Advertising Regulation

Jef I Richards & Ross D Petty. The Handbook of Advertising. Sage Publications. 2007.

Near the end of this past century, the Catholic Church’s study of advertising and its role in society concluded:

“There is nothing intrinsically good or intrinsically evil about advertising. It is a tool, an instrument: it can be used well, and it can be used badly. If it can have, and sometimes does have, beneficial results such as those just described, it also can, and often does, have a negative, harmful impact on individuals and society.” (Foley et al., 1997)

Shortly thereafter, the Court of Appeals for the District of Columbia Circuit affirmed the Federal Trade Commission’s (FTC) order for corrective advertising, to cure lingering effects of harmful advertisements. The FTC ordered the maker of Doan’s Pills to include a disclosure in its advertising for one year, until it had expended $8 million. This was the average amount it spent annually over an eight year period to persuade consumers that Doan’s Pills was a superior product for relief of back pain over other pain relief products. There was no substantiation to support this superiority claim (Novartis Corp. v. FTC, 2000).

This sort of misleading and unsubstantiated claim in commercial advertising is the primary focus of advertising regulation throughout the world and the main focus of this chapter. This regulation of commercial deceptiveness not only protects consumers from being misled, but also bolsters advertising’s credibility. Greater advertising credibility can lead to less resistance to ads and greater belief of their claims, resulting in more effective marketing communications. In this way, both consumers and advertisers benefit from regulating advertising deceptiveness.

However, advertising regulation includes much more than dealing with deceptiveness. The next section describes four domains of advertising regulation. It is followed by a discussion of freedom of speech concerns and the regulation of political advertising. The third section examines regulation of deceptiveness in detail followed by a discussion of fairness concerns in advertising regulation. We conclude with a summary of the chapter. While this chapter focuses on advertising regulation in the United States, the European Community (EC) approach also is discussed since Europe is evolving to become the largest single consumer market as measured by worldwide sales.

Scope of Advertising Regulation

While most advertising regulation throughout the world addresses problems with deceptive advertising, advertising also can be the target of regulators when the advertisements are not the problem. Rather, the regulation is seen to hold promise as a solution for social ills like lung cancer (Petty, 1999; Richards, 1996), obesity (Seiders and Petty, 2004) or even racial discrimination (Petty et al., 2003). The forms and purposes of regulation are numerous and varied. Municipalities, for example, have used local ordinances to beautify communities through elimination or restriction of commercial signage (e.g., Marbin and Journey, 1991). Similarly, many laws seek to curtail unwanted telemarketing (Smolla, 2005) or unsolicited email or fax ads (Zitter, 2004). Laws, too, are used to protect children from ads that might injure or take advantage of them (Curran and Richards, 2000). Laws even are used to force some companies to finance ads that are not in their own best interests (Johanns v. Livestock Marketing Assn., 2005).

The domains of advertising regulation can be roughly categorized as entailing:

Persuasive effects on purchase behaviour. Deceiving someone into buying a product or taking advantage of them at a moment of weakness, such as convincing a recently mugged person to buy an alarm system, are examples of problems at which governmental intervention may be directed. Selling illegal products or services, such as cigarettes to minors, also would fall under this heading.
Persuasive effects beyond purchase behaviour. Advertising not only urges purchase, it encourages consumption which may contribute to materialism, excess smoking or drinking, racial or gender stereotyping, among other things. These effects potentially reach far beyond the sales transaction. Regulations, then, are crafted to prevent advertising from causing or encouraging some consequential behaviour.
Intrusive effects. Many criticisms of advertising have nothing to do with the ad’s message, but with the form or the location where it is placed. In these situations the effects are “content-neutral,” because the message content is virtually irrelevant. Billboards frequently are banned or restricted, not because of their message, but because they are aesthetically unpleasing. Unsolicited email, fax, too, are restricted because they are intrusive. These regulations, including privacy laws, protect our personal environment.
Effects on political behaviour. Advertising for political candidates, and concerning political causes, also is subject to regulation. Some laws are designed to insure one party (or cause) gains no unfair advantage over another by using advertising. Some ensure more information to the electorate. Whatever the intent, however, it is the political—as opposed to commercial—nature of the advertising that distinguishes these effects from those above.

Advertisements can, of course, have effects in more than one category, but the stated purpose for a regulation generally arises from just one of these types. Ultimately, the legitimacy of a regulation often is determined by its purpose.

U.S. First Amendment

In the United States, the principal limit on government’s ability to regulate both political and commercial advertising is the guarantee of free speech written into the First Amendment of the U.S. Constitution. Some other countries have similar protections of free speech, but may apply them differently than the U.S. Still others have no explicit guarantee of free speech at all.

