The Role of Advertising in the Age of Electronic Retailing

Background On The Regulatory Context

Who Is Watching?

Advertising in electronic retailing media is watched by two groups: the target audience of consumers and various watchdog organizations. Watchdogs can include the following: federal regulatory authorities (principally the FCC, FTC and FDA); state attorneys general and other state and local regulatory authorities; industry associations (such as DMA and NIMA); news media; and consumer activists and the plaintiffs' bar.

The level of scrutiny for advertising in electronic media is affected by two factors.

First, scrutiny is intense because electronic media is a high profile business. There are a number of reasons for this:

• These media are powerful; they reach large numbers of consumers because many people have televisions, telephones, and personal computers.
• Information services, shopping services, interactivity, combinations between telecommunications and cable companies, and related subjects are newsworthy topics with a high level of media coverage and interest.
• One of the principal vehicles for electronic retailing, television, is the subject of regulatory consideration of such content related issues as violence, children's advertising, must carry rules, and applicability of must carry rules to shopping channels.

Second, however, scrutiny is less focused because of the proliferation of new electronic retailing media. The growth in new media includes the following phenomena:

• As cable capacity increases, more cable channels become available.
• The Internet is expanding and becoming more accessible.
• Personal computer-based on-line shopping services are offering more merchandise and expanding their customer base.
• CD-ROM catalogues are being developed and distributed.
• Interactive services are being developed and tested.
• The future holds more in terms of additional technological developments and new channels of distribution.

The proliferation of new media means more advertising materials (video, audio, text), but not necessarily a proportionately larger market in terms of customer base and gross revenues. This means that the same pool of dollars available for advertising is spread out over a wider range of media and advertising material.

This also means that whatever resources are devoted to regulatory aspects of advertising are equally spread out. Advertisers, even if their media budgets are constant, may incur additional costs to maintain levels of internal review of advertising to assure legal compliance. The resources of regulators at the FCC, FTC, FDA, and state and local authorities are stretched in a similar manner to monitor activity in a growing number of media.

Sponsorship And Identification

Is It An Ad or Not?

The blending or integration of advertising with other content makes it difficult for the consumer to know when she is on the receiving end of a sales pitch. Central to FTC policy is the requirement that advertisements must not mislead consumers as to the commercial nature of the information provided.

Information sources (such as news reporting, documentaries, data bases) and entertainment (such as talk shows) are becoming less distinct from advertising, especially in new electronic retailing media.

For example, advertorials are advertising in print media designed to look like editorial content, and advertisers avoid the charge of deception by printing the word "Advertisement."

In addition, infomercials, as long commercials designed to capture viewers' attention with interesting information and entertainment features, pose interesting identification issues. Infomercials are often designed to look like talk shows or other entertainment programming. Critics of infomercials often claim that they unfairly masquerade as real programming. It has even been suggested that infomercials are inherently deceptive, based on the argument that the only way to get someone to watch a thirty-minute commercial is to fool her into thinking she's watching an entertainment or news program.

The FTC seems to accept this, and requires that any infomercial 15 minutes in length or longer include disclosures that it is a paid advertisement. Infomercials must be "clearly and conspicuously" identified at the beginning and end, and before specific ordering instructions are displayed, as "paid advertisements for [particular product or service], sponsored by [sponsor]." This requirement also has its basis in similar FCC sponsorship identification rules, which are enforced against radio and television broadcasters and cablecasters (licensees) and require them to identify the sponsor of any paid-for programming.

Infomercial advertisers, however, don't need to fool viewers. People will watch a commercial, as long as it's entertaining, interesting or informative. Just as shoppers stroll through a shopping mall without actually shopping.

New media trends are blurring the lines even more. Live 24-hour television shopping shows like Home Shopping Club and QVC mix so much information and entertainment with selling that viewers watch all day (and night) long, often without making a purchase.

Part-time television shopping confuses the issue even more. MTV and BET have tried this. The transition from entertainment to advertising may not be distinct. A format like MTV makes it especially easy to mix the two from one segment, or even minute, to the next.

Celebrity participation in advertising also tends to blur the distinction. When an entertainer like Dick Clark is selling, viewers will still be entertained by his performance; when a TV figure like Vanna White is selling, viewers will still be interested in her fashion tips, and when a cosmetic designer like Adrien Arpel is selling, viewers will still want to hear her advice about make-up.

On-line computer services and shopping on the Internet will make the line between information and entertainment on the one hand, and advertising and selling on the other hand, even less distinct. On the Internet, the Web ties together thematic materials, which can be navigated by programs like Mosaic. An exploration of information about Elvis Presley can turn up all kinds of sources, and a sales pitch can pop up anywhere. Even if you focus on a tour of Gracie Mansion, there's no way to tell where the gift shop is - it could be anywhere, or everywhere.

What's In The Ad?

Advertisers are losing control over the content of advertising material in the age of electronic retailing.

In traditional media, advertisers create an ad and it is aired or printed without modification. In new, electronic media, the audience may be selective about what is viewed, and may even manipulate or modify what is viewed. For example:

• Viewers may watch only a portion of an infomercial. This can also happen with traditional advertising media, such as commercials, advertorials or other ads with lots of content. But it's more likely to happen in a longer format. Viewers may get tired of listening and miss disclosures, limitations and other information.
• When shopping on-line computer services, the customer sees only one screen at a time. She may elect not to read screens containing important information, or information needed to avoid a misleading sales pitch. In this context, a more affirmative act is required of the customer, such as selecting a screen, to skip material than just continuing to read or watch an ad.
• With interactive media, customers will actually control or manipulate advertising. A customer may be able to cause an ad to display a product doing something it can't actually do, or otherwise add unintended enhancements to advertising.

Third parties may gain access to on-line databases and modify advertising information. When other media, such as television, are digitized and linked to computers to provide at-home interactive services and advertising, security will be an issue for more advertising content. Computer hackers may find their way directly into consumers' in-home television/computer screens and make changes never intended by the advertiser.

Live media is largely unscripted, with a corresponding decrease in control over its content. Live television shopping programs are ad lib advertising. The only way to gain control comparable to that exercised over traditional media is to have a trade regulation/advertising attorney on the set 24 hours a day. Intensive training efforts and programs are required to educate and orient sales and production personnel, to monitor on-air statements. Also, live customer testimonials are completely uncontrolled and unpredictable.

