Advertising Checklist for In-House Counsel

By Penelope A. Preovolos, Claudia M. Vetesi and Mallory Morales

Along 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).

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.

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 looks like news is native advertising. Endorsements/testimonials must be truthful and not misleading. Using unrepresentative testimonials may be misleading if not accompanied by information describing what consumers can generally expect from using the product or service. Endorsers should not talk about their experience with a product if they have not tried it or make claims about a product that would require proof they do not have. Any connection between the endorser and the marketer of a product, including compensation, should be disclosed. Advertisements that are directed at a competitor risk Lanham Act liability, especially if the comparative advertisement falsely casts a product or competitor in a disparaging light or misuses a competitor’s name. Plaintiffs don’t have to be direct competitors to bring Lanham Act claims; anyone who can “allege an injury to a commercial interest in reputation or sales” can sue. A product must be openly offered at a regular price for a “reasonably substantial” period before a discount is advertised. The price reduction cannot be insignificant. Advertisers may not artificially inflate the regular price. They must clearly and conspicuously disclose any material conditions or limitations. This is a common subject of FTC and state law consumer and government actions. When advertising free goods, all terms and conditions must be clearly and conspicuously disclosed. The item must be truly free. The cost of other items the consumer must buy to get the free product, costs of shipping and handling, or other added costs may not be marked up and must be disclosed. Items compared to a competitor’s must be of like kind and quality. An advertiser’s price must be bona fide, not temporarily lowered. Advertisers must disclose if their reduced price is being compared to a competitor’s regular price and must be able to show that the competitor’s price was in effect on the date of the advertisement. The competitor’s price must be representative of prices in the market and not an isolated instance.

Made in the USA

“Made in the USA” means all significant parts and processing that go into the product must be of U.S. origin. Only a negligible amount of foreign content or processing is permitted. Avoid broad terms like “produced” or “manufactured” in the United States. If a product is substantially transformed abroad, advertisers should comply with customs requirements that require it to show a foreign country of origin. Qualified claims convey that the product is not entirely of domestic origin and describe the amount of foreign content or assembly. Example: “Made in USA with U.S. and imported parts.” California’s statute was amended in 2016 to align more closely with the FTC’s standard. California courts have permitted “implied claim” litigation where product packaging imagery suggests product origins (for example, packaging with map of the San Francisco Bay area for beer brewed in Minnesota). Substantiation is particularly important when claims concern health or safety. Claims about health and safety benefits should be supported by reliable scientific evidence under the prevailing expert opinion in the field. False advertising claims continue to be a hotbed of class action litigation against companies that sell consumer products and services, as well as a major focus of competitor litigation in consumer industries and beyond. The FTC, as well as California and other state attorneys general and district attorneys, also aggressively prosecutes these claims. This checklist is intended to provide a quick update and summary of the law, but advertisers and their counsel should review current federal and state law sources for detailed requirements and developments, and seek specialized legal advice as needed.

Penelope A. Preovolos is a partner in Morrison & Foerster’s Class Action Mass Torts group. She serves as lead counsel in major consumer class actions and antitrust cases. ppreovolos@mofo.com

Claudia M. Vetesi is a partner in Morrison & Foerster’s Class Action Mass Torts group. She focuses her practice on the defense of consumer class actions and complex commercial litigation false advertising. cvetesi@mofo.com

Mallory Morales is an associate in Morrison & Foerster’s Litigation Department. mmorales@mofo.com