The U.S. Federal Trade Commission
by
Charles Lamson
In the United States, the Federal Trade Commission (FTC) is the major regulator of advertising for products sold in interstate commerce. Established by an act of Congress, the FTC has a mission of ensuring "that the nation's markets function competitively, and are vigorous, efficient, and free of undue restrictions." The commission enforces a variety of federal antitrust and consumer protection laws and works to enhance the operation of the marketplace by eliminating acts or practices that are deceptive or unfair. In other words, it is the FTC's responsibility to maintain the existence of many sellers in the marketplace, strive to provide more complete information to consumers, and keep the marketing process as free of externalities (a side effect or consequence of an industrial or commercial activity that affects other parties without this being reflected in the cost of the goods or services involved, such as the pollination of surrounding crops by bees kept for honey) as possible.
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Defining Deception
The FTC defines deceptive advertising as any ad that contains a misrepresentation, omission or other practice that can mislead a significant number of reasonable consumers to their detriment. Proof that consumers were deceived is not required, and the representation may be either expressed or implied. The issue is whether the ad conveys a false impression---even if it is literally true.
Take the case of the FTC against Office Depot, Buy.com, and Value America. According to the FTC, the companies engaged in deceptive practices in advertising "free" and "low-cost" personal computer (PC) systems because they failed to adequately disclose the true costs and important restrictions on the offers. The low cost of the PCs was tied to rebates that were conditioned on the purpose of long-term Internet service contracts.
While the companies' advertisements plugged low-cost, and in some cases, free computer systems, the true costs for the systems were far higher. For example, one ad featured a computer for $269. But the purchaser's actual expenses would exceed $1,000 when taking into account the cost of the the required three-year Internet service contract. The FTC said the restrictions and charges were inadequately disclosed or that they were disclosed in tiny print. And that amounted to deception.
Without admitting any wrongdoing, the companies all signed consent agreements, agreeing to disclose the information prominently in the future to help consumers easily determine the real costs of such deals.
The FTC is a powerful regulator. The commission cracked down on Exxon and ordered a groundbreaking educational campaign to inform consumers that the right octane for most cars is regular octane, not the more expensive premium grade. The FTC also looks at environmental claims such as biodegradable, degradable, photodegradable, and recyclable. To avoid confusing terminology, the FTC and the Environmental Protection Agency (EPA) worked jointly with attorneys general from many states to develop uniform national guidelines for environmental marketing claims.
Defining Unfairness
According to FTC policy, some ads that are not deceptive may still be considered unfair to consumers.Unfair advertising occurs when a consumer is "unjustifiably injured" or there is a "violation of public policy" (such as other government statutes). In other words, unfair advertising is due to the inadequacy of complete information or some other externality. For example, practices considered unfair are claims made without prior substantiation, claims that exploit various groups such as children and the elderly, and cases where the consumer cannot make a valid choice because the advertiser omits important information about the product or about competing products mentioned in the ad.
In one case, the FTC found that an automaker's failure to warn of a safety problem was not deceptive but was unfair. Advertising organizations have argued that the word unfair is so vague it can mean whatever any given individual wants it to. They have lobbied Congress to eliminate the FTC's power to prosecute on unfairness grounds, and Congress to eliminate the FTC's power to prosecute on unfairness grounds, and Congress did pass a compromise bill requiring the FTC to show that (1) an alleged unfair practice involves substantial, unavoidable injury to consumers; (2) the injury is not reasonably avoidable by consumers themselves; and (3) the injury is not outweighed by benefits to consumers or competition. This legislation suggests that in the future, the FTC will have to balance on a far narrower beam in its effort to regulate unfairness.
Comparative Advertising
Advertisers use comparative advertising to claim superiority to competitors in some aspect. In the United States, such ads are legal (and encouraged by the FTC) so long as the comparison is truthful. In fact, the FTC cracked down on the Arizona Automobile Dealers Association for restricting truthful, nondeceptive comparative price advertising among its members.
