ADVERTISING’S LEGAL AND REGULATORY ENVIRONMENT

An FTC intervention in alleged deception starts with a claim of deceptive practices to the FTC.  Then the FTC begins to investigate with a request for substantiation from the advertiser.  If the FTC finds the practice to be unsubstantiated and therefore deceptive, a complaint is issued. The advertiser is asked to sign a consent decree where they stop the practice that is under investigation but admits no guilt.  If the advertiser refuses to sign a consent decree, the FTC issues a cease-and-desist order. This order can carry a $10,000-per-day fine.

Even if an advertiser agrees to abide by a cease-and-desist order, the FTC may find that simply stopping the practice does not repair past damages to consumers. They may be required to run corrective advertising to counteract the past residual effect of previous deceptive advertising (this began around the 1960s).

If a company cannot reach an agreement with the FTC, its next recourse is the federal courts.  It is extremely rare that cases go beyond the cease-and-desist stage.

FTC Rules and Guidelines: the FTC is responsible for enforcement and education in:

• Federal Laws passed by Congress
• Formal FTC industry rules: the telemarketing sales rule means that callers are authorized to provide caller information, the used car rule is intended to prevent oral misrepresentations and unfair omissions of material facts by used car dealers, and the contact lens rule made it mandatory that patients receive copies of their prescriptions.

Among the most common areas of FTC inquiry for which guidelines have been issued are the following:

• Environmental claims, the term “free” in advertising, “Made in the USA” label, Advertising as a Contract, facts versus puffery (meaning the advertiser’s opinion of a product that is considered a legitimate expression of biased opinion), testimonials, and warranties and guarantees.

Robinson- Pitman Act: a three-part “package” that evolved over a period of almost 50 years:

1. 1890 Federal Sherman Antitrust Act: designed to prevent alliances of firms conceived to restrict competition
2. 1914 Clayton Antitrust Act: amended the Sherman Act; it eliminated preferential price treatment when manufacturers sold merchandise to retailers
3. 1939 Robinson-Pitman Act: in turn, the Pitman Act amended the Clayton Act. It requires a manufacturer to give proportionate discounts and advertising allowances to all competing dealers in a market. It protects smaller merchants from the unfair competition of larger buyers.  For example, a manufacturer may not limit co-op dollars to television, knowing that many retailers in smaller markets might not have practical access to television advertising. Such an offer is known as an improperly structured program.

Slotting fees are payments to retailers by manufacturers to gain shelf space; the FTC has a continuing review of the role of slotting fees because it fears that they have the potential to prevent marketplace entry of new brands or prevent small retailers from gaining access to establish brands because of disproportionately high slotting fees.

The Federal food, drug, and Cosmetic Act was passed by Congress in 1938 and established the Food and Drug Administration (FDA); it superseded the original legislation (the original prohibited interstate commerce in misbranded and adulterated foods, drinks, and drugs) and gave the FDA increased responsibility. One of the most active and controversial areas of FDA regulation is consumer prescription drug advertising. Until 1997, pharmaceutical companies could only advertise prescription drugs to doctors, and then, consumer advertising was permitted. By 2005, $5 billion was being spent on direct-to-customer drug advertising. The FDA has begun an aggressive campaign of enforcing promotional regulations, often sending formal letters of warning to drug companies. The jurisdiction of the FDA to control and regulate labeling was enhanced when Congress passed the Nutritional Labeling and Education Act of 1990. Beginning on January 1, 2006, the agency was given greater enforcement authority over labeling, and labeling information was enhanced to include data about trans-fat allergen groups, and whole grain ingredients.

Despite a more open environment for commercial messages, judicial opinions supporting commercial speech still deny full first amendment protection to advertising.

In 1980, the court articulated a set of guidelines concerning the constitutional protection that would be afforded commercial speech. These guidelines were set forth in the case of Central Hudson Gas and Electric v. Public Service Commission of NY. The court established a four-part test to determine when commercial speech is constitutionally protected and when regulation is permissible – known as the Hudson Four-Part Test:

1. Is the commercial expression eligible for first amendment protection? Is it neither deceptive nor promoting of illegal activity?
2. Is the government interest asserted in regulating the expression substantial? The stated reason for regulating must be of primary interest to the state rather than of a trivial, arbitrary nature
3. If the first two tests are met, the court then considers if the regulation of advertising imposed advances the cause of the government interest asserted.  If we assume that an activity is of legitimate government concern, will the prohibition of commercial speech further the government’s goals?
4. If the first three tests are met, the court must finally decide if the regulation is more extensive than necessary to serve the government’s interest. Is there a less severe restriction that could accomplish the same goals?

