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Part Two: The Four Main Risks of Social Media Faced By Companies and Employers

OVERVIEW TO THE SERIES

Social media usage has revolutionized the way in which companies communicate with consumers. This Hartung Schroeder Practice Series is presented in five parts and provides practical guidance on the potential risks to a company attributable to the use of social media tools by the company and its employees. The Series explains:

THE FOUR MAIN RISKS OF SOCIAL MEDIA FACED BY COMPANIES AND EMPLOYERS

Although there are many potential benefits of undertaking these and similar activities, before entering the social media arena companies should identify and prepare for the associated risks. Companies should be particularly alert to:

  • The terms of use that govern the relationships between the company, the third-party site owners, and the end users of branded pages and channels;
  • The framework for endorsements and testimonials;
  • Securities-related risks; and,
  • Employment-related risks.

 

BRANDED PAGES AND CHANNELS

If a company creates customized pages or media channels on third-party social media sites (for example, the company’s fan page on Facebook or channels or communities on YouTube), the company should review the terms of use and privacy policies the third-party providers have put in place to govern the use of those sites, and have effective procedures in place to monitor usage and content, and to respond to negative posts.

 

Terms of Use

Company activities must comply with the terms of use of any applicable third-party social media platforms. Terms of use can vary significantly from site to site and may include important restrictions. Particular attention should be paid to terms relating to:

  • The actions of the users who access, use, and interact with the service.  Many social networking sites (including Facebook, YouTube, and Twitter) prohibit the uploading or posting of content by any user that infringes a third party’s rights, including intellectual property, privacy and publicity rights. The company should assess whether such conditions will act as a deterrent and a meaningful enforcement mechanism, and what its liability might be in circumstances where infringing content is posted on its page.
  • The process by which takedown notices are received under the safe harbor provisions of the Digital Millennium Copyright Act (DMCA).  In practice, the third-party site owner usually bears the responsibility for responding to these notices. The DMCA provides online service providers with a safe harbor under certain circumstances for copyright infringement resulting from acts by their users (for example, an infringing video posted by a user on YouTube).
  • Any age limits for users of the platform.  The third-party site owner usually bears the responsibility for establishing age limits for users.
  • The existence of any use restrictions.  Prohibitions or restrictions on the use of the social media platform, including restrictions on use for advertising or marketing, or for promotions and contests. Many social media platforms are beginning to restrict promotions and contests.
  • Any issues related to ownership of the company’s IP. Ownership of intellectual property used on, or information collected or generated through use of, the site (for example, any of the company’s copyrighted material and trademarks that might be posted on the site, or customer information the company collects through the site, or UGC posted to the company’s page).
  • Remedies and recourse in the event of conflicts.  Recourse available to the company if its rights are violated (such as infringement of its copyrights) by other users.
  • Privacy policies, which can vary significantly among sites. Companies should ensure that the site owner’s privacy practices for any data disclosed by the company or collected by the company from users of the site are appropriate and sufficient for the company’s intended use of the site, and monitor such privacy policies regularly for updates and changes.

 

Monitoring of Usage

Despite the efforts by social media platforms to impose terms of use prohibiting individuals from posting content that infringes a third party’s rights, a company may nonetheless find that content is posted that:

  • Infringes its intellectual property rights;
  • Is defamatory or otherwise damaging to the company’s reputation; or,
  • Contains confidential or proprietary information.

The company should implement procedures that will bring offensive or infringing postings to its attention. To protect against unwanted posts and mitigate the damage of such posts on their branded pages, the company can:

  • Institute a monitoring program. The company should monitor social media sites, services, and applications (and websites generally) for potentially damaging comments about the company or its products or services and infringement of the company’s intellectual property. The company should consider whether to engage a third-party monitoring vendor or use company employees.
  • Put together an internal response team to handle damaging statements and content. Responding appropriately to damaging statements and content posted by third parties may require coordination by multiple individuals across many company areas. The company should consider creating a response team that includes, for example, members of senior management, legal, corporate communication/public relations, marketing; and human resources (in case employees are responsible for the damaging activities).
  • Do not ignore defamatory comments or misleading information. The company should not ignore misleading statements being made about the company or its products. The appropriate response, however, will depend on the type and severity of the conduct at issue and could include: if the offending post appears on a third-party website, requesting that the post be taken down; if the offending post appears on the company’s own website, including a disclaimer reserving the right to remove content at the company’s discretion and ban abusive users; deleting false or misleading postings if possible or replying to the post with correct information; responding via other social media outlets, such as a company blog or fan page; responding with a press release; and taking legal action (for example, sending a cease and desist letter or filing a lawsuit). However, drawbacks to litigation include the potential need to identify an anonymous author, bad publicity, and the high cost of litigation.

Companies should enforce their response policies consistently.

