MarkIt to Market® - October 2019: Zero Stars: FTC Settles with Skincare Company Over Fake Online Reviews

Sterne, Kessler, Goldstein & Fox P.L.L.C.
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Sterne, Kessler, Goldstein & Fox P.L.L.C.

Until recently, Texas skincare company Sunday Riley was one of the shining stars of the lucrative cosmetics market – its products were featured at high-end retailers such as Sephora and Nordstrom, high-profile influencers and beauty writers touted the brand’s efficacy and eco-friendly virtues, and the company’s revenue is estimated between $50 - $100 million. But a recent U.S. Federal Trade Commission (FTC) settlement about the company’s intricate fake online reviews scheme offers a troubling look at the darker side of e-commerce “customer” reviews – and a cautionary lesson to any company considering similar actions.

The FTC’s Complaint alleged that both the company Sunday Riley and its eponymous owner/CEO created and participated in a detailed fake online reviews program for over two years, under which employees and interns were charged with setting up fake customer accounts on Sephora’s website to increase the number of positive reviews for the company’s skincare line, disagree with negative reviews of its products, and criticize competitors’ offerings. Sunday Riley committed to these efforts to such an extent that, after Sephora removed numerous fake employee-written reviews, Sunday Riley took the step of obtaining an Express VPN (virtual private network) account to mask its users’ IP addresses and locations, to enable it to continue its review practice.  

The Complaint includes excerpts from a July 2016 staff-wide email written by Ms. Riley, in which she asks each employee to create three different accounts on Sephora.com “registered as different identities,” “connect to the Internet ONLY using the VPN and make sure to choose a city of origin that goes along with where your character lives,” “leave a review… be very enthusiastic without looking like a plant, always leave 5 stars,” “you will need to clear cookies and use the VPN every time, or your account will be flagged,” and “if you see a negative review, DISLIKE it.” Another quoted email from Sunday Riley’s Skincare Account Manager responsible for Sephora details similar steps and requirements for the fake reviews, and includes the observation, “The power of reviews is mighty, people look to what others are saying to persuade them and answer potential questions they have.”

Although the FTC’s Complaint charged the company and its owner with two violations of the FTC Act – (1) false or misleading endorsement claims, and (2) deceptive failure to disclose material connections with endorsers – Sunday Riley negotiated a settlement via a proposed administrative consent order. Although the settlement bars Sunday Riley from misrepresenting the status of a person reviewing products and requires the company to instruct its employees and agents to disclose their connections to the company in any endorsements, it does not include an admission of wrongdoing by either the company or its namesake chief executive, nor any financial penalty. 

This result prompted a strong rebuke from FTC Commissioners Rohit Chopra and Rebecca Kelly Slaughter, who voted against the settlement in the Commission’s 3-2 vote. Even more notably, Commissioner Chopra issued his own statement (joined by Commissioner Slaughter) arguing that the Commission’s failure to seek money damages and an admission of fault for an “unambiguous” violation of its Act is counter to its mission of addressing online consumer deception – “Sunday Riley and its CEO have clearly broken the law, and the Commission has ordered that they not break the law again.” Such a settlement is unlikely to deter other companies or individuals pondering a similar scheme, and may result in a flood of additional consumer deception in the difficult-to-police world of online marketplaces.

The proposed consent order is available for public comment until November 25, 2019 and has been the subject of much discussion in the beauty journalism area (Elle, Allure, The Cut) and beyond (The New York Times, The Washington Post, and CNN), so it will be interesting to see whether a potential consumer backlash may have an impact on its terms. In any event, companies should think twice before penning phony online reviews to boost their sales or torpedo competitors’ – although the FTC may have gone easy on Sunday Riley, it may not be as forgiving in the future.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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