Basics In False Advertising
Although your use of the latest hot marketing and sales strategies may improve the bottom line of your business, you may get into hot "legal waters" if you do not exercise the proper restraints. This article discusses the boundaries beyond which you do not want to stray lest you run afoul of the laws governing false advertising.
Two conflicting principles are involved in advertising law. On the one hand, the First Amendment, which is part of the U.S. Constitution and grants us the right of free speech, protects all forms of communication, including advertising (referred to by lawyers as "commercial speech"). On the other hand, the U.S. Constitution gives the federal government the power to regulate interstate commerce. Most state constitutions similarly give state governments the power to regulate commerce conducted solely within that state.
In exercising its power over interstate commerce, the Congress has enacted two statutes that have the greatest effect on advertising. These are the Federal Trade Commission (FTC) Act and the Lanham Act.
The FTC Act states that false advertising is a form of unfair and deceptive commerce. The term "false advertising" has been broadly construed. As you might expect, the term includes advertisements that are in fact untrue. However, the term false advertising extends well beyond untrue advertisements. It also includes advertisements that make representations that the advertiser has no reasonable basis to believe, even if the representations turn out to be true. An example would be an advertisement for a photocopier machine which stated that the machine used less toner than any comparable machine. The advertiser would have committed false advertising if it had no reasonable basis to believe the truth of this claim (such as through comparative tests), even if it turned out to be true.
The FTC Act gives the FTC broad authority to regulate advertising. Under this broad mandate, the FTC has issued regulations barring advertisements that could be misleading even if they are true. A famous example involves Anacin, a brand of aspirin. The maker of Anacin ran ads claiming that clinical tests showed that Anacin delivered the same headache relief as the leading pain relief prescription. The ad did not mention that aspirin itself is the leading pain medicine. The FTC determined that the ad was misleading. The ad implied that Anacin was more effective than aspirin, when in fact, Anacin is really just aspirin.
In addition to barring advertisements, the FTC also has the power to order corrective ads. Corrective advertising requires a business to run ads that alert future consumers to certain unfavorable facts about a product not revealed in past advertising campaigns. Another famous example involved Listerine mouthwash. For years, Listerine was touted as a cold and sore throat remedy. The FTC forced the manufacturer to run ads stating that Listerine would not cure colds or relieve sore throats. Surely, this is not part of a desirable marketing strategy.
The FTC has a further power, known as "fencing in." This enables the FTC to bar misleading ads with respect to a particular product and across all of a business's other unrelated product lines. For example a testimonial constituting false advertising regarding product A could lead purchasers to believe that products B and c must also be great. In that case, the FTC could bar use of the ad for products A, B, and C.
Only the FTC has the authority to enforce the FTC Act. Private parties, such as consumers or competitors, can bring a legal action regarding false advertising under the Lanham Act.
To establish a violation under the Lanham Act, consumers and competitors must prove the following: (1) the advertiser made false statements of fact about its product; (2) the false advertisements actually deceived or had the capacity to deceive a substantial segment of the target population; (3) the deception was material; (4) the falsely advertised product was sold in interstate commerce; and (5) the party bringing the lawsuit (known as the "plaintiff") was injured as a result of the deception.
Actual loss is not required to show an injury. All that is needed is a reasonable basis for the belief that the plaintiff is likely to be damaged as a result of the advertising. An example of such damage would include ads that deceive consumers who are the target population of both the advertiser and the plaintiff. The penalties for a Lanham Act violation include the plaintiff's lost profits, the additional profits to the advertiser resulting from the deceptive ad, treble damages, and attorneys' fees.
In addition to the FTC Act and the Lanham Act, which are federal statutes, most states, including Illinois, also have laws proscribing false advertising. Illinois is one of many states that has enacted the Uniform Deceptive Trade Practices Act. Under the Act, a "deceptive trade practice" includes such practices as "palming off," misrepresentation, product disparagement, and bait-and-switch advertising.
Palming off occurs when an advertiser creates the impression that its goods or services are those that are furnished by a competitor. For example, this could occur if you set up a hamburger stand that looked like a McDonalds restaurant. Misrepresentation occurs when an advertiser makes false or misleading claims about its goods or services, as under the FTC Act and the Lanham Act. Product disparagement occurs when an advertiser intentionally makes false or misleading negative remarks about competing goods or services, causing its competitor to lose sales. Bait-and-switch advertising occurs when the advertised goods or services are withdrawn from the market and substitute goods or services are instead offered for sale.
The laws regulating false advertising present many traps for the unwary. If you engage a marketing or advertising agent to assist you in your marketing and sales campaign, you might want to get your agent to guarantee that your ads are lawful. Of course, if you are in the business of preparing marketing or advertising campaigns, you might want to get your client to guarantee that the information he or she provides is true. In either case, when in doubt, you should consult with an attorney.