Notwithstanding this loss of control, regulators seek to impose strict liability for the content of advertising. Liability may be imposed on the advertiser and the advertising medium. The FTC, for example, does not recognize a distinction between taped and live media in applying rules for substantiating claims. This is surprising because a looser standard is reasonable if viewers know the programming is live. Also, it should be noted that the liability that is being imposed on operators of computer bulletin boards for libel, infringement and obscenity. The consequences of failing to control content may be severe.

False and Misleading Advertising

The Pfizer Doctrine

The same general standards apply to advertising regardless of the media used. The FTC requires that all objective product claims -- whether express or implied -- be adequately substantiated by the advertiser prior to their dissemination to the public. Failure to adequately substantiate a claim prior to its dissemination is an unfair or deceptive act or practice. See Pfizer, Inc., 81 F.T.C. 23 (1974) and FTC Policy Statement Regarding Advertising Substantiation Program.

The doctrine emerged in the mid-1970s. After Pfizer, the FTC commenced a campaign to put all major advertisers under advertising substantiation orders.

What is a claim?

• Statements about product quality. For example, representations that an advertised product is new, natural, best, safe, pure or durable would be claims. Quality claims are made for all categories of merchandise: jewelry, fashion and other soft goods, electronics and other hard goods, cosmetics and health related products.
  Not every statement is a claim, however. Subjective evaluations (such as "it's beautiful" or "you'll love it") would not be considered to be claims. Some (limited) puffery is allowed. Puffery is generally limited to exaggerated or overstated statements which are not subject to measurement. The FTC and the courts will look at whether a claim is (i) general or specific, (ii) capable of measurement, and (iii) couched in terms of fact or opinion. The basis for excluding puffing from claims requiring substantiation is that the statements are so outrageous that they preclude reliance by consumers. See, e.g., Pfizer, at 64.
• Statements about product performance, or the results that can be achieved through use of the product. For example, statements about the speed of computers, the effectiveness of cleaning products, the ability of creams to affect weight loss or girth reduction, and the ability of fitness or diet programs to affect weight loss would all be claims.
• Comparative claims about quality or performance. These invite challenge and will be discussed in more detail below.
• Claims about price or value. The FTC has promulgated specific guides on these types of claims, which will be discussed in more detail below.
• Statements of fact or information, including statements of common knowledge or background, as well as any reference to specific studies.

In deciding what claims are being made, it is important to keep in mind that objective claims may be express or implied. For example:

"All 5 Ford Motor Company small cars got over 26 MPG...Of course the mileage you will get depends on many factors: Equipment, engine displacement, vehicle weight, local road conditions, and your personal driving style. So the mileage you get may be less or even more than the figures quoted here." Ford Motor Co., 93 F.T.C. 813, 876 (1979).

Implied claims can arise from pictorial representations, as well as the spoken word. The FTC will look at statements made in the context of the entire advertisement and its "net impression."

Of crucial importance is the FTC's interpretation of the claim's scope. It will, in fact, drive the level of documentation the advertiser will be required to produce in order to substantiate the claim. The FTC's Complaint Counsel normally seeks -- and is uniformly successful in obtaining -- partial summary judgment interpreting the claim made in the advertising. The interpretations obtained are often very broad in scope which, consequently, can present the advertiser with insurmountable problems. In the Ford advertisement referenced above, for example, the FTC successfully took the position that the high mileage claim was so strong, notwithstanding the express qualifying language, that the claim communicated meant that the mileage referenced would always be obtained by "typical drivers" under all normally expectable conditions. Id. While some may view Ford as an egregious result, it nonetheless underscores the need for very careful crafting of the presentation and positioning of strong product claims.

Is it false?

A claim will be determined to be false if it presents any of the following situations: expressly untrue statements, exaggerated claims, or unrepresentative or atypical results (e.g., weight loss or acne benefits).

Is it substantiated? "Reasonable basis" defined.

The test of whether a claim is adequately substantiated is whether it is supported by a "reasonable basis." See Pfizer and FTC Policy Statement Regarding Advertising Substantiation.

The unfair or deceptive act or practice is the failure to adequately document a claim before dissemination. The FTC takes the position that subsequently obtained documentation, even if it validates the claim, does not rehabilitate the unfair or deceptive act or practice. See Thompson Medical Co., 104 F.T.C. 648, 839 (1984), aff'd, 791 F.2d 189 (D.C. Cir. 1986), cert. denied, 479 U.S. 1086 (1987).

"Reasonable basis" is a flexible concept permitting a claim to be supported by varying levels of substantiation, depending upon the claim's nature and specificity.

The general test found in many orders and cases is: "...based on competent and reliable tests, or other competent and reliable evidence that substantiates such claims." See, e.g., Sears, Roebuck and Co. v. FTC, 676 F.2d 389 (9th Cir. 1982).

The manner in which the claim is framed has a substantial influence on the level of substantiation required. If the claim purports to be based on scientific testing (an "establishment" claim), the level of substantiation is higher. For example, in Removatron Int'l Corp., the advertiser claimed that its hair removal product had been "clinically tested and endorsed." The FTC required two clinically controlled scientific tests that would satisfy the appropriate scientific community as to the reliability of the results claimed. Removatron Int'l Corp., 111 F.T.C. 206, 298, aff'd, 884 F.2d 1489 (1st Cir. 1989).

Where no particular level of support is claimed, the FTC balances several factors to determine what type of "reasonable basis" the advertiser should have (see FTC Policy Statement Regarding Advertising Substantiation Program and various cases, including Pfizer, at 64 and Thompson Medical, at 840):

• Type of product. Claims about food, drugs and other health related or potentially hazardous products, require high levels of substantiation.
• Type of claim. Health, medical and safety claims require high levels of substantiation. Claims that are important selling points, such as significant quality, performance and value claims, also require high levels of substantiation. See, e.g., Porter & Deutsch, 90 F.T.C. 770, 865 (1977).
• Benefits of a truthful claim.
• Cost/difficulty of developing substantiation for the claim.
• Consequences of a false claim.
• Amount of substantiation experts in the field believe is reasonable.

