FTC’s New Rulemaking Attempts to Tackle Fake Reviews

The Federal Trade Commission (“FTC” or the “Commission”) announced a final rule targeting buying and selling fake reviews and testimonials on August 14, 2024. (Mitchell J. Katz, FTC.gov). This final rule is the result of a two-year process initiated in 2022 with an advanced notice of proposed rulemaking followed by a notice of proposed rulemaking in June 2023, and finally an informal hearing on the proposed rulemaking in February of 2024. Id. The final rule was then announced on August 14, 2024, where the Commission outlined activities the rule will regulate, primarily the buying, selling, or fabricating of fake online reviews and testimonials. Id. Fake online reviews can pop up anytime something is sold or rated online, ranging from travel review sites to e-commerce businesses to paid influencer testimonials, and make up an estimated 16% to 40% of all online reviews. (Heidi Mitchell, Wall Street Journal). According to FTC Chair Lina Khan, the final rule is necessary because fake reviews “not only waste people’s time and money, but also pollute the marketplace and divert business away from honest competitors.” (Mitchell J. Katz, FTC.gov). Confusingly, however, in the FTC’s federal register notice of the final rule (a detailed document which accompanies all FTC rulemaking), the Commission stated that the buying and selling of fake reviews was already illegal under Section 5 of the FTC Act. (15 U.S.C. § 45; FTC, Final Register Notice). This begs the question, why was this new rulemaking necessary? This post examines why the Commission deems this rule necessary, what activities the final rule prohibits, and how it can be used to help consumers.

Prior to the final rule, the FTC relied on Sections 5 and 13 of the FTC Act to pursue civil penalties from those who market in fake reviews. Section 5 of the FTC Act states that “unfair or deceptive acts or practices in or affecting commerce, are hereby declared unlawful.” 15 U.S.C. § 45. Section 13 of the FTC Act allowed the FTC to seek remedies from those who violated Section 5. 15 U.S.C. § 53. For example, in 2022, the FTC sued the online rental listing company Roomster for flooding its site with fake reviews of rental listings under Section 5 of the FTC and sought monetary relief under Section 13. (FTC, Press Release). However, this pathway to monetary relief was recently barred by the Supreme Court, which, according to the FTC, led to the development of the final rule. (FTC, Final Register Notice).

In AMG Cap. Mgmt., LLC v. FTC, the Court rejected the Commission’s ability to use Section 13(b) of the FTC Act to obtain court-ordered monetary relief for consumers who were harmed by violations of the FTC Act. See 593 U.S. 67, 82 (2021). Section 13(b) grants the Commission the ability to seek permanent injunctive relief for violations of the FTC Act, and friendly district and appellate courts in the past allowed the Commission to pursue monetary relief via civil penalties under this section. Id. at 73. However, as Justice Breyer pointed out in his majority opinion, Section 13 only allows for injunctive relief, and furthermore, Section 19 of the FTC Act provides a detailed path for civil penalties. Id. at 92. Overall, the Court reasoned that allowing the FTC to pursue civil penalties under Section 13 was not only contrary to the plain language of the FTC Act, but also redundant and unnecessary as a path to relief already exists. Id. This holding presented a problem for the Commission, as the pathway to monetary relief under Section 19 is long and complicated, thus lessening its effectiveness as a deterrence mechanism. (FTC, Final Register Notice).

Section 19 provides two paths for civil penalties— Section 19(a)(1) and Section 19(a)(2). See 15 U.S.C. § 57b. Under Section 19(a)(2), the FTC can only obtain relief by first conducting an administrative hearing to determine whether the FTC Act was violated. (FTC, Final Register Notice). To illustrate, the Commission would need to prove that a company or individual engaged in “unfair and deceptive acts in or affecting commerce,” which is banned under Section 5 of the FTC Act. Id. Then, if the administrative hearing found a violation, the Commission could issue a cease-and-desist order, appealable in federal court. Id. If the FTC wins the appeal, the cease-and-desist order becomes final, and the FTC can initiate a civil action in federal court. Id. The other path available under Section 19, Section 19(a)(1), grants the FTC the ability to go directly to federal court, bypassing the need to obtain a final cease and desist order, if the Commission believes a specific FTC rule has been violated. Id. Thus, after the Court ruled in AMG, the FTC needed a new rule to take advantage of the streamlined path to monetary relief granted under Section 19. Id.

The final rule itself prohibits several activities which fall under the umbrella of “clearly unfair or deceptive acts . . . involving consumer reviews or testimonial.” (FTC, Final Register Notice). The prohibited activities are: buying and selling testimonials created by people who do not exist (e.g., AI generated reviews) or have no experience with the product; incentivizing reviews on the condition that the reviewer express a certain sentiment; reviews written by officers and managers of the business or their employees and family members; suppressing reviews through baseless threats and litigation; and purchasing and selling fake social media indicators such as bot followers. (Kenneth Benway & Alexander Brown, Alston & Bird). Lastly, the final rule will allow the FTC to pursue civil penalties against companies and individuals who violate any of these restricted activities, an enforcement mechanism that was recently restricted by the Supreme Court. (FTC, Final Register Notice).

The FTC believes that the final rule will primarily benefit consumers by saving them time and money. Id. Reviews are a critical part of the online shopping experience, with up to 98% of consumers reading reviews before making a purchase. (Dima Raketa, Forbes). Additionally, around 75% of consumers will consult more than one review site before making their purchase. (Sammy Paget, Brightlocal). Despite this time commitment, people are only able to detect fake reviews around half the time, meaning consumers are no better at detecting fake reviews than pure chance. (Heidi Mitchell, Wall Street Journal). Additionally, fake reviews account for anywhere between 16% to 40% of all online reviews. Id. According to a quantitative estimate done by the FTC, potential consumer savings from eliminating these fake reviews could be between $57 and $230 billion a year. (FTC, Final Register Notice). The Commission arrived at these numbers by assuming that fake reviews result in a less competitive marketplace, additional time spent researching before purchase, and less informed consumer decision making. (FTC, Final Register Notice). This likely adds costs to the consumer in the form of time spent shopping and actual money spent on purchases and returns. Id. Therefore, the Commission believes that strengthening its deterrent mechanisms through additional civil penalties and renumeration will ultimately strengthen competition in the marketplace and increase informed decision making, thereby saving consumers time and money.

The FTC, in its notice of proposed rulemaking in June of 2023, called for comments from the public and received generally positive support for the final rule. (Kenneth Benway & Alexander Brown, Alston & Bird). For example, Yelp commented that they “fully support[] and endorse[] the commission’s proposed rule.” (Yelp).  Similarly, Amazon stated that it “is encouraged to see the [FTC] increasing its focus of fake reviews.” (Kenneth Benway & Alexander Brown, Alston & Bird). Almost all the corporate comments echoed similar statements and most of the opponents simply claimed that the final rule didn’t go far enough. Id. (See here for the full list of comments). Overall, the Final Rule seems to be a popular move creatively enacted out of a real need. It will be interesting to see what litigation arises out of this rulemaking and if the Commission is able to achieve the goals it has outlined.