 

Endorsements and Testimonials

Companies that use bloggers, influencers, or other endorsers to advertise their products need to be aware that if endorsers fail to disclose a material connection between the endorser and the company (such as payment, free products, or other perks from the company to the endorser), both the endorser and company may face regulatory scrutiny. They may also face backlash from consumers who might feel as if they have been duped or that a blog or other social media post is a glorified advertisement.

The Federal Trade Commission (FTC) revised its Guides Concerning the Use of Endorsements and Testimonials in Advertising (FTC Guides) in 2009. The FTC Guides provide a general principle of liability for communications made through endorsements and testimonials, stating: “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.”

In March 2013, the FTC again reminded advertisers to disclose material connections in its revised guidance for .com disclosures.

The FTC has indicated that:

  • Endorsers in social media, along with sponsoring advertisers, are subject to liability for failing to make material disclosures relating to the endorsement relationship (for example, gifts, employment, or other connections and circumstances).
  • The endorsement relationship itself may trigger the obligation to disclose.
  • Advertisers need to take reasonable steps to ensure that material disclosures are made.
  • Advertisers cannot rely on the remoteness of the social media endorsers or on the advertiser’s lack of control over them to escape liability.
  • Advertisers are technically liable for a remote endorser’s failure to disclose. An advertiser’s ability to avoid discretionary regulatory enforcement due to the endorser’s failure to disclose is a function of the quality of the advertiser’s policies, practices, and policing efforts.

In light of the FTC Guides:

  • Companies that provide products to a blogger, influencer, or other endorser for purposes of a product review should never instruct the endorser regarding what to say in the review, or ask to review or edit the review prior to posting.
  • Companies must disclose material connections with third-party endorsers and establish procedures to advise endorsers to make the necessary disclosures, such as through social media and endorser policies.
  • While companies should provide endorsers with up-to-date, company-approved product information sheets, those information sheets should not reflect the companies’ opinions or include prices.
  • In the event of a negative review, companies have the option of not providing products to the endorser for future reviews.
  • Companies should caution their personnel about engaging in inflammatory disputes with endorsers (known as flaming) on any review or other community-based sites.
  • Companies should monitor product reviews made by endorsers to ensure that the claims made are truthful and can be substantiated.

Recent enforcement actions suggest that the FTC is actively policing online disclosures, especially as they relate to endorsements and testimonials given by influencers through their social media channels. Companies should establish a system of monitoring endorser communications on social media about or on behalf of the company.

 

 

Securities-Related Risks

While social media presents an attractive channel for public companies to communicate with their investors, market professionals, and the public at large, the company should ensure that disclosures are appropriate and conform to applicable legal standards, and that those standards are understood and followed by the company’s employees and agents. Some key securities regulations that may be applicable include:

  • Regulation FD. Regulation FD prohibits selective disclosure of material nonpublic information. If such information is disclosed, it must be disseminated by methods of disclosure “reasonably designed to provide broad, non-exclusionary distribution of information to the public.”
  • Rule 10b-5. Rule 10b-5 of the Exchange Act prohibits companies from making untrue or materially misleading statements and omitting material information.
  • Regulation G. Regulation G limits companies’ use of non-GAAP financial information. Generally, a company cannot disclose non-GAAP financial information unless it is accompanied by comparable GAAP financial measures and a reconciliation of the information.
  • Forward-looking statements. The Private Securities Litigation Reform Act of 1995 (PSLRA) contains a safe harbor for certain forward-looking statements made by companies under limited circumstances. In order to benefit from this safe harbor, written statements must be identified as forward-looking statements and be accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statements. For more information on these requirements, see Standard Document, Forward-Looking Statements: Standard Safe Harbor Legend.

Before a company adopts social media as a form of communication and disclosure, it must ensure that the proper controls are in place. The company:

  • Must be careful not to violate Regulation FD through selective disclosures on social media aimed at market or securities professionals and not the public at large.
  • Should create programs to educate its employees on insider trading rules and liabilities, the importance of Regulation FD’s prohibitions on selective disclosure, and keeping the company’s most important confidential information internal to the company. Employees need to know what information they can and cannot communicate electronically in order to stay within the limits of compliance. These programs, together with meaningful and well-circulated corporate Regulation FD and insider trading policies, will help to prevent violations in the first instance. If a problem should arise, these steps may tip the balance in the company’s favor when the SEC decides whether or not to bring an enforcement action.
  • Should verify that all mandatory disclaimers regarding forward-looking statements and non-GAAP financial measures are included with any electronic disclosure.
  • Should regularly monitor its websites and social media presence to ensure that the discussion is appropriate, the dispersal of information is compliant with the securities laws and, more simply, that these vehicles are being properly and lawfully used. The company also should conduct routine searches for the use of the company’s name and corporate logo or other image to ensure that false rumors or other forms of market manipulations are not occurring.
  • Must carefully plan, execute and periodically revisit a strategy that ensures that its use of social media is compliant with securities laws and that it is protected against any abuse.

 

Continue to Part Three: The Use of Social Media in Employment Practices