If the claim is within the general experience of consumers, the threshold for substantiation would be relatively low. For example, adequate substantiation for the claim "Humidifiers help eliminate dry air and make the room more comfortable," may be nothing more than articles from respected publications discussing the principle of osmotic migration of water vapor, and the widely recognized fact that moist skin is more comfortable than dry skin.

Under certain conditions, a retail dealer may reasonably rely on product claims provided by a manufacturer. Assuming the retailer has no reason to doubt the validity of manufacturer's claim, and the retailer merely mimics the claims provided to it by the manufacturer, the retailer is under no duty to reverify the manufacturer's claims. However, if a reasonable person would have doubts about the accuracy of the claim, further inquiry into whether the manufacturer has a "reasonable basis" may be indicated. This concept is set forth in the Ohio Attorney General's Advertising Regulations.

Advertising agencies have independent liability for a failure to establish a "reasonable basis" for a claim in which they were involved. However, most advertising agencies quickly agree to consent orders even though they may have had significant input in fashioning the claim.

Procedures to avoid false or unsubstantiated claims.

Frequently, testing or other documentation is developed before the scope of the claim is determined. This approach limits the claim to the "four corners" of the substantiation that has already been developed and which typically is narrower than the claim the marketing staff would like to make. From a timing and economic standpoint, it is far better to determine the claim first, and then design the testing or documentation strategy so that it develops substantiation that "fits" the claim.

• Have knowledgeable and responsible creative staff, producers and advertising agencies.
• Send a message from senior management that legal violations, regulatory risk and exposure to liability are not justified by additional sales.
• Educate inside and outside personnel with written guidelines, seminars and other input from legal.
• Legal review of products to assure regulatory compliance and to evaluate claims.
• Legal review of substantiation of claims.
• Legal meet with writers, producers and sales personnel.
• Legal review of all print copy, text, audio recordings and video for all media, including traditional print advertising, traditional television commercials, infomercials, and computer shopping services.  For print and other text-based media, legal review of all copy or text. For taped audio and video, legal review of outline, script, rough cut and final. For taped video, legal presence in studio. For live video, legal presence in studio, or legal monitoring of program with feedback.
• Most important, build legal review function into procedures so that problems are identified early (reducing the cost of correcting problems and increasing the likelihood that they will be corrected) and advertising material is not used without legal approval.

Testimonials and Endorsements

Review of FTC Guide Concerning Use of Endorsements and Testimonials in Advertising at 16 C.F.R. Part 255.

Definition of Endorsement

Endorsements include any advertising message suggesting that the message reflects the opinions or experience of someone other than the advertiser. Typically, endorsers are celebrities, experts or actual consumers.

However, an actor who appeared as a spokesperson for a broker selling investments was held liable as an endorser for false and unsubstantiated claims because he appeared to be a real consumer. Diamond Mortgage Corp. of Illinois, 118 B.R. 575 (Bnkrptcy. N.D. Ill. 1989).

Honest Beliefs/Actual Use

Endorsements must be the honest beliefs and reflect the actual use or experience of the endorser. The advertiser should obtain an affidavit or other substantiating materials.

In a recent enforcement action the FTC took the position that the testimonials for a home business starter kit were fabrications. Hawthorne Communications, Inc., FTC Docket No. 9264, Westlaw 59 FR 26791 (1994).

Current Beliefs/Current Use

Endorsements must be the current beliefs and reflect the current use or experience of the endorser. The advertiser should obtain a commitment from the endorser to advise the advertiser of changes, and should periodically update the affidavit and/or other substantiating documentation.

Endorsements used in advertisements four years after they were given have been found to be deceptive. Cliffdale Associates, 3 CCH Trade Reg. Rptr. Par. 22, 137 (1984)

Advertiser's Responsibility

The endorsement is deemed to be a claim made by the advertiser, and must be true and substantiated as if made by the advertiser.

The FTC has taken frequent enforcement actions on this point. For recent examples, see IHI Clinics, Inc. , FTC File No. 942-3100 (1994), involving testimonial claims about hypnosis programs for weight loss and smoking cessation, and RN Nutrition, FTC File No. 912-3145 (1994), involving testimonial claims as to the favorable effects of certain nutritional supplements on bones.

Misleading Endorsements.

Endorsements must not be distorted or exaggerated.

For instance, it is deceptive to imply that an entire kitchen appliance is made by a particular manufacturer when only a component was made by that manufacturer, Niresk Indus., Inc. v. FTC, 278 F.2d 337, rehearing denied, (7th Cir.), cert. denied, 364 U.S. 883 (1960), or to imply that a subsidiary is an independent testing organization, Product Testing Co., 64 F.T.C. 857 (1964).

Representative Results

Consumer endorsements must be representative of results that can be generally expected by consumers. Classic examples of problem areas for unrepresentative endorsements are money saving claims, weight loss programs, acne creams, and the use of before and after pictures. Examples in the FTC Guide suggest that it is sufficient for the endorser's results to be representative of a significant proportion of consumers. But FTC enforcement actions indicate that typical or average results are required.

For example, the FTC found testimonial claims for fitness results from using exercise toning tables to be unrepresentative in Hawthorne Communications, supra,; IHI Clinics, supra; and Fleetwood Manufacturing, Inc., FTC File No. 822-3133, Westlaw 58 FR 13267 (1993).

If claims are not representative, the advertiser must disclose either the likely results that a typical consumer can expect to realize, or that results claimed are not representative.

Experts and Organizations.

Experts or organizations giving endorsements must be qualified, i.e., actually have expertise, and must have conducted an evaluation using appropriate procedures based on industry standards.

For example, in Pacific Inspection and Research Lab. Inc., 5 CCH Trade Reg. Rptr. Par. 25, 453 (1993), the FTC found that the advertiser misrepresented thermal performance of windows by failing to disclose that tests were not performed using industry standards and accepted engineering practices.

Compensation.

Compensation or other benefits paid to an endorser or material connections between the endorser and the advertiser must be disclosed if they would materially affect the weight or credibility of the endorser. Since consumers expect celebrities and experts to be paid, compensation for their endorsements need not be disclosed.

Benefits requiring disclosure include employment (Dr. Barry Bricklin, 106 F.T.C. 115, Docket No. 9194 (1985)), the possibility of a television appearance, travel reimbursements, possibly even product samples. Other connections include business or family relationships.

