Celebrity endorsements—how brands can manage legal risks and protect their reputations

Using a celebrity to build brand awareness or influence a consumer’s decision to purchase a company’s product is nothing new. At the same time, featuring a celebrity in advertising can be risky. If the celebrity is too famous relative to the brand, the brand may be eclipsed. If the celebrity is known for promoting a zillion brands, he or she may lack credibility with consumers due to overexposure. There are three ways to associate a company’s brand or product and services with a celebrity: the celebrity can be a company spokesperson, an endorser of a company’s product or service or a long-term business partner with an ownership stake in the company. Celebrity as spokesperson Whether a celebrity spokesperson is also an endorser depends on what the celebrity says or does in an advertisement. Both parties should be very clear on whether the celebrity will be endorsing the company’s product or service, remembering that endorsements can be implicit as well as explicit. What’s important is the net consumer takeaway: After digesting the advertisement, is it reasonable for the consumer to conclude that the celebrity has endorsed the company’s product or service? Or is the celebrity merely speaking on behalf of the company? Check out the latest Ad Age events and award programs The importance of this distinction is illustrated by the Federal Trade Commission’s 2000 lawsuit against Steve Garvey, the retired Los Angeles Dodgers first baseman, and Enforma, which marketed and sold weight-loss supplements “Exercise in a Bottle” and “Fat Trapper.” In two infomercials, Garvey served as a somewhat skeptical host interviewing an expert endorsing the weight-loss supplements. The infomercials featured footage of people eating enormous amounts of high-caloric food and promised consumers that if they purchased the supplements—which purportedly contained fat-blockers and fat-burners—they could eat food such as fried chicken, pizza and cheeseburgers without gaining weight. The FTC alleged that both Garvey and Enforma had made false, deceptive and unsubstantiated advertising claims about the weight-loss supplements and that Garvey was liable not only as a participant acting as a spokesperson but as an “endorser” of the products. According to the FTC’s Guides Concerning Use of Endorsements and Testimonials in Advertising, an “endorsement” means “any advertising message that consumers are likely to believe reflects the opinions, beliefs, findings or experience of a party other than the sponsoring advertiser …” Further, the endorser must be a “bona fide” user of the product or service at the time of the endorsement and the endorsement should not contain any representations that would be deceptive or could not be substantiated if made directly by the advertiser. Unlike Enforma, Garvey refused to settle the lawsuit. His case eventually made its way to the 9th Circuit Court of Appeals, which upheld the district court’s holding that Garvey did not endorse the weight-loss supplements. It said the FTC failed to establish that a reasonable consumer would conclude Garvey’s statements in the infomercials reflected his personal opinion about the products. In other words, Garvey was merely speaking on behalf of the company. The lesson here is to determine from the beginning whether the celebrity will merely be a spokesperson for the company or also an endorser of a company’s product or service. And it must also be clear to consumers that the celebrity is being compensated to speak on behalf of the company and/or its products or services. Celebrity as endorser Consider a hypothetical company selling a diet program and weight-loss supplements that hires a well-known actress to endorse its program. Advertising features before and after photos of the actress, claiming that she lost 10 pounds in two weeks on the program. And it discloses, as required by FTC guidelines, that according to a clinical study, the average weight loss after two weeks on the program is five pounds. The company also has an affidavit from the actress, stating that she followed the program according to the instructions, including the recommended amount of exercise, and lost 16 pounds in two weeks—twice the amount of the average weight loss experienced by the participants in the clinical study. The company later hears a rumor that it is common entertainment industry knowledge that the actress has struggled with an eating disorder for at least a decade. Regardless of whether the rumor is true, vetting the actress beforehand would have allowed the company to determine the potential risk of using her as an endorser. To protect itself against fake endorsements, a company may want an indemnification provision in its contract with the celebrity. The company should also make sure is has an affidavit from the celebrity setting forth the due diligence the celebrity conducted on the company’s product or services; that the celebrity is a bona fide user of the product or services; and the celebrity’s honest opinions, findings, beliefs and experience with the product or service. If a company hires a celebrity to advertise an investment opportunity or even just investment education, don’t forget about the Securities and Exchange Commission. In November 2017 the SEC issued an investor alert regarding celebrity endorsements, warning that celebrities typically do not have the expertise to determine whether an investment opportunity is appropriate and in compliance with federal securities laws. Celebrity as investor While many celebrities might receive a percentage of sales as compensation for speaking on behalf of a company and/or endorsing its products or services, that does not mean that the celebrity has an ownership interest in the business. Celebrities who invest in companies generally own equity in the company and have at least one board seat. In this scenario, the company and the celebrity often form a limited liability company and the celebrity licenses her name and image and likeness to the LLC—often becoming the de facto face of the company. So, choose your business partners wisely and consider what impact it will have on the company’s future if the company and the celebrity decide to part ways. Subscribe to Ad Age Sign up now for the latest industry news and analysis Click here

Celebrity endorsements—how brands can manage legal risks and protect their reputations

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