In 1994, the AADA's 199 members constituted 99 percent of the new automobile and truck dealers in Arizona. The FTC challenged the association's Standards for Advertising Motor Vehicles, which, among other things, prohibited members from advertising that prices are equal to or lower than a competitor's or are the lowest; that the advertiser will match or beat any price; or that the advertiser will offer compensation if it cannot offer an equal or lower price.
These prohibitions, according to the FTC, unreasonably restrained competition among the member dealers and injured consumers by depriving them of truthful information concerning the prices and financing available for new cars and trucks.
The 1988 Trademark Law Revision Act closed a loophole in the Lanham Act, which governed comparison ads but did not mention misrepresenting another company's product. Under current law, any adviser that misrepresents its own or another firm's goods, services, or activities is vulnerable to a civil action.
In addition to being truthful, comparative ads must compare some objectively measurable characteristic. And great scrutiny must be given to the substantiation. Given the potential for sizable damages---for faulty comparative advertising, the greatest care must be exercised in this area.
Investigating Suspected Violations
If it receives complaints from consumers, competitors, or its own staff members who monitor ads in various media, the FTC may decide to investigate an advertiser. The agency has broad powers to pursue suspected violators and demand information from them. Typically, the FTC looks for three kinds of information: substantiation, endorsements, and affirmative disclosures.
If a suspected violator cites survey findings or scientific studies, the FTC may ask for substantiation. Advertisers are expected to have supporting data before running an ad, although the FTC sometimes allows postclaim evidence. The FTC does not solicit substantiation for ads it is not investigating.
The FTC also scrutinizes ads that contain questionable endorsements or testimonials. If a noncelebrity endorser is paid, the ad must disclose this on-screen. The endorsers may not make claims the advertiser cannot substantiate. Further, celebrity endorsers must actually use the product or service (if portrayed), and they can be held personally liable if they misrepresent it.
Advertisers must make affirmative disclosure of their product's limitations or deficiencies: for example, EPA mileage ratings for cars, pesticide warnings, and statements that saccharin may be hazardous to one's health.
Remedies for Unfair or Deceptive Advertising
When the FTC determines that an ad is deceptive or unfair, it may take three courses of action: negotiate with the advertiser for a consent decree, issue a cease-and-desist order, and/or require corrective advertising.
A consent decree is a document the advertiser signs agreeing to stop the objectionable advertising without admitting any wrongdoing. Before signing, the advertiser can negotiate specific directives with the FTC that will govern future advertising claims.
If an advertiser will not sign a consent decree, the FTC may issue a cease-and-desist order prohibiting further use of the ad. Before the order is final, it is heard by an administrative law judge. Most advertisers sign the consent decree after the hearing and agree, without admitting guilt, to halt the advertising. Advertisers that violate either a consent decree or a cease-and-desist or can be fined up to $11,000 per showing of the offending ad.
The FTC may also require corrective advertising for some period of time to explain and correct offending ads. In 1999 the FTC ruled that pharmaceutical giant Novartis advertised without substantiation that its Doan's Pills brand was more effective against back pain than its rivals. Because the deceptive advertising had gone on for more than nine years, the FTC ordered Novartis to run $8 million worth of corrective advertising. The advertising was to include this statement: "Although Doan's is an effective pain reliever, there is no evidence that Doan's is more effective than other pain relievers for back pain" The FTC also ordered Novartis to place the statement on Doan's packaging for a year.
To help advertisers avoid such an expense, the FTC will review advertising before it runs and give "advance clearance" in an advisory opinion. It also publishes Industry Guides and Trade Regulation Rules, which gives advertisers, agencies, and the media ongoing information about FTC regulations.
In Canada, the laws are even tougher and the consequences stiffer. It is an offense for any public promotion to be "false or misleading in a material respect." It is not necessary that anyone be misled by the representation, only that it be false. An offense is a crime. If convicted, an advertiser or agency executive could go to jail for up to five years, pay a fine, or both.
*SOURCE: CONTEMPORARY ADVERTISING, 25TH ANNIVERSARY ED., 2008, WILLIAM F. ARENS, MICHAEL F. WEIGOLD, CHRISTIAN ARENS, PGS. 81-84*
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