Establishing Trust in Influencers and Third Parties

March 19, 2019

Almost all advertisers use influencer marketing and event sponsorship as part of their marketing strategy. While third parties might be engaged directly, more frequently they’re hired through one or more intermediaries — e.g., a network or agency. With so many disparate parties working on your behalf, how can you trust that they’ll all do the right thing, ensuring you won’t become the next target of a regulatory investigation or false advertising claim that was largely outside of your control? This panel explored the contractual and practical steps advertisers can take to help minimize risk when working with influencers and establishing event sponsorships.

Building trust when working with third parties is a critical step to minimize risk. The notorious Fyre Festival is just one modern example of a fraudulent event that resulted in an array of legal issues as well as damage to brands’ reputations. The failed festival and its messy aftermath raise the question: how can lawyers and marketers establish trust and avoid risk when working with outside parties, sponsoring events, and establishing influencer partnerships?

The Fyre Festival’s pitch deck, as seen above, was used to successfully obtain investments and sponsors, and boasted a number of “pending partnerships.” Panelists Joseph Lewczak, David Hubbard, and Todd Hartley shared their legal expertise in a captivating discussion about mitigating risk and establishing trust when working with third parties.

Joseph Lewczak: If Bridgestone or Verizon appeared on this list, what would your reaction be?

David Hubbard: First, I think we would have to get approval before we even had the “pending” up there. We’re usually decently conservative about a “pending” because nothing is done until its done. What’s the point of putting us up there until we make a deal? We wouldn’t necessarily agree to a “pending” unless with had finalized deal terms.

Todd Hartley: We often won’t be in this kind of partnership, and it would be unlikely to see Bridgestone on this list. If we did appear, my first question would be: who signed off on that? Did we have the CMO sign the papers? If not, we need a strongly worded statement saying we’re not associated.

Lewczak: What can you do if you signed up to be a sponsor at the Fyre Festival? Is there anything you could conceivably do to prevent something like this from going south? Is the contract enough?

Hartley: You’ll want your contract in place. It’s a prerequisite. There will be fraudsters out there and bad people. One thing that can help is signing on to events that are bigger than your company. If we go with something less common, it’s about having as much due diligence as you can. Do you have a trusted intermediary, like an agency? Is your in-house marketing team talking to them and having a good relationship with them? It’s important to understand their faith. They have similar concerns. If you’re associated with Fyre in a real way, and Fyre happens, that’s huge damage to your brand’s reputation. Where is that communication internally to understand their mechanism of trust?

Hubbard: As lawyers, whether or not we do a Fyre Festival is not our call. We’re in the business of mitigating risk where we see it. The big question: do we actually see a risk here? In this instance it’s not established. We would probably spend more time trying to figure out what this festival is. To prevent it from going south, that’s where the whole trust dynamic comes in. We trust that the business people are doing due diligence and asking as many questions as possible to get a basic foundation for us contractually and to get a sense whether there is a really big risk.

Lewczak: Would you normally get involved in that level of due diligence? Are you changing your point of view? As lawyers we get the documents and think that someone probably looked into this before thinking it’s legitimate to spend $10 million on a sponsorship. Should lawyers have their antennae up when something like this comes along?

Hartley: For me Fyre is shining a light on the issue of how we will be partners with various festivals and other types of emerging activations. As inside counsel, you’re building structures — are we funneling these kinds of opportunities early enough? Are we building the correct form so our internal marketing people are not working on their own? Beyond that we have World Check. We have various functions to audit individuals. There will always be fraudsters, and if you are presented with a pitch deck and assets like that, you think it’s legitimate. Some of these things you won’t catch, and you have to be comfortable with that. You have to build a general compliance program and understand there will always be bad situations. The good news is that none of these brands have really suffered a negative backlash.

Lewczak: The pending sponsors weren’t really involved. Normally you would put forward your sponsorship agreement, which wouldn’t do that much here. Putting in place those protections will only do so much. Do you think insurance is the right coverage here, or at this point is there nothing you can do?

Hubbard: There are many ways to mitigate the risk for your company — indemnity language, insurance provisions — but predominantly in this situation it would be the payment terms. You cannot change the reputational damage, but you can ensure that your company is not out millions of dollars. For a live event and festival, we would try to backload any of the actual payment terms such that you didn’t owe all the money up front, especially for a company that isn’t as established. When we work with the NFL or NBA we’re not as worried about those events. This type of event we would be very stringent on payment.

Lewczak: Are morals previsions in sponsorship arrangements effective? We’re seeing a lot of mutual morals provisions, where the sponsorship entity and the entity organizing the event will say “I don’t know what your executives are getting involved with, how do we prevent against that?”

Hartley: I’m generally fine with those. You definitely want morals provisions pointing in their direction. As far as pointing it back at the brand, there is generally very little that an individual’s bad actions can do to damage a brand the size of Verizon, Bridgestone, Nissan, etc. For example, Nissan’s global chairman is in jail right now in Japan for 100 days. From my understanding, there is no real impact on sponsorships, and no one is pulling out. Nissan is much bigger than the chairman. For most of us, any individual action that would be covered by a morals clause would be immaterial to the size and scope of the brand. I’m more worried about provisions asking for the ability to get out of a deal for systemic practices of the brand — like a provision that triggered if we were found to be using child labor or harming the environment.

