Truth in advertising Featured

8:00pm EDT September 25, 2007

It pays to advertise, and it seems that businesses are inundating consumers with more advertising today than ever before. Print, TV, radio and now the Internet are all serving as strong mediums to get companies’ messages out.

But what if the advertising is untrue? What if your competitor is seeking an edge over you by making false claims about its products? Rest assured that there are actions to take, says Ed Novotny, shareholder in the Atlanta office of Baker, Donelson, Bearman, Caldwell & Berkowitz, PC. The key is to know the laws and the “truth-in-advertising” rules.

Smart Business spoke with Novotny about what businesses need to know about false advertising and how to ensure a level playing field among their competitors.

What are the truth-in-advertising rules?

Under federal law, all advertising must be: 1) truthful and nondeceptive, 2) backed up by evidence, and 3) not unfair. There are additional laws for specialized products like consumer leases, consumer credit, 900 telephone numbers, and products sold through the mail or over the telephone. Most states have additional consumer protection laws that govern ads running in that state as well as additional particular products and services.

What makes an advertisement deceptive?

The Federal Trade Commission and the U.S. Postal Service (if mail is involved) are the federal agencies that have developed standards to determine whether advertising is deceptive. Under these standards, an advertisement is deceptive if it contains a statement or omits information that: 1) is likely to mislead consumers acting reasonably under the circumstances and 2) is ‘material’ that is important to a consumer’s decision to buy or use the product.

The advertisement is analyzed from the point of view of the ‘reasonable consumer’ — the typical person looking at the ad. The overall impression is examined, not merely its specific words. The goal is to determine what claims about the product or service are being conveyed to consumers.

Both ‘express’ and ‘implied’ claims are then evaluated. An express claim is what’s literally expressed in the advertisement. For example, ‘Our widgets kill mice,’ is an express claim that the product will exterminate mice. An implied claim is one made indirectly or by inference. For example, ‘Mice fear our widgets.’ Although the ad doesn’t literally say that the product kills mice, a reasonable consumer could conclude from the statement that the product will kill mice. Under the law, advertisers must have proof to back up both express and implied claims that consumers take from an ad.

The next step involves the claims being categorized as ‘material’ or not. Material claims are those that affect a consumer’s decision to buy or use the product. Examples of material claims are representations about a product’s features, performance, price, safety or effectiveness.

The advertisement is also analyzed to determine what the advertisement doesn’t say. If the failure to include information leaves consumers with a misimpression about the product, it’s deemed deceptive. For example, if a company advertised a gold widget, the ad could be deceptive if it didn’t disclose that the widget was gold-plated.

Also, all claims made in an advertisement must have a ‘reasonable basis’ for the claims made. A ‘reasonable basis’ means objective evidence that supports the claim. The kind of evidence depends on the claim. At a minimum, an advertiser must have the level of evidence that the ad says it has. For example, the claims that ‘75 percent of consumers prefer our widgets’ must be supported by a reliable consumer survey to that effect. If the ad isn’t specific, the FTC and courts looks at several factors to determine what level of proof is necessary, including what experts in the field think is needed to support the claim. Advertisements that make health or safety claims must normally be supported by ‘competent and reliable scientific evidence.’

What are the risks in false advertising?

The remedies and penalties that the FTC or the courts have imposed include cease and desist orders, injunctions, civil penalties, consumer redress and other monetary remedies. Civil penalties range from thousands to millions of dollars, depending on the nature of the violation. Sometimes advertisers have been ordered to give refunds to all consumers who bought the product. Other remedies could include corrective advertising, mandatory disclosures and other informational remedies.

Also, keep in mind that false advertising from a competitor about your products can give you a right to sue under the federal Lanham Act and various state laws.

How does one prevent false advertising?

First, every advertisement should be examined to ensure that you understand every claim the advertisement contains. Second, make certain that you have the proof to support the claim, even if it’s implied. Third, make certain you’re knowledgeable about the myriad federal and state laws that may govern the advertising of your product or service.

ED NOVOTNY is a shareholder in the Atlanta office of Baker, Donelson, Bearman, Caldwell & Berkowitz, PC and concentrates his practice in business litigation. Reach him at (678) 406-8704 or enovotny@bakerdonedson.com.