Here Be Dragons!
When a product is sold, there is an implied representation that the product is fit for the purpose for which it is sold. When it isn’t, deception occurs.
The phrase “Here Be Dragons” harkens back to the medieval practice of adding depictions of dragons, sea serpents and other creatures in uncharted areas of maps to denote dangerous territory. The seas of advertising are also fraught with peril – of the non-mythical type. Investigations conducted by the Federal Trade Commission (FTC), complaints filed with the National Advertising Division (NAD)1 and false advertising/unfair competition lawsuits loom and await the unprepared and ill-informed.
Penalties for false or deceptive advertising include injunctive orders, civil and monetary penalties, consumer redress and corrective advertising and mandated disclosures in future ads. Awareness of the key principles of advertising law is a crucial part of rigorous self-review that may steer you and your business away from the rocks – and dragons!
1. Do you have prior substantiation for your advertising claims?
Advertising substantiation is a vital requirement for all advertisers. The FTC issued its Policy Statement Regarding Advertising Substantiation2 in 1984, which confirms its commitment to the underlying legal requirement that all advertising claims must have a reasonable basis before they are disseminated to the public. Objective claims for products or services represent – either explicitly or by implication – that the advertiser has a reasonable basis to support its claims. An express claim is literally made in the ad (“ABC mouthwash prevents colds”), while an implied claim is made indirectly or by inference (“ABC mouthwash kills the germs that cause colds”).3
A “reasonable basis” means objective evidence supports the claim, with the level of proof depending on the nature of the claim. Ads that make health or safety claims (to which the FTC pays particularly close attention) must be supported by “competent and reliable scientific evidence.” Statements from customers usually are insufficient to support a health or safety claim or, for that matter, any other claim that requires objective evaluation.
Failure by an advertiser to possess prior substantiation for its objective advertising claims constitutes an unfair and deceptive act or practice in violation of Section 5 of the FTC Act.
2. Are your advertising claims “deceptive”?
According to the FTC’s Policy Statement on Deception,4 an ad is deceptive if it contains a statement or omits information that is likely to mislead consumers acting reasonably under the circumstances and also is material – that is, important to a consumer’s decision to buy or use a product or service. Most deception involves written or oral misrepresentation or omission of material information. The issue is whether the act or practice is likely to mislead rather than whether it causes actual deception.
Marketing and point-of-sale practices that are likely to mislead consumers are also deceptive. For example, in classic bait and switch cases, a violation occurs when the product advertised is not the product for sale. When a product is sold, there is also an implied representation that the product is fit for the purpose for which it is sold. When it isn’t, deception occurs.
The FTC recognizes, however, that some practices are unlikely to deceive consumers acting reasonably and so it generally will not bring advertising cases based on subjective claims (“Tastes great, less filling!”) or on correctly stated opinion claims, if consumers understand the source and limitations of the opinion. Cases involving exaggerated or puffing representations (“The best burger on the planet ever!”) also generally will not be pursued.
3. Are your sales practices “unfair”?
The concept of consumer “unfairness” is difficult to precisely define. In the late 1970s, the U.S. Senate debated whether to relieve the FTC of its power to regulate “unfairness” other than in advertising. In response, the FTC issued its Policy Statement on Unfairness,5 which delineated the boundaries of its “consumer unfairness” jurisdiction.
That document synthesized the decided cases and rules, and three key factors emerged that the FTC considers when applying the prohibition against consumer unfairness: (1) whether the practice injures consumers; (2) whether it violates established public policy; and (3) whether it is unethical or unscrupulous.
Section 5 of the FTC Act prohibits, in part, “unfair … acts or practices in or affecting commerce.” The FTC Act amendments of 1994 further refined Section 5 to require the Commission, prior to finding an act or practice “unfair,” to first determine that the act or practice: (1) causes or is likely to cause substantial injury to consumers; (2) is not reasonably avoidable by consumers; and (3) is not outweighed by countervailing benefits to consumers or competitors.
4. Do your advertising claims meet the NAD’s “truth and accuracy” standard?
The NAD is the investigative arm of the Better Business Bureau charged with monitoring and evaluating “truth and accuracy” in national advertising directed toward consumers over the age of 12.6 The NAD is also a self-regulatory forum for adjudication of disputes between companies over their national advertising. Participants include virtually every major company that advertises products or services nationally to consumers or that promotes products nationally to professionals. The NAD is highly valued because it is a relatively cost effective and more expedient alternative to costly and arduous litigation in federal court. The range of industries that bring disputes before the NAD is as vast as the products and services that companies advertise and sell. Companies that make comparative/parity/superiority claims to attract buyers are often challenged by the affected competitor, but non-comparative “monadic” claims can be challenged as false and misleading as well. A party may file a complaint with the NAD challenging the advertisement and the claims, and the advertiser must formally reply. After briefs are submitted by each party, the NAD renders a decision, which is published in its Case Reports archive. The NAD has the support and backing of the FTC and other relevant regulatory agencies if an advertiser refuses to comply with a NAD decision.
5. Will your advertising withstand the rigors of court scrutiny?
In addition to possible action by the FTC or before the NAD, a false advertising dispute has the potential to become the basis for formal legal action in court. Under the plain language of Section 43(a) of the Lanham Act (the primary federal trademark statute in the United States7), any person or entity who believes that he, she or it is, or is likely to be, damaged by false or misleading representations in commercial advertising or promotion may bring suit. To prevail in a Lanham Act false advertising claim, the plaintiff must prove that the challenged advertisement is either literally or implicitly false and that the false or misleading statement is material in having an effect on consumers’ purchasing decisions.
For a harmed competitor to challenge an advertisement, there must be real weakness in the claim that can be successfully attacked. If the substantiation for a claim is questionable, or the claim goes too far, the harmed competitor can challenge the advertisement through the various avenues, including, in certain cases, injunctive relief under the Lanham Act. Lanham Act litigation is inevitable when the economic stakes are very high, and the claim in dispute will cause significant competitive harm with lost revenue to another party.
Unlike many other decisions on whether to litigate, when the alternative to litigation is a dramatic loss of millions of dollars in revenue to a rival making an apparently unsubstantiated claim, the choice is clear. Usually, injunctive relief is the only solution.
Lanham Act false advertising litigation involves furious digging and scrutiny by the challenging party into alleged claim substantiation. Technical experts attack the validity of scientific and other technical claims. Extensive and artfully designed consumer takeaway surveys are conducted by survey experts who dissect the promotional claim through intricate questionnaires to establish how consumers would interpret the message.
A company considering a new claim in an “inevitable litigation” context should seek to impose similarly exacting litigation-type scrutiny in the internal advertising review process. Only if every possible weak point is questioned to the fullest extent, and survives as true and defensible, should the claim be cleared. With a rigorous self-review that effectively mirrors the microscopic scrutiny accompanying a federal court challenge, Lanham Act litigation may be avoided by a manufacturer or a challenge can be overcome.
6. Are there other concerns?
There are many, all of which require consideration. For example, the advertising law(s) of individual states may come into play. There are special advertising rules for certain types of goods and services, including wool and textile products, jewelry, telephone services, and energy savings and environmental claims. Global commerce is growing exponentially and countries treat advertising law issues in different ways. The significance of new advertising and privacy laws affecting e-commerce also cannot be overstated. Because the FTC Act is not limited to any particular medium, the rules that apply to more “traditional” forms of advertising also apply to electronic marketing. However, there are specialized guidelines for online methods, such as keyword advertising and behavioral marketing. Those topics, and more, will be discussed in future issues.