Advertising is usually the key to a service or product not only turning a profit but surviving. Advertising can come in all shapes and sizes: mail, radio, television, internet, print or social media, among others. No matter the type of advertising your company is doing, it is regulated and controlled by a combination of entities and laws, including:
- The Federal Trade Commission (FTC);
- The Federal Communications Commission;
- The Food, Drug, and Cosmetic Act;
- The Lanham Trademark Act [specifically section 43(a)];
- Digital Advertising Alliance;
- Children’s Advertising Review Unit; and
- Common law restrictions on commercial speech.
If your company is within a regulated industry such as alcohol, tobacco, financial services, legal, or cannabis, then you have even more regulations you must follow. With all of this, where do you even start? Well, in this first segment, let’s focus on the FTC, its regulations, examples of FTC rule violations, and advertising tips (the legal aspect, we are not creative here).
What is the FTC and What are Some of Its Rules?
The Federal Trade Commission (“FTC”) is a federal agency that regulates advertising to protect consumers. The FTC is consumer-oriented and states the following objectives on its website:
- Protect consumers from unfair and deceptive practices in the marketplace
- Maintain competition to promote a marketplace free from anticompetitive mergers, business practices, or public policy outcomes
- Advance the FTC’s performance through excellence in managing resources, human capital, and information technology.
The FTC enforces the FTC Act and the regulations found within. So, what are some of the regulations that the FTC enforces?
The FTC Act establishes that all advertising must be truthful and non-deception. But when is an advertisement deceptive? Your business’ advertisement is deceptive if it contains a statement that is likely to mislead consumers acting reasonably under the circumstances, or does not include information that is material, I.e., likely to impact a consumer’s conduct or decision-making regarding the product.
The most common type of deception is written or oral misrepresentations. The deception can occur at different points, such as in the actual advertisement or during the course of the transaction. For more information on deception, see the official FTC’ public statement here.
Going hand-in-hand with deception is fairness. It is obvious to most of us that an advertisement can be unfair, but what does the FTC consider to be unfair? An ad is unfair if:
- It causes, or is likely to cause, substantial consumer injury;
- The injury is not outweighed by the benefit to consumers; and
- A consumer could not reasonably avoid the injury.
Let’s break this down. What is considered a substantial injury? Generally, a substantial injury is in the form of money injury. This can be when sellers “convince” (we use this term lightly) buyers to purchase unwanted goods or when the products purchased are defective. Other than money, a substantial injury can also include physical health risks or emotional impacts.
Next, the injury cannot be outweighed by the benefit to consumers. Consumer benefit takes into consideration the competitive benefits the sales practice produces; economic and other costs for the purchases; costs to present technical data; and a host of other factors.
Finally, the FTC assumes that consumers will educate themselves on products. Such as reading reviews, comparing products, and other types of normal research that people do before purchasing products. However, the FTC recognizes that certain sales tactics prevent some consumers from making their own decisions. This is what the FTC seeks to stop and considers when evaluating if an advertisement is “fair.”
We have all seen the commercials that state things like, “tests prove,” “four out of five doctors recommend,” or “studies show,” but did you know that when companies use these types of statements, they must be able to substantiate those claims? Recently, we have seen quite a bit of FTC action when it comes to statements like this in the CBD and cannabis industries. For example, the FTC has recently targeted CBD companies claiming that their product cured or prevented COVID-19. In fact, companies must be in possession of the tests, doctors’ recommendations, or studies that show the claim being made.
What happens when the claims made are not like above? In those cases, the FTC looks for a reasonable basis for the claims being made. To show that the company making the claims has a reasonable basis, the following are considered:
- The type of claim made;
- The type of product;
- The consequences of a false claim;
- The benefits of a true claim;
- The costs of substantiating the claim; and
- The amount of substantiation that experts in the field believe is reasonable.
Examples of Misleading or Deceptive Ads/Hints for Advertisers
Now that we have an understanding of some of factors the FTC looks at when evaluating advertisements, let’s look at practices that the FTC has found to be misleading or deceptive, including:
- Failure to meet warranty obligations;
- Use of bait-and-switch techniques;
- Failure to disclose information on pyramid schemes; and
- Failure to perform promised services.
You may be saying, “Eric, there is a lot of information here, and I’m a bit scared about my company’s advertisements. What can we do to make sure our ads aren’t misleading or deceptive?” One thing to do is to make sure disclosures are made, but make sure the disclosure does not contradict the claim you are making (this is common sense.) Basically, don’t say something like “this has been shown to help you sleep,” then have a disclosure say, “this has not been shown to help you sleep.” This will lead to FTC action. Here are a few hints to help with your disclosures:
- Make sure your disclosure is clearly and conspicuously presented so that consumers notice and understand the disclosure;
- Use clear and unambiguous language;
- Prominently display the disclosure; and
- Avoid using small type or distracting elements that could undermine the disclosure.
This article provided some general information regarding the FTC, FTC Act, its regulations, and some helpful hints. Remember, the FTC is just one body that governs advertising regulations. To make sure your ads are legally compliant, speak with your attorney.