UPDATE: After making some changes from the proposal discussed below, the FTC published the new regulations in the Federal Register on Oct. 5, 2009, with the new rules scheduled to go into effect on Dec. 1.  More details here.

What do Harry Potter books, The Blair Witch Project, Razor scooters, the Ford Focus and Hebrew National hot dogs have in common? In the late 1990s and early 2000s, these brands -- or, more precisely, the marketers behind them -- were at the cutting edge of a new advertising technique: "buzz marketing." A decade later, the government's efforts to control such marketing techniques may have impact on blogs and other citizen media.

Inspired by Malcolm Gladwell's 2000 book The Tipping Point: How Little Things Can Make a Big Difference, the idea behind buzz marketing, as explained by BusinessWeek magazine in July 2001, was to eschew traditional advertisements, replacing them with "influencers" whose role is to promote a brand to a particular group of people. These "influencers" can be paid in the traditional sense, or instead they can be offered special perks and benefits, or given free samples for their own use, or to give away to others. The key is that the "influencers" do not reveal the arrangement, so that their use and interest in a product seems to be a genuine personal preference.

The Federal Trade Commission took notice of this trend in 2006, in response to a petition by the advocacy group Commercial Alert. The result was a FTC staff opinion letter questioning the practice:

[I]n some word of mouth marketing contexts, it would appear that consumers may reasonably give more weight to statements that sponsored consumers make about their opinions or experiences with a product based on their assumed independence from the marketer. ... In such circumstances it would appear that the failure to disclose the relationship between the marketer and the consumer would be deceptive unless the relationship were otherwise clear from the context.

Despite this declaration, the staff letter declined to make a general policy on the practice, stating instead that the Commission would address cases on an individual basis.

But by early 2007, the Commission decided to address the issue head-on by looking to revise its Guides Concerning the Use of Endorsements and Testimonials in Advertising, 16 C.F.R. Part 255. The Guides, first issued in 1972 and last revised in 1980, do not have the force of law, but can be used as the basis for FTC enforcement actions. As currently written, they recommend that endorsements and testimonials be truthful and unsolicited; that advertisements disclose if an endorser's results with a product or service are not typical; and that the connections between the endorser and the advertiser be disclosed if they are not obvious to the consumer.

On Jan. 16, 2007, the Commission invited comments on two studies from 2003 and 2004 on the effect of consumer testimonials in weight loss, dietary supplement and business opportunity advertisements, and on several issues regarding testimonials and endorsements. See 72 Fed. Reg. 2214 (Jan. 18, 2007); press release. After receiving 23 comments from various parties, in November 2008 the Commission released its proposed revisions to the Guides, which would significantly change acceptable advertising practices.

Several others have undertaken a detailed analysis of the proposal (here, here, here, and here). But what made the blogosphere sit up and take notice was the inclusion of examples specifically dealing with blogs.

The first of these examples is under proposed § 255.1(d), which states: "Advertisers are subject to liability for false or unsubstantiated statements made through endorsements, or for failing to disclose material connections between themselves and their endorsers. Endorsers also may be liable for statements made in the course of their endorsements." § 255.1(d).

"Example 5" under this provision reads as follows:

Example 5: A skin care products advertiser participates in a blog advertising service. The service matches up advertisers with bloggers who will promote the advertiser's products on their personal blogs. The advertiser requests that a blogger try a new body lotion and write a review of the product on her blog. Although the advertiser does not make any specific claims about the lotion's ability to cure skin conditions and the blogger does not ask the advertiser whether there is substantiation for the claim, in her review the blogger writes that the lotion cures eczema and recommends the product to her blog readers who suffer from this condition. The advertiser is subject to liability for false or unsubstantiated statements made through the blogger's endorsement. The blogger also is subject to liability for representations made in the course of her endorsement. The blogger is also liable if she fails to disclose clearly and conspicuously that she is being paid for her services.

In order to limit its potential liability, the advertiser should ensure that the advertising service provides guidance and training to its bloggers concerning the need to ensure that statements they make are truthful and substantiated. The advertiser should also monitor bloggers who are being paid to promote its products and take steps necessary to halt the continued publication of deceptive representations when they are discovered.

Proposed Guides Concerning the Use of Endorsements and Testimonials in Advertising, at 69-70 (emphasis added).

The other example involving bloggers is under proposed § 255.5, dealing with disclosure of material connections:

Example 7: A college student who has earned a reputation as a video game expert maintains a personal weblog or "blog" where he posts entries about his gaming experiences. Readers of his blog frequently seek his opinions about video game hardware and software. As it has done in the past, the manufacturer of a newly released video game system sends the student a free copy of the system and asks him to write about it on his blog. He tests the new gaming system and writes a favorable review. The readers of his blog are unlikely to expect that he has received the video game system free of charge in exchange for his review of the product, and given the value of the video game system, this fact would likely materially affect the credibility they attach to his endorsement. Accordingly, the blogger should clearly and conspicuously disclose that he received the gaming system free of charge.

Proposed Guides Concerning the Use of Endorsements and Testimonials in Advertising, at 84-5 (emphasis added).

The FTC received 17 comments in response to these proposals, and is expected to issue permanent guidelines by the end of the year.

Traditionally, "mainstream" journalists were often held to ethical standards -- such as those formulated by the Associated Press, the Society of Professional Journalists, and The New York Times Company -- which restricted or prohibited endorsements and testimonials. But enforcement of these standards was often left to the employer, as an employee discipline matter, and enforcement was sometimes spotty.

There have been several efforts to create ethical codes for general bloggers (here, here, here) and bloggers that specialize in certain topics (food bloggers 1; food bloggers 2; medical bloggers (archived)). Yet no code has emerged as a consensus, and bloggers generally follow their own notions of proper behavior.

In August 2009, the Electronic Retailing Self-Regulation Program -- a self-regulatory program for the advertising industry --  recommended that a natural supplements and skin care products company "clearly and conspicuously disclose" its ownership of various websites that present themselves as unbiased and independent consumer resources, and of the fact that the reviewers are paid by the company.  (Press release available here.)

So some guidelines on endorsements by bloggers may be a good idea. But the problem with the proposed FTC regulations is that, even though they are fashioned as "guides," they are ultimately backed by the Commission's enforcement powers.

The FTC may legitimately penalize advertisers for improper claims and methods in advertising and promotion. But a government agency punishing bloggers for their comments creates a real First Amendment problem.

While it is true that courts have allowed publishers of discriminatory housing ads and advertisements for illegal activity to be held liable for those ads, the new FTC rules would hold online content producers liable not for an advertisement created by others, but for their own editorial content.

It's dangerous for the FTC to be regulating editorial content and ethics, rather than straight ad content.  FTC regulations on advertisers, barring them from giving freebies, for example, may be legitimate; regulating bloggers for what is essentially an ethical issue is a dangerous precedent of government encroaching on First Amendment speech. 

A better solution would be the development of a "Better Business Bureau" for bloggers: a voluntary group that would certify that certain blogs and sites meet certain standards for disclosure of commercial interests. Obviously, this would require a bit of organization by bloggers. Some bloggers have created just such a group.  But that would be less intrusive than ceding the creation and enforcement of standards to the federal government.