Unauthorized Endorsements

Use of unauthorized endorsements is deceptive.

This may be as simple as false and unauthorized use of the "Good Housekeeping Seal" (Niresk Indus., Inc., supra), or as subtle as identifying customers as "satisfied" without written authorization (J&R Marketing Corp., 3 CCH Trade Reg. Rptr. Par. 22, 252 (1985). See also General Nutrition, Inc., 113 F.T.C. 146 (1986). General Nutrition's advertising included a description of a National Research Council study which concluded that eating green cruciferous vegetables enhances our natural defenses against cancer, and also stated that its Healthy Greens product contained a dose of these vegetables in tablet form. The Commission concluded that the ad claimed by implication that the NRC recommended the Healthy Greens product as a hedge against cancer.

Endorser's Right of Publicity.

Definition of Right of Publicity.

Right of publicity arises from the publicity value of an individual's persona, and is violated when a third party appropriates that persona for commercial exploitation without consent.

The right of publicity arises under state law. It was first recognized in new York in 1903, after rejection by New York courts.

Scope of Right of Publicity.

Publicity value may attach to a name, likeness, voice or other characteristic associated with a celebrity.

• Use of a look-alike model may violate a celebrity's right of privacy. Woody Allen successfully enjoined a clothing store advertiser from using a look-alike model in a print advertisement. Allen v. Men's World Outlet, Inc., 679 F.Supp. 360 (S.D.N.Y. 1988).
• Even the use of a robot, which could not possibly be mistaken for the real person it imitates, may violate this right. Vanna White successfully sued Samsung for the use of a futuristic robot game show hostess in an evening gown mimicking her actions on Wheel of Fortune. White v. Samsung Electronics of America, Inc., 971 F.2d 1395 (9th Cir. 1992), cert. denied, 113 S.Ct. 2443 (1993).
• Impersonating a singer's distinctive voice to sell merchandise is also a violation of the right of publicity. The 9th Circuit said that Ford pirated Bette Midler's identity in Midler v. Ford Motor Co., 849 F.2d 460 (9th Cir. 1988). Tom Waits achieved a similar result in Waits v. Frito-Lay, Inc., 978 F.2d 1093 (9th Cir. 1992).
• Even the use of a phrase associated with a celebrity can be a violation of the right of publicity. Johnny Carson established that his right of publicity as host of The Tonight Show was misappropriated by use of the introductory phrase Here's Johnny - King of Commodians to sell portable toilets. Carson v. Here's Johnny Portable Toilets, Inc., 698 F.2d 831 (6th Cir. 1983).

Enforcement After Death

In some jurisdictions, the right of publicity can pass to a celebrity's heirs. This rule has been applied, for example, in the case of Stanley Laurel and Oliver Hardy, Price v. Hall Roach Studios, 400 F.Supp. 836 (S.D.N.Y 1975).

However, under some decisions, the right of publicity can survive the celebrity's death only if the celebrity has commercially exploited the publicity value of his or her persona during the celebrity's life. See, e.g., Factors Etc., Inc. v. Pro Arts, Inc., 496 F.Supp. 401 (S.D.N.Y. 1978), regarding Agatha Christie.

In some instances, courts have held that to have a right of publicity with respect to exploitation of a deceased celebrity's persona, the heirs must be exploiting the persona in the context of a particular product or business similar to a product or business with respect to which the celebrity exploited his or her persona during the celebrity's life. See, e.g., Lugosi v. Universal Pictures, 25 Cal.3d 813 (1979), regarding Bella Lugosi as Count Dracula.

Choice of Law

Choice of law can be a significant issue. The right of publicity is most developed, and most favorable to celebrities seeking its protection, in New York and California. Generally, courts choose the law of the jurisdiction where the right of publicity has been exploited or that has the most significant relationship with the transaction, rather than the domicile of the parties.

Liability of Advertising Medium.

Usually, liability is imposed on the advertising medium only if it actively participated in misappropriation of the publicity value of the celebrity's persona. However, in at least one instance a magazine publisher was held responsible for misappropriation without any knowledge or intent. Lerman v. Chuckleberry Publications, Inc., 544 F.Supp. 966 (S.D.N.Y. 1982), cert. denied, 105 S.Ct. 2114 (1985). Cases on infringement and defamation may have bearing on the need for a finding of active participation or knowledge of misappropriation as an element of violation of right of publicity.

• At least one recent case has held computer bulletin board services liable for copyright infringement, without requiring knowledge. Playboy Enterprises, Inc. v. Frene, 839 F.Supp. 1552 (M.D. Fla. 1993) (service had no knowledge of infringement, merely enabled copying with uploading and downloading of copyrighted photographs).
• Other cases have found computer bulletin board services not liable for defamation where they had no knowledge of defamatory statements. Cubby, Inc. v. CompuServe, Inc., 776 F.Supp. 135 (S.D.N.Y. 1991); Auvil v. CBS "60 Minutes", 800 F. Supp. 928 (E.D. Wash 1992).

Fair Use.

The fair use exception justifies the use of celebrity names, likenesses, etc. for historical or news accounts, such as encyclopedias or newspapers and news broadcasts. But when does content expand into commercial exploitation that requires authorization by the celebrity? It can be difficult to distinguish entertainment from information. (This is similar to issues regarding the blurring of the distinction between advertising and information/entertainment.) When, for example, does a CD-ROM or multi-media data available on the Internet constitute an actual consumer good or service being sold for consumer use, rather than just a source of news or information?

The test is shaped by the First Amendment: when a communication is on a matter of public interest or has social value, the right of publication is based on the First Amendment right of the public to know and the freedom of the press to tell. For example, the California courts rejected a claim by Mickey Dora in Mickey Dora v. Front Line Video, Inc., Case No. B065165, Cal. Ct. of Appeal, 2d App. Dist. (1993).

