False Advertising

Especially in today’s economy, most business owners are looking to improve the bottom line. A new and aggressive advertising campaign may be one of your tools. But, the savvy business owner should know that there are boundaries which, if crossed, can lead to legal liability.

Of course everyone enjoys the protection of the First Amendment to the United States Constitution. It protects all forms of communication including “commercial communication” – better known as advertising. On the other hand, state and federal governments are empowered to regulate advertising within their respective spheres.

First, no matter the legal theory, “puffery” is never actionable. Puffing can be either “exaggerated blustering and boasting upon which no reasonable buyer would rely” or “a general claim of superiority over comparable goods that is so vague that it will be understood as merely the seller’s expression of opinion.” An example would be “The World’s Best Soda.” There’s simply no way to prove the statement and no consumer would reasonably rely on the claim. On the other hand, “a specific measurable advertising claim . . . is not puffery.” An example would be “Our Soda has only 1 calorie.”

There are several different false advertising/consumer protection regimes that should be of concern to advertisers: the Federal Trade Commission (FTC) Act; the Lanham Act; and enforcement actions by the Illinois Attorney General or consumers under the Deceptive Trade Practices Act. Litigation can be instituted by the various governmental agencies or by competitors of the advertiser.

False advertising is defined broadly under the FTC Act. It includes advertisements that are factually incorrect. But, it extends well beyond untrue advertisements to include ads that make representations that an advertiser has no reasonable basis to believe – even if they turn out to be true. For example, if Ford advertises that its latest car gets 15 miles per gallon, yet ran no tests to confirm the statement, it would be guilty of false advertising even if the car did somehow perform as advertised.

The FTC Act also requires that a false claim be “material” to be subject to liability. A material claim is one that is likely to affect a consumer’s choice of a product or service. Materiality is presumed for certain categories of claims such as express claims (such as “uses 10 watts an hour”) and claims that specifically involve health or safety. Finally, the advertiser has the burden of substantiating the ad in question and of demonstrating that it possessed at least the level of proof claimed in the ad.

The FTC Act has a broad range of remedies, including cease and desist orders, corrective advertising, more complete disclosures, consumer redress, paying over profits, and other civil penalties. There is no private right of action under the FTC Act. Only the government may pursue these claims.

Under the Lanham Act competitors and non-competitors who have a “reasonable interest” to protect may sue, but consumers may not. For this reason, Lanham Act cases are usually brought by companies in order to stop their competitors advertising program. Unlike the FTC Act, the plaintiff in a Lanham Act case has the burden of affirmatively proving that the challenged ad is false or deceptive. To establish a violation under the Lanham Act, a plaintiff 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 was injured as a result of the deception.

Actual loss is not required to show an injury for claims made under the Lanham Act. Rather, a Plaintiff need only demonstrate a reasonable basis for the belief that it is likely to be damaged as a result of the advertising. Ads that deceive consumers who are the target population of both the advertiser and the plaintiff-competitor are typical fodder for Lanham Act litigation. Think of American suing United Airlines regarding false claims about on-time departure and arrival information. 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 in certain situations, and attorneys’ fees.

In addition to the FTC Act and the Lanham Act, Illinois also has laws prohibiting false advertising. Illinois, together with many other states, 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, as one might suspect, deals with an advertiser creating the impression that its goods or services are furnished by a competitor. Starbucks would likely sue a company using the name Starlucks, especially if the logo and overall impression were very similar, under this theory. Misrepresentation involves a competitor making false or misleading claims about its products or services. Product disparagement relates to advertisements that make false or misleading negative remarks about competing goods or services, causing its competitor to lose sales. Finally, bait-and-switch advertising might involve a tire dealer advertising a certain tire for sale, but who then substitutes a different tire for sale instead.

You can bet that your competitor will be thoroughly reviewing and verifying any advertisements that you run. Make sure you use accurate information, that your claims can be verified, and if in doubt call your attorney. And, if you engage a marketing or advertising agent to help develop your campaign, you will want to make sure that he or she doesn’t take liberties with the facts. Moreover, don’t be surprised if your marketing consultant asks you to verify any information that you provide to help develop a campaign. Laws regarding false advertising present numerous traps for the unwary.

by Thomas C. Pavlik, Jr.

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