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Would Foursquare referral fees be legal?

By Julianne Pepitone, staff reporter

NEW YORK (CNNMoney.com) -- Foursquare founder Dennis Crowley kicked up a firestorm last week when he said users "should get some kind of referrer's fee" when they get their online followers to buy items like movie tickets.

Crowley, who made the remarks at a panel discussion about the media business in New York last week, was shocked when a Forbes reporter pointed out the Federal Trade Commission has rules against "kickbacks" for blogged recommendations if the payment isn't prominently disclosed.

As the Forbes reporter, Jeff Bercovici, later wrote, the kickback laws "are so Byzantine, even [Crowley, an] influential person in the New York tech scene didn't know what was in them."

The FTC maintains that the endorsements law boils down to a simple rule of thumb: Don't mislead consumers. But the rise of new social media companies has made creating an effective policy a difficult task.

It's easy to slap a disclaimer message at the bottom of a blog post, but that simplicity seems almost quaint now. Disclosure is tougher with the short messages found on sites like Foursquare and Twitter.

No one wants to be an FTC guinea pig: On the surface, the FTC laws are clear. It's perfectly legal for companies to pay bloggers, either in freebies or money, for reviews. Writers must clearly disclose the terms of the "endorsement," and the brands involved should make sure the writer knows to do so.

But how does someone cram a disclosure into a 140-character tweet? What about short messages blasted off from a location-based service like Foursquare?

The FTC admits that it's not sure. "There's a challenge there, and this stuff is always changing," says FTC Northeast director Leonard Gordon. But the onus is on companies to make sure writers' endorsements follow the law.

The FTC's wait-and-see attitude leaves social media companies in a tough spot, notes Kevin Houchin, an entrepreneurial lawyer in Colorado. Houchin, who runs a private practice, created a program to help businesses keep their websites FTC compliant.

"The government is playing whack-a-mole, and no company wants to stick their head out," Houchin says. "A few companies are going to be the test cases while the FTC figures out what they want to do."

Gordon says the FTC is looking at symbols users have come up on their own. For example, Twitter users might slug a tweet #paid. People checking into locations on Foursquare might send a message with a $ symbol.

Foursquare, which had close to 3 million global users as of August, declined to comment for this story.

'We just want to protect consumers': Last year, the FTC sparked a flurry when said it would crack down on bloggers who receive compensation for discussing products.

The uproar reached its peak last fall, with people questioning whether casual bloggers who received free bars of soap would find themselves trapped in the crosshairs of complicated laws.

"We're not sending people to bang down the doors of stay-at-home parents who blog," Gordon says. "Our goal is simply to make sure consumers aren't misled."

Houchin thinks the FTC's philosophy is admirable but underestimates the consumer: "The policy says the American public are basically idiots and can't understand anything without it being spelled out."

'Not a gotcha game': Social media companies hoping to create a program to reward their users for product referrals should err on the side of caution, Houchin says.

Gordon says users who get kickbacks need to be careful of the messages they post. It's OK for a paid user to "check in" at a movie theater with a neutral message like "Seeing 'Never Let Me Go' at 7 p.m."

But if the message read, "'Never Let Me Go' is the greatest movie since 'Citizen Kane,' so go see it" -- and the user was being paid to say so -- it would be against the law without a clear disclosure.

That's why programs like Amazon.com's (AMZN, Fortune 500) referrals service, which pay bloggers a percentage of the sales generated by links on their pages, are legal. The links simply appear on the bloggers' sites, looking much like regular ads, and there's no blog post shilling a product.

"We've worked really hard to illuminate this for businesses, and we think it's pretty clear," Gordon said. "We are not playing a 'gotcha' game here."

Social media companies have to hope that's true, because they can't afford to hang on the sidelines while the FTC writes its policy.

"Government policies will never change as fast as the technology, and becoming the guinea pig could really cost you," Houchin says. "But not aggressively jumping in might end up being even worse." To top of page

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