Hubbard: I am having this very discussion on a deal we’re working on right now where the client put in a request for a reciprocal morals clause. The concern from a brand perspective: it’s all bigger than one of us. But it also depends on the level they’re trying to get to with respect to morals. If something happens with our CEO and at the executive level, absolutely. But if it’s a Verizon employee, no way. The level you are going to look for is something that will actually matter to you — typically that’s someone high-profile who represents the brand where the affiliation would matter. On that level, it makes sense.

There was a time it went wrong for us. We were doing music festivals and had a relationship with Gwen Stefani and AKON. We were using AKON’s music in a bunch of Verizon Wireless commercials and he was the opening act for the Gwen Stefani tour we were sponsoring. AKON went to a music festival in the Caribbean where he performed at a non-Verizon-sponsored event. He brought an underage girl on stage to dance with. He got arrested for bringing a young girl up on stage — there was a huge amount of bad attention, and he was associated with our brand. We had morals contract language for him. We pulled all of his music and had him off of our stuff. We didn’t have anything in Stefani’s contract regarding AKON, but he was the opening act of her summer tour. We asked Stefani to pull AKON. She said no, and we got out of the tour. We made a brand decision. The non-public part is how you get out of a deal like that and the settlement.

Practical Suggestions

  • If the event is new and unknown, do your diligence and ask:
    • Who is running it? What’s their reputation and track record?
    • Are other sponsors involved? Can we speak with them?
    • Who are the investors? Can we speak with them?
  • Backload as much of the payment as possible.
    • Establish a mechanism to obtain certificates of insurance.
  • Get out as soon as possible if things start to go wrong.
  • Think about the lessons learned from Fyre in the context of legitimate sponsorship opportunities.
  • Things can and do go wrong, such as:
    • Shootings
    • Talent failing to show up
    • Sponsors not providing contracted benefits

Lewczak: When there is illegitimate fallout — e.g., a shooting — of what is otherwise a legitimate event, do you address that or think the likelihood of that happening is not a big deal?

Hubbard: Contractually we try to cover as much as we can cover while being reasonable. You’re not anticipating a shooting, but from an indemnity standpoint, should there be one, we would expect that they would have proper procedures in place such as security, metal detectors, etc. to ensure they’ve taken reasonable measure to prevent that. That’s where our protection in essence would lie.

Lewczak: You would imagine brands like Woodstock are up there, but when you see they are plagued by financial issues, and you’ve inked a deal to be a sponsor at the festival, it’s a red flag. Even with legitimate high-profile events that you would assume are funded and have all the right backing, things can go wrong.

Lewczak: One of the brilliant marketing things in connecting with the Fyre Festival was that they used influencers to great effect, calling them Fyre Starters — Bella Hadid, Kendall Jenner, the list goes on. These people have millions of followers. The beauty of this was using that orange box, which took over Instagram. What’s missing from these posts? #ad.

How do you protect against that? We put a ton of trust in influencers and that they will follow contracts, make posts, do what they say, etc. You can also imagine a situation where a festival or organized event may itself be contracting with influencers and offering that as part of the sponsorship package — “Use our influencer network to talk about your brand.”

What protections are you putting in place in respect to influencers?

Hubbard: We’ve left the universe where everything was prepackaged and done beforehand. The real-time social media world and influencer world is different from that — we have to provide a framework for how the business can move forward and execute in real time without having the ability to review a script, for instance. From a protection standpoint, we’ve got to protect our brand. Everything has to be truthful and accurate. You have to make sure that you communicate that you’re connected to us — a material connection. The influencer ecosystem, while more mature than it was a few years ago, is still developing. We have to educate some of the influencers whom we’re working with as to what our polices are. We also don’t want them to talk about our competitors. We include intellectual property protection and education regarding that. Those are some of the things we try to address.

Hartley: There are macro influencers, who have their own lawyers, and micro influencers. That’s a big divide. Micro influencers are often looking for that kind of guidance and contract. On the macros, that’s like a traditional endorsement— there will be pushback and discussion. You have to be flexible with your guidelines.

Lewczak: Maybe we should be training the influencers. In my ideal world, I would have something like that. The notion of being their legal department on the back end is a good one. When you think about it, do guidelines matter if you will essentially control or approve what an influencer is posting anyway? Usually there will be some conclusion as to what the post will say, and the brand will have more control over the disclosure issues that are involved in those posts.

Hubbard: You said control or approve. I think the level of risk moves. The more control you take, the more comfortable you can be that your business is going to comply. Generally, the more sophisticated influencers know the law and have seen these provisions. Most of the time, we don’t want to play the role of training. We want you to be able to comply. That’s why we have the guidelines, but we recognize that influencers want to be somewhat creative and talk to their audience — we are in essence sponsoring that activity, but do not pre-approve what they will say. We just provide the framework and tell them what they can’t do and need to add.