Because of the unique nature of communication, it may be that the Supreme Court will never be able to issue a totally definitive decision that will cover every instance of commercial speech.

CAN-SPAM Act of 2003: the controlling the assault of non-solicited pornography and marketing act is enforced by the FTC, and established requirements for those who sent commercial email. Provisions to the act include false or misleading information is banned, deceptive subject lines are prohibited, the e-mail must give recipients an opt-out method, the commercial email must be identified as an advertisement and include the senders valid physical postal address.

Advertising of professional services: one of the most controversial areas of commercial speech involves advertising by professionals; especially attorneys and health care providers.

Comparison of Advertising has primary concerns.  Comparative advertising runs the risk of inadvertently promoting competitive brands and/or appearing to offer credibility to them by including their names.  Some comparison advertising may appear unfair to consumers and damage the reputation of the brand as well as advertising in general.  Firms fear that comparative advertising claims will precipitate lawsuits by companies that think their brand is unfairly disparaged.  Comparison of advertising can also invite counterattacks to form competitive brands.

The Advertising Clearance Process: the internal process of clearing ads for publication and broadcast, conducted primarily by ad agencies and clients.  The toy is presented logically and realistically.  The animation is limited to about 10-second spot.  A copy must clearly disclose if parts are sold separately and if batteries are not included

Self-Regulation by Industry-wide groups serves two important purposes beyond ensuring more informative and truthful advertising by seeking to overcome the relatively poor public perception of advertising by showing that there is a concerted attempt within the industry to foster responsible advertising and strong self-regulation may ward off even stricter government control.

Better Business Bureaus are one of the best-known, aggressive, and successful organizations in the fight for honest and truthful advertising.  Their primary responsibility is for truthful and non-deceptive advertising rests with the advertiser.  Advertisements that are untrue, misleading, deceptive, fraudulent, falsely disparaging of competitors or insincere offers shall not be used.  An advertisement as a whole may be misleading although every sentence separately considered is literally true.  Although the BBB’s have no legal authority, they are a major influence on truth and accuracy in advertising.

The National Advertising Review Council (NARC)’s primary purpose was to develop a structure which would effectively apply the persuasive capacities of peers to seek the voluntary elimination of national advertising which professionals would consider deceptive. Its objective was to sustain high standards of truth and accuracy in national advertising through voluntary self-regulation.

National Advertising Division (NAD) is the primary investigating unit of the NARC self-regulation program. The NAD is staffed by full-time lawyers who respond to complaints from competitors and consumers and from referrals from local BBBs. They also monitor national advertising. Primary areas of challenges are product testing, consumer perception studies, taste/sensory claims, pricing, testimonial/anecdotal evidence, and demonstrations.  The NAD/NARB process cannot order an advertiser to stop an ad, impose a fine, bar anyone from advertising, or boycott an advertiser or product.

The National Advertising Review Board (NARB) provides an advertiser with a jury of peers if it chooses to appeal a NAD decision.

The Children’s Advertising Review Unit (CARU) was established in 1974 to review the special advertising concerns of advertising directed to children.  The CARU primarily deals with product presentations and claims, sales pressure, disclosures and disclaimers, comparative claims, endorsements and promotions by the program or editorial characters, safety, and interactive electronic media.

Obesity concerns: an area of concern is food advertising and its alleged contribution to childhood obesity, demonstrates many similarities with the battle over tobacco advertising in the 1990s.

The Children’s Food and Beverage Advertising Initiative (CFBAI): launched by CBBB in 2006 to provide transparent and accountable self-regulatory guidelines for companies that advertise foods and beverages to children. The initiative’s goal is to ensure that food and beverage advertising messages directed to children younger than 12 encourage healthy dietary choices and lifestyles.

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