Good advertising is designed to capture the attention of consumers and motivate them to make a buying decision.
Without careful scrutiny of the methods used to capture interest and motivate buyers, however, businesses can be subjected to false advertising claims by the government, competitors and consumers. Unfortunately this happens more often than one might think, not by intent but by ignorance of what can be a tricky subject.
Careful scrutiny can be difficult given the layers of overlapping state and federal laws and regulations. In a competitive marketplace where effective advertising is essential, where do businesses look for law governing advertising? What guidelines should businesses follow? What resources are available? What protections can minimize liability from charges of false advertising?
Initially, specific statutes address certain industries such as credit cards, consumer leasing, lending, telemarketing, medical devices, food, drugs, alcohol, tobacco and others.
Businesses typically know when they are subject to these statutes and design their advertising to meet the requirements. It is the vagueness of general statutes prohibiting “unfair” or “deceptive” advertising that can present traps for the unwary.
– Two Laws At Federal Level
At the federal level, the two main bodies of law are the Federal Trade Commission Act and the Lanham Act. The basic statute enforced by the FTC declares “unfair or deceptive acts or practices in or affecting commerce” unlawful.
“Unfair” practices are those “that cause or are likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition.”
The FTC investigates claims and can initiate enforcement actions when it finds “reason to believe” there is a violation. False advertising can result in restitution to consumers, civil penalties, cease and desist orders, restrictions on future advertising, and corrective advertising orders.
The Lanham Act allows consumers and competitors to combat false advertising by making advertisers liable in a civil action to any person damaged or likely to be damaged by any false or misleading description or misrepresentation of fact in commercial advertising concerning the nature, characteristics, qualities, or geographic origin of goods, services, or commercial activities.
False advertising can result in payment of another’s lost profits, disgorgement of profits gained through the false advertising, damages and attorneys’ fees.
– State Statutes Protect Consumers
The basic consumer statutes concerning advertising in California are the Unfair Business Practices Statute and the Deceptive, False, and Misleading Advertising Statute.
The Unfair Business Practices Statute defines unfair competition to include “any unlawful, unfair, or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising.”
The statute can apply to a single act, and extends to acts not expressly declared illegal, but that may be simply unfair. Competitors and consumers can sue, and there is no requirement to show actual injury or intent to injure.
False advertising claims are easy to allege, making early resolution though a pre-trial motion difficult to obtain. A lawsuit very often subjects a defendant business to expensive litigation and intrusive requests for discovery.
A successful prosecution or settlement can result in injunctions and restitution orders. Civil penalties can apply if attorneys for the government bring the action.
The Deceptive, False, and Misleading Advertising Statute makes unlawful any untrue or misleading advertising relating to the disposition of property or services. This includes statements both known to be untrue and those that an exercise of reasonable care would reveal to be untrue or misleading.
– Actions Include Lawsuits, Penalties
Consumers and competitors can sue for restitution and can seek injunctions. The government can seek civil and criminal penalties.
Against this background, what guidelines should businesses follow to avoid claims of false advertising?
The first guideline is to view potential advertisements from the perspective of the consumer. Consider what reasonable expectations are created concerning the performance, availability, and price of the product or service.
Make sure consumers can tell if there are exclusions, limitations or conditions. Be scrupulous about the claims made. Keep copies of advertisements and pair them with evidence substantiating the claims. Make sure the evidence is credible.
For example, if the claim is that two out of three doctors recommend something, there should be a valid survey. A record of telephone calls to three doctors does not suffice. If there are testimonials, make sure they represent the typical experience and not just one person’s outstanding results.
The second guideline is to look at the overall context. Certain types of advertising, particularly those touching on issues of public safety and health, draw the attention of competitors and watchdogs.
For instance, in August 2000, a Long Island landscaping company drew the attention of the New York attorney general because it claimed spraying insecticide on homeowners’ shrubs and trees would kill mosquitoes carrying the West Nile virus.
– Company Claimed Product Was Effective
The company claimed its methods were “extremely effective” in killing mosquito eggs and warned of the “very real threat of the encephalitic mosquito outbreak.”
The company did not have the proper certification to eradicate mosquitoes and was using an insecticide not permitted for mosquito control. Significant fines were levied.
Closer to home, California businesses claiming energy efficient products or services should recognize their claims might be questioned in the context of record-high electricity and gas bills.
The third guideline is to watch out for red flags. Any time an advertisement uses words like “free” or “guaranteed,” or absolutes such as “No. 1” or “the largest,” someone will test the limits.
Likewise, if a product or service historically has been the subject of consumer complaints, this often signals that the legislature may have enacted a particular statute. For example, a promotion involving “sweepstakes” or a “contest” with prizes must navigate various laws and regulations.
Finally, comparative advertising can be very effective. However, comparisons often give rise to disputes, and heightened scrutiny should be applied to make sure the information is factually correct and not presented in a misleading fashion.
Be aware that advertising laws and regulations apply with equal force to emerging media like the Internet. Some early entrepreneurs took a “wild west” attitude toward the Internet, as though established laws did not apply. The reverse is true. Old laws do apply.
– Internet Issues More Complex
The Internet also adds new layers of complexity, such as consumer privacy, security, and marketing to children. Since the Internet is global, potential damages caused by false advertising can be multiplied.
Although the Internet presents new advertising challenges, it also makes business guidance readily accessible.
The FTC’s Web site at (www.ftc.gov) has a wealth of information under the heading “Business Guidance,” including free downloadable guides for particular industries, and policy statements regarding substantiating claims, use of the word “free,” what constitutes “deception,” and many others.
The Food and Drug Administration Web site (www.fda.gov) has useful information relating to marketing of food, cosmetic and medical-related products. Another excellent resource is the Better Business Bureau Web site at (bbb.org). Following the BBB Code of Advertising provides a measure of protection from charges of “unfair,” “untrue,” or “deceptive” advertising.
Finally, since advertising lawsuits can be extraordinarily expensive, serious consideration should be given to advertising injury insurance policies. Insurance will generally pay not only an adverse judgment or settlement, but also the cost of defense. If questions remain, businesses should consider consulting a lawyer familiar with the law of false advertising.
Lytle is an attorney with Higgs, Fletcher & Mack LLP in San Diego.
