The settlement, which was announced on Monday, does not provide consumers with refunds, and it does not force Sunday Riley to admit any wrongdoing: The company simply agreed not to break the law in the future.
After a whistle blower posted on Reddit last year that Sunday Riley staff members were leaving reviews of the company’s products, the F.T.C. opened an investigation, two commissioners said in a statement.
The complaints charged the company and its chief executive, whose name is Sunday Riley, with “making false or misleading claims that the fake reviews reflected the opinions of ordinary users of the products,” and with deceiving the public by not disclosing that the reviews were written by Ms. Riley or her employees.
According to the complaint, Ms. Riley asked her staff in a July 2016 email to “create 3 accounts on Sephora.com,” encouraging them to register under “different identities” so they could post multiple positive reviews of Sunday Riley products and inflate the products’ ratings. The email included step-by-step instructions on how to set up a virtual private network, which allowed employees to conceal their online activity while making new profiles, according to the F.T.C.
The commission said Ms. Riley asked her staff to focus on specific products and to “always leave five stars” when reviewing them. Moreover, the F.T.C. said, Ms. Riley asked her employees to “dislike” negative reviews to increase the likelihood that they would be removed. “This directly translates to sales!!” she wrote, according to the complaint.
Sunday Riley products range in price from $22 to $158.
The company and Sephora did not immediately respond to requests for comment on Tuesday.
Online reviews can have a real effect on a product’s sales, according to Michael Luca, an associate professor at Harvard Business School who has researched the way fake reviews can distort markets.
In a 2016 study, Mr. Luca showed that a one-star rating increase on Yelp could mean a 5 to 9 percent increase in revenue.
A 2016 Pew Research Center study on online reviews also showed that around half of adults under 50 “always or almost always” check online reviews before buying a product for the first time.
“Online reviews definitely affect the customers,” Panagiotis Stamolampros, a lecturer in business analytics at Leeds University Business School, said. “If there are fake reviews, someone can distort the market, and a lot of these companies, their success is very much based on this mechanism of reviews,” he added. “You need to rely on other people online.”
For two of the F.T.C.’s five commissioners, Rohit Chopra and Rebecca Kelly Slaughter, Sunday Riley’s promise never to break the law again is not enough. In a separate statement, Mr. Chopra and Ms. Slaughter said that the settlement was not likely “to deter other would-be wrongdoers,” adding that the possible benefits of review fraud are too great and more affordable than traditional advertisements.
“Higher ratings, more buzz, better positioning relative to competitors, and higher sales,” the commissioners said in the statement, adding that “the biggest potential cost is if the wrongdoer is caught, but it is likely that the vast majority of fake review fraud goes undetected.”
According to Professor Stamolampros, many platforms try to identify fake reviews, and some use algorithms to spot suspicious activity. “If someone posts many positive reviews at the same time or there is a similarity in text it is easy to spot, but when reviews are posted by different people this is more difficult to trace,” he said.
Mr. Chopra and Ms. Slaughter expressed concern that fake-review fraud could deter businesses from following the law because of the outcome of the Sunday Riley case. They worry future fraud review could distort the marketplace.
“Consumers may come to lack confidence that reviews are truthful,” they wrote.