Product Demonstrations

A product demonstration must be an accurate depiction of how the product will perform in the consumer's home and must prove something relating to a material attribute of the product. A product demonstration is misleading if the demonstrated results arise from presenting or manipulating the product in a misleading way, tampering with an object on which the product is demonstrated or employing any other misleading illusion, e.g., demonstrating the ability of a kitchen knife to cut through a nail where the nail was partially cut through prior to the demonstration is deceptive. Similarly, it is deceptive to demonstrate the sharpness of a kitchen knife after cutting a nail where the cutting edge used to demonstrate sharpness on a tomato is not the same cutting edge used to cut the nail. Winston Sales Co., Inc., 63 F.T.C. 1456 (1963).

In another case, an advertiser used an imitation shaving cream made of water and a foaming agent, but omitting other ingredients used to keep lather from breaking down and drying up, to demonstrate the tendency of competitors' shaving creams to dry out during shaving. This demonstration was held to be deceptive, but only because it did not accurately portray other products, some of which do not dry out as fast as the imitation. The court stated that the demonstration would not be deceptive if the only untruth was that what is seen in the depiction is artificial, and the appearance of the demonstration is otherwise a correct and accurate representation of the product. The court explained that, because of the nature of the television medium, some objects cannot be shown as they really are and, therefore, mockups are not illegal per se. Carter Products, Inc. v. F.T.C., 323 F.2d 523 (1963), relying on the First Circuit decision in F.T.C. v. Colgate-Palmolive, Co., 310 F.2d 89 (1st Cir. 1962).

However, in 1965 the Supreme Court reversed the First Circuit holding in Colgate-Palmolive, and sided with the Commission's original position in that case.

In Colgate-Palmolive, 380 U.S. 1035 (Warren, 1965), the company substituted a mockup of Plexiglas to which sand had been applied for real sandpaper to show that, with Rapid Shave Shaving Cream, consumers could shave beards having the toughness of sandpaper. The Court held that it was deceptive to represent falsely that a television demonstration of a test or performance provides viewers with visual proof of the claim, i.e., the viewer is seeing the actual test or performance itself, regardless of whether the product claim itself is true. In arriving at this conclusion, the Court distinguished between claims about product performance and claims that the viewer is seeing the actual demonstration. Although this deception was coupled with another deception as to the need to soak sandpaper for up to 80 minutes in order to give it a close shave, the Court made clear its findings that the failure to disclose that the demonstration was a simulation was deceptive in itself and that the corresponding provisions in the Commission's order were appropriate.

Colgate-Palmolive was followed in a case involving claims about the grade and quality of glass used in General Motors cars. The Commission found that the television commercials exaggerated the distortion in sheet glass by using different camera lenses in filming, more acute angles, and other techniques (including taking a photograph through an open window instead of through a window as the viewer was led to believe, and smearing streaks of Vaseline on the window). Libbey-Owens-Ford Glass Co. and General Motors Corp. v. F.T.C., 352 F.2d 415 (1965).

It is especially notable in the Libbey-Owens-Ford case that the court expressly held that it was not a defense to the advertiser's liability that the producer was responsible for production of the commercial, even though the advertiser was unaware of the deception and in good faith directed the producer to present a fair commercial.

The Commission has also found it to be a deceptive practice for Campbell Soup Co. to present a bowl of soup in which clear glass marbles were placed to increase the apparent abundance of solid ingredients. This advertising was referred to by the Commission as "a tawdry practice." Campbell Soup Co., 77 F.T.C. 664 (1970).

In Standard Oil Company of California v. F.T.C., 577 F.2d 653 (9th Cir. 1978), the court evaluated an advertisement for gasoline formulated to reduce automobile emissions. The ad showed a vehicle filling a clear plastic bag with dirty exhaust and then, after using reformulated gasoline, filling a bag with transparent vapor. The court determined that it was deceptive to fail to disclose that heavy engine deposits had been built up in the test vehicles by use of dirty fuel to show a more dramatic difference in the before and after sequence. The court also found it was deceptive for Standard Oil to calibrate an emissions measuring device to show a drop from 100 to 20 when the actual reduction was 50% or less.

Standard Oil is one of numerous cases where the courts and the Commission have expressly held that an advertising agency is also responsible for deceptions arising from misleading product demonstrations. Other recent cases involving demonstrations of children's toys are Hasbro, Inc., FTC Docket No. C-3447 (July 2, 1993); Griffin Bacal, Inc., FTC Docket No. C-3446 (July 2, 1993); and Towne, Silverstein, Rotter, Inc., FTC Docket No. C-3325 (February 27, 1991).

In a more recent case, the Commission considered an advertisement depicting a monster truck event, in which an oversized pickup truck drives over a row of automobiles. The ad in question showed the monster truck crushing all of the cars except a Volvo station wagon, which remained intact. The Commission found that the Volvo was structurally reinforced and that structural supports in the other cars were severed, and that the advertising was misleading. Volvo North America Corp., 5 CCH Trade Reg. Rptr. Par. 23,041 (1992).

The cease and desist order in the Volvo case includes an extremely broad definition of prohibited acts viewed by the Commission as deceptive, including the following:

• Undisclosed use or substitution of a material mock-up or prop.
• Undisclosed material alteration in a material characteristic of the advertised product, any product to which the advertised product is compared, or any other material prop or device depicted in the advertisement.
• Use of a visual perspective, camera, film, audio or video technique that materially misrepresents a material characteristic of the advertised product, any product to which the advertised product is compared, or any other material aspect of the demonstration.
• The undisclosed differential treatment, in a material respect, to which the advertised product and the product to which it is compared are subjected.

New advertising media may create special new issues for product demonstrations, such as the use of computer-enhanced photographs or video material. Advertising in interactive media may create new problems, when the consumer can manipulate the image of the advertised product or the way it is presented in ways that may never have been intended or anticipated by the advertiser.

Comparative Advertising

The Federal Trade Commission's Position

The FTC encourages comparative advertising. See FTC Policy on Comparative Advertising, CCH Trade Regulation Reporter, Para. 39,056. The rationale is that truthful and non-misleading comparative advertising as encouraging product innovation and providing information to consumers. Of course, comparative tests must be fair and impartial, comparing material, similar attributes in a consistent manner. For comparative claims based upon differences in performance, the comparison should take into account the purpose for which the products are intended; the manner in which they are normally used by the consumer; and individual label instructions.

As a practical matter, because of the availability of private rights of action under the Lanham Act (discussed below) and state law, the Commission rarely takes action against competitors under Section 5(a) of the Federal Trade Commission Act.

