Pursuant to the Fair Labeling and Advertising Act (the “FLAA”), the Korea Fair Trade Commission (the “KFTC”) imposed sanctions (i.e., corrective orders and administrative fines of KRW 269 million in total) on seven companies which had been investigated for their failure to disclose the fact that economic benefits had been provided to influencers who advertised such companies’ products on Instagram accounts.

A recently emerged term “influencer” refers to those who use social media platforms to share their daily experiences with other people and have significant influence over consumers’ purchasing decisions.  Accordingly, businesses have been increasingly using influencers for advertisements by asking them to post product reviews on social media.

Such trend is prompting regulators worldwide to monitor advertisements on social media, particularly those posted by influencers, and take action against those that are found to be deceptive or false.  In line with this global trend, the KFTC launched an investigation into Instagram influencer marketing for three major categories, including cosmetics, small home appliances and weight loss products, and collected information on cases in which influencers failed to disclose the fact that they had received compensation for posting advertisements.  Moreover, the competition watchdog inspected all advertisements that had been run since 2017 by the seven companies which generated the highest number of posts without having disclosed any related compensation to influencers.

Through such inspection, the KFTC found that the seven companies had provided influencers with a total of KRW 1.15 billion either in cash or free advertised products in return for their posts on Instagram.  A total of 4,177 posts on Instagram had no indication that the companies provided compensation to the influencers.  As a result, the KFTC imposed or issued administrative fines and corrective orders on all of the seven companies on the grounds that non-disclosure of the provision of compensation to influencers constituted deceptive or false advertising.

This was the first instance of the KFTC imposing sanctions for failure to disclose the commercial nature of posts on Instagram, a social media platform typically optimized for mobile devices.  Following the KFTC’s past ruling that imposed sanctions against advertisements on online blogs, the KFTC reports that the number of online blog posts that fail to disclose their commercial nature has been decreasing significantly since the enforcement of sanctions.  Similarly, the regulator believes that such practice of disclosing the commercial nature of posts will also expand throughout social media, including Instagram and YouTube. 

Going forward, the KFTC also plans to amend its Guidelines on Review of Advertising Through Recommendations and Endorsement, in consideration of the varying nature for each platform, such as those centered around still photos (e.g., Instagram) or video content (e.g., YouTube), so as to allow consumers to be better informed of the commercial nature of social media posts, and to create a separate set of guidelines for businesses, influencers and consumers, on the use of advertisement and use of social media.

Implications

Given the nature of influencer marketing, it is difficult for advertisers to control the manner in which influencers advertise their products.  Nonetheless, the KFTC sanctions indicate that, going forward, advertisers themselves can be held liable for any deceptive or false advertisements made by influencers on the advertisers’ products.  As such, it is essential that companies review legal issues that may arise from influencer marketing, and also monitor influencers’ compliance with the applicable laws and regulations, including the FLAA.

In addition, providing economic benefits to influencers or influencer marketing involving members of the press may raise issues under the Anti-Graft Act.  Further, benefits provided to the influencers can have tax implications for the advertisers.

In order to reduce potential legal risks associated with influencer marketing, we advise companies and their employees to understand the potential legal issues and establish clear internal guidelines and manuals for influencer marketing (including full disclosure of any compensation given to the influencers), closely review any advertisement contracts with marketing agencies and influencers, and develop a system to monitor influencer advertisements.