Lewczak: There are situations where you can’t have that much control to give them creative freedom. In terms of trust, there is only so far that you can trust what they will do. Are you throwing caution to the wind too much? Does any influencer read the guidelines? Do they have enough knowledge to comply with the guidelines? They should at least have a basic understanding of how it will play out in a business-friendly way as opposed to relying on the contract or the guidelines.

Hartley: The FTC is concerned with influencers right now. They’ve taken action against influencers. They haven’t taken action directly against a brand for an influencer statement, but that’s the next thing the FTC will do — “This influencer is posting on behalf of this brand and not giving disclosure.” The influencer is judgment-proof and will come after the brand. You have to treat it like a compliance program: we’re giving them the tools and guidelines, maybe we’re training them, maybe we’re meeting with them, we’re putting contractual protections in, but we’re also monitoring them. We’re taking an active role. The influencer is an extension of the corporate family — this is a spokesperson for us and a brand ambassador. Let’s make sure they’re presenting us the way we want to be presented in the marketplace.

Hubbard: Most of our training time is with the internal marketing team, which has the relationship with the agencies or influencers themselves. They have to communicate what is necessary — tone, code of conduct, etc. It’s always an extension. You’re affiliated because you want to be.

Hartley: The legal risk is not different than the business risk. Just like we are concerned with how this can result in liability for the company, those same negative statement will also cause brand damage — it’s counterproductive for marketers, just as it is for us. We’re all aligned on treating influencers like family, getting them on the right page, and helping them to be in compliance.

Lewczak: When contracting with influencers or getting involved in third-party contracts, it’s the notion that things not directly in the control of the person you are connecting with could paint you and your brand in a negative light. Can you account for that, and should we account for that as lawyers?

Hartley: It’s risk versus reward. Do you first and foremost trust your marketing team to have good judgment about who we partner with and then put in place the compliance and contractual documents as a backstop?

Hubbard: Every time something bad happens and brands can suffer, that can be part of the next contract negotiation that you’re having where you try and find that right balance of protection of the brand.

Lewczak: It’s also about negotiating power. I was recently negotiating an esports sponsorship. My client was concerned about first-person shooter games. If a shooting were to happen, what if the guy doing the shooting is associated with violent video games? If something like that happens, the client wanted to be able to pause the relationship and reconsider it. The esports teams were willing to agree to that.

Practical Suggestions:

  • Do background checks, on everyone.
  • Have an agreement.
  • Have approval rights over influencers if network is choosing them.
  • Train, monitor, and enforce.


Q&A with Joseph Lewczak, Partner at Davis & Gilbert LLP; W. David Hubbard, VP and Deputy General Counsel at Verizon Communications; Todd Hartley, Senior Counsel at Bridgestone Americas


Q. Do you think that there will be heightened regulatory scrutiny of influencer marketing as a result of the Fyre fraud effect?

Lewczak: I think no. A lot of articles came out after the documentaries about how Fyre was the “death of influencer marketing.” I haven’t seen that.

Hubbard: I haven’t seen a change.

Q. Has the role of lawyers moved from trust to “trust but verify”? Do we look like obstacles, constantly raising doubts?

Lewczak: I am now thinking about this, the notion of the certificate of insurance — that’s “trust but verify.” How much do you verify? Our role should be shifting a little bit.

Hubbard: I think our role has always been “trust but verify” to some extent. We’re not necessarily going out and getting the certificates of insurance; some of the verification is more of recognizing that the marketing and business people have thought through all of the issues and risks that we see. It’s having that conversation. There is that balance where our job is to facilitate what the business is trying to accomplish and mitigate the risk and protect the brand as we do it. We cannot be that roadblock or stoplight.

Lewczak: The lessons should be: one, trust in your business people, and that they know what they’re doing. Two, look for the red flags, if it’s a startup festival or other brands are dropping out. That’s how you can allow free flow to happen and be a facilitator, not an obstruction.

Hartley: I judge myself on how much time I am spending every day, week, month with marketing folks. How much time am I spending training them, advising them, and counseling them? The more time I’m spending on building that relationship, the more than I’m going to be seen not as an obstacle but a strategic partner. I don’t think Fyre changed that; it just shifted our role a little bit toward compliance.

Q. When working with brands and agencies, marketing and businesses seem to push back on disclosures (#ad) for fear of tainting the organic nature of the message. How are you addressing that internally and balancing compliance risk with marketing goals?

Hubbard: Our marketers are pushing back less than they used to. #ad isn’t the only way to achieve the goal, and we need to provide creative solutions to communicate that there is a material connection. #ad is the easy way out, but if we want another approach we can talk about other options. We’ve had many conversations about other ways to communicate with the same effect.

Lewczak: In the infancy of influencer marketing, we had hours of conversation about making disclosures and convincing the teams to make the disclosure. Now they accept that as part of what they have to do.

Source

"Establishing Trust in Influencers and Third Parties." Joseph Lewczak, Partner at Davis & Gilbert LLP; W. David Hubbard, VP and Deputy General Counsel at Verizon Communications; Todd Hartley, Senior Counsel at Bridgestone Americas. ANA 2019 Advertising Law and Public Policy Conference, 3/19/19.

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