Section 43(a) of the Lanham Act

Section 43(a) of the Lanham Act, 15 U.S.C. &#sect; 1125(a), provides competitors with a private federal cause of action for unfair competitive practices. The false advertising provisions of the Lanham Act provide a cause of action where an advertiser makes false claims, whether the claims relate to the advertiser's or a competitor's product or service or commercial activities. Trademark Law Revision Act of 1988, Pub. L. No. 100-667, Sec. 136, 102 Stat. 3935 (15 U.S.C. &#sect; 1125(a))

Section 43(a) provides for injunctive relief and money damages. The latter must be proven to obtain a judgment.

Although not limited to comparative claims, the Section is often applied to cases where one competitor compares its product to another's in a false or misleading manner as to leave consumers with an erroneous impression as to quality, performance and other attributes.

In order to have standing, the competitor should be in the same industry, or be a competitor at minimum. See Ortho Pharmaceutical Corp. v. Cosprophar, Inc., 828 F. Supp. 1114 (S.D.N.Y. 1993).

In order to prevail, a plaintiff must prove either a literal falsity or consumer confusion by a substantial segment of the relevant audience, but not both. See Castrol, Inc. v. Pennzoil Co., 987 F.2d 939 (3d Cir. 1993). Additionally, in order to prevail with respect to advertising which is only misleading as opposed to literally false, the plaintiff must demonstrate by extrinsic evidence that an adverse representation would mislead or confuse consumers. See Gordon v. Breach Science Publishers S.A. v. American Institute of Physics, 112 S.Ct. 302 (1991).

Other elements which must be proven include: (1) proving the deception was material, i.e., is likely to affect the consumer's purchasing decision; (2) proving that the advertised merchandise was in interstate commerce; and (3) proving there is a likelihood of injury stemming from a decline in sales or from a loss of good will.

Some believe that there may be a "puffing" exception in this area of the law. See Cook, Perkiss and Liehe, Inc. v. Northern Calif. Collection Serv., Inc., 911 F.2d 242, 245-56 (9th Cir. 1990) and Metro Mobile CTS v. New Victor Communications, 643 F. Supp. 1289 (D. Ariz. 1986). However, such an exception may be of limited vitality. Cf. FTC v. U.S. Sales, 785 F. Supp. 737 (N.D. Ill. 1992) in which the court found that despite a disclaimer and the fact that great deals were to be had, defendant's ads claiming "hot cars" for $100 were false, lacked a reasonable basis, and were unfair and deceptive acts or practices justifying $13 million in consumer redress.

Recently, some courts have provided only limited injunctive relief. See Biec Int'l, Inc. v. Global Steel Serv., 791 F. Supp. 489 (1992) where the court limited the injunction to one year.

Voluntary Self-Regulation by Industry

The National Advertising Division ("NAD") of the Council of Better Business Bureaus, Inc. routinely entertains, evaluates, and then publishes its views on the accuracy and truth of comparative advertising claims.

The NAD process requires one of the advertisers to initiate a challenge of a competitor's advertising, although it has been known to initiate a challenge on its own volition.

Although strictly voluntary, the NAD's Decisions are widely read and respected by the law enforcement community, who have been known to follow-up in the event an advertiser ignores the NAD's Decision, or fails to cooperate with the Division.

Most advertisers whose comparative advertising is problematic usually abandon their campaigns in order to avoid the potential for adverse publicity by the Division. The NAD has been known to widely disseminate information relating to uncooperative advertisers.

Challenges lodged with the NAD generally represent a cost-effective way to force an advertiser to terminate a misleading or deceptive comparative advertising campaign.

Price and Value Claims

Pricing claims are regulated by FTC Guide Against Deceptive Pricing at 16 C.F.R. Part 233.

Value Claims

How Made

Value claims are made by reference to another comparison price (such as manufacturers suggested retail price, retail price, retail value, reference price, compare at, etc.).

When Permitted/Substantial Sales.

The FTC rule is that the advertiser must be reasonably certain that the comparison price does not appreciably exceed the price at which substantial sales are made in the area.

FTC enforcement actions include State of New York v. Middletown Beef Co., 444 N.Y.S. 2d 184 (1981)(value of bulk meats misrepresented); and Scherling Photography, Inc., 5 CCH Trade Reg. Rptr. Par. 28,096 (1991)(cost of photoprocessing and enlargements less than usual price of same service provided by others).

It is permissible for the claimed retail value to exceed the prices of some other retailers or even the average retail price. The FTC Guide also indicates that the comparison price may not substantially exceed that of representative retail outlets in the area, or a reasonable number of principal outlets in the area.

The National Advertising Division of the Council of Better Business Bureaus (NAD) has articulated a similar standard: The advertiser must be reasonably certain that the comparison price is one at which substantial sales are made in the area, and should not be based on isolated or unrepresentative sales.

Note that a number of older cases pre-dating the FTC Guide relating to pre-ticketing of prices by manufacturers suggested that substantial sales are approximately 60% of all sales. For examples, see Benrus Watch Co. v. FTC, 352 F.2d 313 (8th Cir. 1965), cert. denied, 380 U.S. 955 (1965); Rayex Corp. v. FTC, 317 F.2d 290 (2d Cir. 1963); and Helbros Watch Co. v. FTC, 310 F.2d 868 (D.C. Cir. 1962), cert. denied, 372 U.S. 976, rehearing denied, 364 U.S. 906 (1960). The FTC Guides offer an easier test.

Identical Merchandise.

The price comparison must be to identical merchandise or to merchandise that is of essentially similar quality. This means it may be impossible for a retailer to establish a valid price comparison for merchandise sold exclusively by the retailer.

Geographic Area.

The price comparison must be based on retail prices in the geographic area where the merchandise is advertised. However, a national retailer is not expected to monitor prices in all markets, and can rely on a good faith estimate based on a market survey in a substantial number of representative communities.

Substantiation.

Price comparisons are value claims, and must be substantiated like any other claims. A variety of methods can be used to substantiate price comparisons.

