

[104] According to the FTC Act, 15 U.S.C. § 45(n) and the FTC's Unfairness Policy Statement, an advertisement is unfair if it causes or is likely to cause substantial consumer injury that consumers could not reasonably avoid and that is not outweighed by the benefit to consumers or competition. See FTC Policy Statement on Unfairness, appended to International Harvester Co., 104 F.T.C. 949, 1070 (1984).

[105] This policy statement was appended to the FTC decision In re Cliffdale Associates, Inc.. 103 F.T.C. 110 (FTC 1984).

[106] See supra note 105.

[107] Id. at n.4. The Statement also elaborates on omissions as follows: "In determining whether an omission is deceptive, the Commission will examine the overall impression created by a practice, claim, or representation.… Omissions may also be deceptive where the representations made are not literally misleading, if those representations create a reasonable expectation or belief among consumers which is misleading, absent the omitted disclosure." Id.

[108] See e.g., Georgetown Publ'g House Ltd. P'ship, 122 F.T.C. 392, 393-94 (1996) (consent order); Nat'l Media Corp., 116 F.T.C. 549, 559 (1993) (consent order).

[109] According to Jonathan Ressler, founder of undercover marketing firm Big Fat Promotions, the consumer can "never, ever tell we're doing it. And we'll never admit to it. If people ever know they are being marketing to, we're not doing our job properly." Undercover Agencies, The Australian, Sept. 27, 2001, at M03.

[110] See Khermouch, supra note 12.

[111] "The public record is devoid of pending investigations of the practice, filings of individualized FTC complaints, or entries of enforcement orders against specific undercover marketers." Crescenti, supra note 19, at 729-731. Searches of Westlaw and Lexis-Nexis similarly revealed a lack of FTC action against undercover marketers. This is further corroborated by Consumer Alert's recent request for an FTC investigation into undercover marketing practices. See infra note 132.

[112] In 2001, assistant director of the FTC's advertising practices division Mary Engle was quoted as saying, "[i]t's troubling, but whether it rises to the level of being illegal is not clear. At a minimum, it's not clear that there's enough harm done to make it a priority for the FTC." Catherine Donaldson-Evans, Advertisers Go Undercover to Push Products, Fox News, (Aug. 17, 2001).

[113] CBS, supra note 49, ¶34.

[114] "For instance, an online campaign that involves marketers creating a blog that looks like it's written by a consumer might be troubling 'because it would be omitting the key fact that it's a product of the marketing department.'" Wendy Davis, Consumer Group Protests Stealth Marketing, ¶4, Online Media Daily, (Oct 19, 2005) quoting Executive Director of Consumer Alert, Gary Ruskin.

[115] Sinclair, supra note 102, at 355-56.

[116] 16 C.F.R. § 255.5 (2005).

[117] Id.

[118] 16 C.F.R. §§ 255.0-255.5 (2005).

[119] 16 C.F.R. § 255(b).

[120]See Crescenti, supra note 19, citing multiple cases in support of this proposition.

[121] FTC, Information About Online Advertising, Part II, ¶2, Dot Com Disclosures, (last visited Nov. 20, 2005).

[122] See infra Part IV, Section G, discussing infomercials.

[123] Guides Concerning the Use of Endorsements and Testimonials in Advertising, 16 C.F.R. § 255.2.

[124] FTC Policy Statement on Advertising Substantiation, appended to In re Thompson Medical Co., 104 F.T.C. 648, 839 (1984), aff'd, 791 F.2d 189 (D.C. Cir. 1986), cert. denied, 479 U.S. 1086 (1987).

[125] Id.

[126] FTC v. California Pacific Research, Inc., No. CV-N-88-602BRT, 1991 WL 208470 at 3 (D. Nev. 1991).

[127] See In re Matter of Bogdana Corporation, 126 F.T.C. 37 (1998).

[128] See In re Matter of Mega Sys. Int'l, Inc., 1998 FTC LEXIS 207; In re Matter of Nutrivida, Inc., 126 F.T.C. 339 (1998); In re Matter of Wyatt Marketing Corp. Inc., 118 F.T.C. 117 (1993).

[129] Kathyleen A. O'Brien, Strategies for Successfully Defending Against Federal Trade Commission Investigations of False and Deceptive Advertising, 775 PLI/Comm 269 (1997).

[130] FTC, Frequently Asked Advertising Questions: Answers for Small Business, at 24, General Advertising Policies, available at (last visited Nov. 29, 2005).

[131] Id.

[132] In re Twin Star Prods. Inc., No. C 3307 (FTC Oct. 2, 1990).

[133] See Crescenti, supra note 120.