A year ago, Sunday Riley caught the attention of federal regulators after a former employee revealed that the buzzy skincare company was engaging in a scheme to dupe consumers about its products by way of fake reviews on e-commerce sites like Sephora. After the former employee leaked an internal email from the company to a number of employees, which called on the individuals to go to great lengths to hide their identities and then leave glowing reviews about its products on Sephora.com in order to entice consumers to purchase its skincare goods, a rep for Sunday Riley confirmed that the company’s eponymous founder had, in fact, sent the email.
In addition to causing a media frenzy, the Sunday Riley email and the alleged practices that it revealed – which involved the intentional non-disclosure of individuals’ status as employees of the company in connection with their “fake” product reviews – prompted an investigation by the Federal Trade Commission (“FTC”). On the heels of a formal probe, the FTC filed a complaint against Sunday Riley in October 2019, alleging that “between November 2015 and August 2017 Sunday Riley Skincare managers, including Ms. Riley, posted reviews of their branded products on the Sephora site using fake accounts created to hide their identities, and requested that other Sunday Riley Skincare employees do the same thing.”
In its complaint, the FTC pointed to a July 2016 email that Ms. Riley allegedly wrote to her staff directing them to “create three accounts on Sephora.com, registered as different identities” as proof that the company’s management also “requested that other Sunday Riley Skincare employees” post fake reviews endorsing the brand’s products. The email “included step-by-step instructions for setting up new personas and [how to] use a VPN to hide [an individual’s] identity.” It also “directed employees to focus on certain products,” to “[a]lways leave 5 stars” when reviewing Sunday Riley Skincare products, and to “dislike” negative reviews. “If you see a negative review – DISLIKE it,” Ms. Riley wrote, “After enough dislikes, it is removed. This directly translates into sales!!”
According to the FTC, a federal entity tasked with promoting consumer protection, and eliminating and preventing anti-competitive business practices, the actions taken by Sunday Riley’s founder and employees give rise to two violations of the FTC Act, including: 1) making false or misleading claims that the fake reviews reflected the opinions of ordinary users of the products; and 2) deceptively failing to disclose that the reviews were written by Ms. Riley or her employees.
The parties ultimately reached an agreement to settle the matter, which would require Houston, Texas-based Sunday Riley to refrain from “misrepresenting the status of any endorser or person reviewing [its] products” and from “making any representation about any consumer or other product endorser without clearly and conspicuously disclosing any unexpected material connection between the endorser and any respondent or entity affiliated with the product.”
Weighing in the proposed agreement on October 21, 2019, three of the FTC’s Commissioners voted in favor, while two – Commissioner Rohit Chopra and Commissioner Kelly Slaughter – dissented on the basis that the settlement terms simply are not strong enough. Commissioners Chopra and Slaughter asserted in a separate statement that the proposed settlement falls short as it “includes no redress, no disgorgement of ill-gotten gains, no notice to consumers, and no admission of wrongdoing.” While “Sunday Riley and its CEO have clearly broken the law,” the two Commissioners argued that “the proposed settlement is unlikely to deter other would-be wrongdoers,” and instead, actually “sends the wrong message to the marketplace: dishonest firms may come to conclude that posting fake reviews is a viable strategy, given the proposed outcome here.”
The two Commissioners were not alone in their sentiments about the proposed settlement; consumers largely agreed that the settlement simply was not enough to remedy Sunday Riley’s alleged wrongdoing. In furtherance of the required 30 day public comment period (after which the FTC is able to decide whether to make the proposed settlement final or not), consumers called the proposed settlement terms “disgusting,” “deeply disappointing,” and lacking in “actual consequences.” At the same time, at least some urged the FTC to levy an “appropriate but considerable fine to stop the company, and entire skincare industry, from deceiving consumers,” noting that “companies won’t change unless it affects their bottom line.”
A “No-Money, No-Fault Settlement”
Despite such pushback from two Commissioners and the public, alike, the FTC announced this month that it has finalized the Sunday Riley settlement. In a statement on November 6, the FTC revealed that it “has approved a final consent agreement settling charges that Sunday Riley Modern Skincare, LLC (Sunday Riley Skincare) and its CEO, Sunday Riley, misled consumers by posting fake reviews of the company’s products online, at the CEO’s direction, and by failing to disclose that the reviewers were company employees.”
As a result of the settlement, Sunday Riley Skincare and Ms. Riley are formally prohibited “from misrepresenting the status of any endorser or person reviewing a product they are selling,” and required to ensure that “ any unexpected material connection between endorsers and Sunday Riley Skincare, Ms. Riley, or any entity affiliated with the product” is “clearly and conspicuously disclosed.” Additionally, Sunday Riley is required to provide “each employee, agent, and representative with a clear statement of his or her responsibilities to disclose clearly and conspicuously and in close proximity to any endorsement in any online review, social media posting, or other communication endorsing any [of the company’s] products, the employee’s, agent’s, or representative’s connection to the product, and obtaining from each such recipient a signed and dated statement acknowledging receipt of that statement and expressly agreeing to comply with it.”
The settlement does not levy any monetary penalties on the brand or its founder.
The move to settle the matter on those terms again saw a 3-2 breakdown among the FTC Commissioners, with Chopra and Slaughter voting against the FTC’s “doubling down on its no-money, no-fault settlement with Sunday Riley, who was charged with egregious fake review fraud.” The two Commissioners call the “weak settlement is a serious setback for the Commission’s credibility as a watchdog over digital markets.”
Commissioner Chopra points, in particular, to an objection filed during the 30 day period by Consumer Reports, which he says “was correct in arguing that the Commission can seek monetary relief in cases such as this one,” noting that the FTC “can seek monetary relief in federal court, through either Section 13(b) or Section 19,” which is why the agency “been able to recover funds in cases involving fake reviews without time-consuming litigation” in the past.
Instead of using the matter to “signal that disinformation campaigns have costs,” Chopra claims the Commission’s “decision to finalize this flawed settlement” while “disinformation [is] pervading the digital world and fake reviews [are] polluting online marketplaces” is “more than a missed opportunity, it is a serious setback for online shoppers, honest sellers, and the Commission’s credibility.”
Reflecting on the “FTC’s divided decision, which signals competing views on the agency’s role in enforcement of the promotion of competition and protection of consumers in the online marketplace,” Hunton Andrews Kurth attorneys Phyllis Marcus and Emma Hutchison encourage brands to ensure that they “have robust compliance programs [in place] to oversee user-generated content and employee endorsements, including up to the executive level.” They also note that “with new Democratic leadership expected in January 2021, [brands] should expect a more active FTC that is less willing to entertain arguments that non-monetary sanctions alone can address consumer harm.”
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