• MSRP (manufacturers suggested retail price). The source of this information may be advertised suggested retail prices, confidential retail price lists circulated to distributors, pre-ticketed prices, etc. MSRP may be relied on only if it is a price at which substantial (not merely isolated or insignificant) sales are made in the area.
• A number of other methods can be used to substantiate comparison prices, but all are based on what is actually happening in the retail marketplace.
• National catalog advertisements. This method of substantiation also includes other national price advertising, such as CD-ROM, live television shopping programs, infomercials, direct mail and computer shopping services.
• Shopping surveys. Merchandise can be purchased, or merely priced, by in-store visits or telephone surveys. The survey must include a variety of representative retail outlets in a representative number of communities reflecting a fair national balance. Local print and other advertising offers can be included in a market survey. For certain commodities, like gold and silver, market surveys can be used to establish a per gram comparison price, which may then be used to set retail values across an entire category.
• Appraisals. This method can be used to establish comparison prices for gemstone jewelry. Use of appraisals should also be applicable to art, coins, sports memorabilia and other collectibles. Appraisals reflect an expert's evaluation of (i) what constitutes identical merchandise, based on various gemstone characteristics affecting quality, and (ii) what the retail price, or replacement cost, would be for the item. This is not really different from a survey, since an appraisal is based on the appraiser's pre-existing knowledge of actual retail market prices.
• Customary mark-ups. This method of substantiating price comparisons requires establishment of reliable information about standard industry mark-ups from wholesale to retail within categories of merchandise.

Discounts/Price Reductions.

When Permitted/Regular Officer

The FTC rule is that advertising a price reduction is permissible only if the former price is the actual, bona fide price at which the item was offered to the public on a regular basis for a reasonably substantial period of time. The NAD rule is the same. The FTC Guide states that no sales are required at the former price, but it must be a good faith offer that was not made for the purpose of establishing a fictitious price.

Enforcement actions have been too numerous to mention, but it's worth noting that they go all the way back to 1919. Sears Roebuck & Co. v. FTC, 258 F. 307 (7th Cir. 1919).

Advance Sales.

An advance sale can be advertised only if the advertiser in good faith expects to increase the price at a later date.

Permitted Practices.

The rules governing price reductions do not prohibit normal selling practices. Many retailers initially offer an item for sale at the highest price at which they think the goods will sell, and then lower the price repeatedly to establish or maintain sales volume and then sell out or liquidate inventory. Retailers also conduct periodic sales with prices regularly being reduced and then raised again. These practices are bona fide, and it is permissible to advertise the price reductions.

Free Offers.

Free offers are addressed in the FTC Guide Against Deceptive Pricing at 16 CFR Part 233, Section 233.4, and also in their own Guide Concerning Use of the Word "Free" and Similar Representations at 16 CFR Part 251.

Generally, if an item is advertised as free (or a gift or bonus, at no charge, etc.), the advertiser cannot recover the cost of the free item by marking up the price of the purchased merchandise or by substituting merchandise of inferior quality.

For instance, when automobile customers are required to choose between receiving discounts and merchandise advertised as free, the merchandise is not free because customers must give up something of value (the discounts) to receive it. Toyota of Visalia v. Dept. of Motor Vehicles, 202 Cal. Rptr. 190 (Ct.App. 1984). See also C&L Lindus, Inc., 5 CCH Trade Reg. Rptr. Par. 23, 198 (1992).

Note that a two for one offer is treated the same way, since two for the price of one implies that one of the two is free.

When merchandise is advertised as free, it means that the customer is paying no more than the regular price for the purchased article. The regular price is the price at which the advertiser actively sold the item in the same area during the recent regular course of business for a substantial period of time. A substantial period of time is a minimum of 30 days. Free offers should be limited to six months in duration or a total of three offers in any 12 month period. Free offers should be separated by at least 30 days and should be limited to 50% of total sales.

As an alternative, an item may be advertised as free if the customer is entitled to keep the free item and return the purchased merchandise for a full refund. However, this offer must be clearly disclosed in the advertising.

All conditions of a free offer must be clearly disclosed at the time of the offer (i.e., in the advertising).

Hidden Charges

Advertising a price for an item without disclosing hidden charges is deceptive. All charges, such as shipping and handling, must be disclosed at the time of the offer. (Note that all disclosures necessary to prevent advertising from being deceptive must be included in the advertising. Subsequent disclosure when the customer responds to the advertising (e.g., by initiating the order process) is not adequate (i.e., cannot cure an omission from the advertising), since the customer has already been induced to respond.)

Finance charges are the most common hidden charges. For example, undisclosed automobile purchase finance charges, including fees and expenses. Ford Motor Co v. FTC, 120 F.2d 175 (6th Cir.), cert. denied, 314 U.S. 682 (1941). Also, undisclosed mortgage costs. Nationwide Mortgage Corp., 3 CCH Trade Reg. Rptr. Par. 22,540 (1988).

Note that the existence of finance charges may also give rise to disclosure requirements under the Federal Truth in Lending Act. For this purpose, a strict reading of the statute suggests that any additional cost or lower benefit to the consumer associated with the financing (or any benefit or premium offered for full payment at the time of purchase) constitutes a finance charge.

Other charges may be hidden. For example, required additional diet program costs for special foods and nutritional supplements, Diet Center, 5 CCH Trade Reg. Rptr. Par. 23,466 (1993); or the existence and amount of airport surcharges and mandatory vehicle fuel charges for automobile rental, General Rent-A-Car Systems, Inc., 5 CCH Trade Reg. Rptr. Par. 22,656 (1989).

Charges can be hidden simply by shifting them from one component of a package to another. For example, the advertised price of vacation airfares is deceptive if part of the cost is added to the cost of accommodations, World Travel Brokers, 3 CCH Trade Reg. Rptr. Par. 22,505 (1988). This means advertisers cannot advertise shipping and handling charges more than or less than actual shipping and handling costs, since this would either hide part of the cost of the item in the shipping and handling charges or hide part of the shipping and handling charges in the cost of the item.

Investments/Appreciation.

Advertisements for no-risk or low-risk investments or claiming a likelihood of profits or appreciation in value are often held to be deceptive. For example, art prints, Solomon Trading Co., Inc., 5 CCH Trade Reg. Rptr. Par. 23,412 (1993); stamps, World Wide Classics, Inc., 5 CCH Trade Reg. Rptr. Par. 23,377 (1993); coins, U.S. Rarities, Inc., 5 CCH Trade Reg. Rptr. Par. 23,153,23,199 (1992); mining, Continental Trading International, Ltd., 5 CCH Trade Reg. Rptr. Par. 23,152 (1992); and land, Avatar Holdings, Inc., 5 CCH Trade Reg. Rptr. Par. 23,09 (1991).

