February 4, 2022
Practical Law Canada Competition, of which I am Lawyer Editor, published a new Legal Update, which discusses potential implications in Canadian competition law regarding false and misleading advertising and algorithms following a recent enforcement decision by the United States Federal Trade Commission (FTC) against Fashion Nova, LLC.
In this case, the FTC concluded that Fashion Nova misled consumers contrary to section 5(a) of the United States Federal Trade Commission Act by using a third-party management interface algorithm to automatically publish favourable customer reviews while withholding and concealing more negative customer reviews. This case also follows several recent enforcement efforts, studies and policy changes from foreign and international enforcement agencies on the use of technology, including algorithms, in the digital economy.
Below is an extract of the new Legal Update with a link to the full Update.
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This Legal Update discusses potential implications in Canadian competition law regarding false and misleading advertising and algorithms following a recent enforcement decision by the United States Federal Trade Commission (FTC) against Fashion Nova, LLC (Fashion Nova). In this case, the FTC concluded that Fashion Nova misled consumers contrary to section 5(a) of the United States Federal Trade Commission Act by using a third-party management interface algorithm to automatically publish favourable customer reviews while withholding and concealing more negative customer reviews. It follows increased enforcement efforts from Canadian and foreign competition authorities regarding algorithms in the digital economy. This Update discusses this novel case, Canadian parallels and potential implications, and some of the broader emerging issues relating to algorithms and competition.
Online customer reviews are commonplace for internet retailers and can inform and influence consumer purchases. However, concealing negative customer reviews can contravene competition and other consumer protection laws. For example, the use of management interface software or algorithms to conceal negative online customer reviews directly or indirectly may inaccurately reflect and inflate customer satisfaction, raising misleading advertising issues under the Competition Act, R.S.C. 1985, c. C-34 and other Canadian and international competition or consumer protection laws.
In this regard, on January 25, 2022, the United States Federal Trade Commission (FTC) announced that it reached a proposed settlement agreement with California-based fashion retailer Fashion Nova, LLC (Fashion Nova) (see Press Release, Fashion Nova will Pay $4.2 Million as part of Settlement of FTC Allegations it Blocked Negative Reviews of Products, FTC, January 25, 2022).
In making the announcement, the FTC’s Director of Consumer Protection said:
“Deceptive review practices cheat consumers, undercut honest businesses, and pollute online commerce.”
Under the settlement agreement, Fashion Nova will pay USD $4.2 million for allegedly concealing negative online customer reviews, thereby misleading customers. In addition, Fashion Nova will be prohibited from making misrepresentations about customer reviews or endorsements and must post on its website all product reviews, excluding unrelated and obscene reviews (for example, reviews that contain obscene, sexually explicit or racist content).
Like many online retailers, Fashion Nova’s website uses a five-star customer review rating system for its products. Each product web page allows customers to post a product review and rating. Prospective customers visiting the web page can view the average product rating, number of reviews and individual reviews.
According to the FTC, Fashion Nova engaged in deceptive marketing practices by intentionally filtering reviews through its management interface algorithm, which automatically posted four- and five-star reviews, while holding and not approving lower-star (more negative) reviews. In particular, the FTC claims that Fashion Nova installed a third-party online product review management interface algorithm to filter and conceal hundreds of thousands of unfavourable reviews below four stars from as early as late 2015 to mid-November 2019. As such, the FTC alleged that Fashion Nova inaccurately inflated its overall online product rating contrary to section 5(a) of the Federal Trade Commission Act.
In addition to the settlement agreement, the FTC also announced that it was sending warning letters to ten companies offering review management services regarding the collection or publication of online customer reviews. This follows the FTC’s wide sweeping warnings in October 2021 sent to more than 700 companies regarding fake or misleading endorsements and representations in social media (see Press Release, FTC Puts Hundreds of Businesses on Notice About Fake Reviews and Other Misleading Endorsements, FTC, October 13, 2021).
The FTC has also released new guidance for online retailers and review platforms to educate them with respect to the agency’s key principles for collecting and publishing customer reviews to not mislead consumers (see Soliciting and Paying For Online Reviews: A Guide For Marketers, FTC, January 2022).
While this case involves online retailers in the United States, it reflects many parallel competition-law issues and enforcement priorities in Canada, including the Canadian Competition Bureau’s (Bureau) increasing focus on the digital economy and algorithms.
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For the full Legal Update, see: here.
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