FALL 2020 TODAY’S GENER AL COUNSEL
Compliance
Advertising Checklist for In-House Counsel By Penelope A. Preovolos, Claudia M. Vetesi and Mallory Morales
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long with making their advertising materials eye-catching and influential, consumer-facing companies need to ensure that their representations about products and services comply with advertising laws. This article discusses basic advertising law, some things to avoid and some things to do. Although every state has its own consumer protection laws, our focus is on federal and California law. The primary sources of federal advertising law are the Federal Trade Commission (FTC) Act and the Lanham Act. The FTC Act prohibits “unfair or deceptive acts or practices.” Violations can lead to injunctions in district court, civil penalties, restitution and corrective advertising. Similarly, the Lanham Act allows private parties to obtain relief for false advertising. There also are self-regulating bodies, such as the Council of Better Business Bureaus’ National Advertising Division (NAD).
Advertising laws cover both express and implied representations about products and services. Many states have passed baby FTC acts and other consumer protection statutes. In California, there are three primary statutes: • The Unfair Competition Law (UCL) prohibits unlawful, unfair or fraudulent business practices. Plaintiffs must have suffered injury in fact and lost
money or property as a result of the defendant’s practice. • The False Advertising Law prohibits untrue and misleading representations. The test is identical to the UCL’s fraudulence prong except that scienter is required (“knew or should have known”). • The Consumers Legal Remedies Act enumerates 24 specific acts defined as unlawful if they are part of a transaction that results in the sale or lease of goods or services. Only consumers can bring claims. Advertising laws cover both express and implied representations about products and services. Deceptive advertising occurs when a statement or omission is likely to mislead a “reasonable consumer” and the misrepresentation is important to the decision to purchase the product. The Lanham Act differentiates between advertisements that are literally false and advertisements that are literally true but misleading in context. If an advertisement is not literally false, the plaintiff must establish that it is misleading by showing how consumers perceived the advertisement. UNFAIRNESS
According to the FTC test, unfairness occurs when there has been substantial injury to consumers, consumers cannot reasonably avoid injury, and the injury is not outweighed by benefits to consumers or competition. California’s test for unfairness is whether the practice is “immoral, unethical, oppressive, unscrupulous, or substantially injurious to consumers.” Additionally, there is a determination whether the alleged harm to the victim outweighs the utility of the defendant’s conduct. The tethering test concerns whether the practice is tied to a violation
of public policy as declared in specific constitutional, statutory or regulatory provisions. In order for a misrepresentation to be actionable, it must be a statement of fact that can be objectively measured or empirically verified. Mere “puffery” cannot be the basis for a lawsuit. Puffery can be best described as opinions or superlatives commonly used in sales pitches. Objective claims must be factual and substantiated before they are made. An advertiser must have a reasonable basis for claims, i.e., empirical evidence. An omission is not actionable unless there is a duty to disclose. In California, a duty to disclose may arise if the defendant (1) has a fiduciary obligation to the plaintiff, (2) has exclusive knowledge of material facts not known or reasonably accessible to the plaintiff, (3) actively conceals a material fact from the plaintiff, or (4) makes partial representations that are misleading because another material fact has not been disclosed. The Ninth Circuit has held that for an omission regarding a product defect to be actionable, the defect must raise a safety concern. It recently noted that some courts permit omissions claims where the defect is “central to the product’s function,” but it did not decide the issue. Disclosures cannot cure a false claim, but qualifications to avoid a misrepresentation are permitted. FTC guidelines suggest that disclosures be placed as close to the claim they qualify as possible. Seeing the disclosure should be unavoidable; it should be clear, conspicuous and understandable. Hyperlinks in online disclosures should be clearly and conspicuously labeled. Advertisers should not include a claim on a label without the same disclosures provided elsewhere. Advertisers who rely on disclosures on a label or packaging should make sure consumers who purchase online see the label before purchase or make the disclosures online as well. Advertisements should not suggest or imply that they are anything other than an advertisement. A clear and prominent disclosure may be necessary to ensure consumers understand that content that