Warranties, Guarantees And Refunds

In general, the terms and conditions of any warranty (from the manufacturer) or guarantee (from the immediate seller), if advertised, should be clearly stated.

Additional specific requirements apply to the advertising of warranties. The Magnuson-Moss Warranty Act requires that, if a warranty is advertised, it be identified as either full or limited and that the consumer be told in the advertisement where he or she may obtain a copy of the warranty prior to purchase ("Call or write for a copy of our [full or limited] warranty"). This disclosure of pre-sale availability must appear simultaneously with or immediately after the warranty claim and must either be in the voice over or appear on screen for at least five seconds.

Advertising of a "satisfaction guarantee" or "money back guarantee" is also common. Use of these terms means that the advertiser is willing to provide a full refund if, for any reason, the customer returns the product. Any material limitations or conditions that apply to a guarantee or refund policy must be disclosed in the advertisement. For example, limiting the guarantee to thirty days and requiring the customer to pay return shipping and handling are often seen.

Refunds must be provided within a reasonable period of time after a consumer complies with the conditions for receiving a refund. "Reasonable time period" has been defined by the FTC as the period of time clearly and conspicuously specified in the advertisement or, if no time is specified, within thirty (30) days.

The following references provide additional information in this area: The FTC's Guides for the Advertising of Warranties and Guarantees, 16 C.F.R. &#sect; 239; FTC's Disclosure of Written Consumer Product Warranty Terms and Guidelines, 16 C.F.R. &#sect; 701; and FTC's Pre-Sale Availability of Written Warranty Terms, 16 C.F.R. &#sect; 702.

900 Numbers

The FTC has issued a Trade Regulation Rule implementing the Telephone Disclosure and Dispute Resolution Act of 1992, 15 U.S.C. 5711-14, 5721-24. The Rule is found at 16 C.F.R. Part 308 and became effective November 1, 1993.

"900" Telephone Numbers

Under the Rule, those who sell via a 900 telephone number must "disclose more fully any charges for the call, whether they be a flat fee, cost-per-minute, or minimum and maximum charges. Additionally, if the telephone call is billed on a variable rate basis, the cost of each stage must be so identified. Finally, any fees for additional services must also be fully disclosed.

Disclosures in the advertising must be "clear and conspicuous," with print no less than one-half the size of the 900 number. General rules governing other types of disclaimers also apply, i.e., the disclosure must be in a shade that contrasts with the background.

To avoid the cost of the telephone call, callers must hang up after the tone that follows the preamble.

Pay-per-call services directed toward children under 12 are banned, unless the service is a bona fide educational service.

Services directed at children ages 12-18 must state that parental permission is required for children to make a call.

Billing complaints must be acknowledged in writing within 40 days, and addressed within 90 days. Consumer's credit rating may not be affected while the bill is in dispute.

Infomercials

Under the FTC's new Pay-Per-Call Service Rule, the cost disclosure must be made at least three times during the infomercial. As a general rule, the disclosure should be made at the beginning, middle and at the end of the program. If, however, the 900 number is presented throughout the program, a video cost disclosure must appear adjacent to each video presentation of the 900 number. The cost disclosure must be in print at least one-half the size of the 900 number adjacent to it. The video cost disclosure must remain on screen as long as the 900 number remains on the screen. Finally, there must be at least one audio disclosure of the cost, and it must be given simultaneously with the video cost disclosure. If the 900 number is given only in the audio portion of the ad and not presented visually, the cost must still be stated immediately following each delivery of the 900 number.

Those utilizing infomercials, 800 or 900 numbers in a deceptive manner are subject to liability under Section 43(a) of the Lanham Act. See Soloflex, Inc. v. Nordic Track, Inc., WL 568401 (D. Or. 1994).

Continuity Programs

With the high cost of transmitting advertising messages, many marketers are using continuity programs, sales arrangements under which a product is automatically shipped to the consumer each month and his or her credit card is automatically charged.

The FTC's position has been highlighted in the consent order issued in the case of Synchronal Corp., 58 Fed. Reg. 32947 (June 14, 1993) and 58 Fed. Reg. 59041 (Nov. 5, 1993). The basic requirement is that the terms and conditions of the arrangement must be clearly understood by the consumer and he or she must give "expressed consent." Clearly, the inbound operator must provide the information before credit information is taken. In addition, ordering information in the advertisement must explain that shipment of the product will continue without further action by the consumer and the minimum number of purchases, if any. Subscribers must receive a clear description on how to cancel with each shipment or, if there is a minimum purchase requirement, with each shipment after the minimum. The marketer must cease shipment and billing as soon as the consumer cancels.

Consumer Credit Issues - Multiple Payments

Sellers of products on terms that are anything other than a single payment may be deemed to be extending credit and subject to state and federal credit laws.

If a seller permits payment in more than four installments or assesses a finance charge, then he or she may be classified as a seller of goods on credit, subject to the federal Truth-in-Lending Act and Federal Reserve Board Regulation Z.

Assessing a finance charge includes offering a product at a lower price if paid in full than the total of the multiple payments.

Delivery Time

In general, products should not be offered for sale if they are not available in sufficient quantities to meet reasonably anticipated demand. In addition, effective March 1, 1994, the FTC's Mail Order Rule applies to orders placed over the telephone, as well as by mail. As a result, advertisers must have a reasonable basis for being able to ship merchandise within the time stated in the advertisement or, if no time is specified, within thirty (30) days of receiving a "properly completed order." A properly completed order is now defined as when the advertiser received enough information from the consumer to process a credit card sale or upon receipt of a check.

The Rule also provides detailed procedures to follow in notifying the consumer of any changes or delays in delivery. If the merchandise cannot be shipped before expiration of the 30-day period, the customer must be offered the option of either consenting to a delay in shipping or canceling the order and receiving a prompt refund. If at the time of sending the notice a revised shipping date of 30 days or less is not possible, the option notice must also state that the buyer's order will be canceled unless he or she expressly consents to the delay.