For the first century and a half after the First Amendment was ratified, advertising never received serious consideration for protection as “speech” under that provision. Courts recognized the Amendment as designed to protect the expression of political ideas and protest against the government. Yet even such advertising for political purposes, by a political candidate or by anyone supporting/ criticizing the government, is subject to legal limitations. There are laws on the books to restrict everything from anonymously contributing money to political ad campaigns to using an outdated photograph of a candidate in an ad, and more (Richman, 1998; Richards and Caywood, 1991). But because these laws affect the most highly valued speech, U.S. courts look very closely before enforcing them.

One recent attempt to fence in advertising by political candidates is the McCain-Feingold bill (Bipartisan Campaign Reform Act, 2001). Most provisions of that law were declared Constitutional by the Supreme Court (McConnell v. Federal Election Commission, 2003), ensuring its enforceability. It largely prohibits corporations and unions from paying for “issue ads” immediately preceding an election. This illustrates that the Constitution does not entirely prohibit regulation of political speech, considered the “core” value of First Amendment protection (FEC v. National Conservative PAC, 1985), but commercial ads always were subject to even more regulation.

Not until 1976, in Virginia State Board of Pharmacy v. Virginia Citizens Consumer Council, did the Supreme Court finally declare commercial speech, defined as that which does no more than propose a commercial transaction (Pittsburgh Press v. Pittsburgh Commission on Human Relations, 1973), to be constitutionally protected. But in the years that followed, the judiciary struggled with this new constitutional status, recognizing the need to both protect advertising and prevent deception and other negative ad effects (Richards, 1997). To provide judges, and legislatures, some guidance as to when a regulation would be allowed and when it would tread on free speech rights, Central Hudson Gas & Electric v. Public Service Commission of New York(1980) established a four-part test:

Step 1. Is the speech concerning a lawful activity and not misleading?
Step 2. Does the government have a substantial interest in regulating it?
Step 3. Does the regulation directly advance that interest?
Step 4. Is the regulation more extensive than necessary?

If the speech is misleading or promotes illegal activity, clearly it can be regulated or even prohibited. Otherwise, to be constitutional the regulation must meet all of steps 2-4. This same test is used today, except that the fourth step was later refined to mean that the regulation must be “narrowly tailored” to be a reasonable fit to the interest being protected (S.U.N.Y. v. Fox, 1989).

So, for example, if a city passed a law banning advertising signs in homeowners’ yards, that law must pass the four-step test. Unless the law targeted only deceptive ads, or ads for illegal products/services, the first step would yield a “yes.” Consequently, the second step would ask the government’s purpose. If the purpose were simply that the mayor did not like the signs, it probably would fail the test as being “not substantial.” But if the signs are distracting drivers, causing accidents, the purpose being to prevent those accidents is likely a substantial interest, so it would pass that step. The third step, then, would ask whether banning the signs will prevent accidents. If “yes,” it would pass again. If “no,” it would fail the test. Finally, if only certain types of signs, such as those with naked models on them, are causing accidents, banning all signs would not be “narrowly tailored,” causing the law to fail the test. All of these determinations, ultimately, would be made by a court.

The Central Hudson test proved somewhat variable in its results from case to case, and for years the extent to which commercial speech received speech-of-the-second-class status under the First Amendment was unclear. But this finally was clarified in 44 Liquormart v. Rhode Island(1996), when the Supreme Court introduced a new—and still current—way to look at commercial speech cases.

In that decision, the Court explained the lesser protection for commercial speech as being limited to ensuring “fair bargaining.” Prohibition of deceptive claims, for example, is all about assuring a level playing field in the commercial bargaining process. Conversely, where laws are designed to achieve some goal other than fair dealing, such as reducing tobacco consumption or removing billboard eyesores from the public right-of-way, the affected speech deserves protection on a par with more highly valued expression. This decision indicated commercial speech would receive less protection than other speech only where the government’s substantial interest involved the Persuasive Effects on Purchase Behaviour category mentioned earlier. The second and third categories would be judged by the stricter standards accorded most forms of speech. The fourth category, though, involves political speech rather than commercial speech. Thus, while the First Amendment stands as a tall hurdle to much regulation, clearly its call for “no law abridging the freedom of speech” is not interpreted as a total prohibition on legal restraints.

Deceptiveness

The first part of the Central Hudson test denies First Amendment protection to misleading (also called deceptive) commercial speech. Numerous guidelines in the US and throughout the world help advertisers avoid deceptiveness in advertising. Most are published by self-regulatory groups such as the National Advertising Division (NAD) of the Council of Better Business Bureaus (CBBB) in the US, the Advertising Standards Authority in the UK, or the International Chamber of Commerce. The FTC also publishes guidelines, providing mere guidance, as well as rules that have the force of law. Otherwise, deceptiveness in advertising is regulated through specific case-by-case challenges to particular ads.

These challenges to deceptive advertising can be examined in five stages: (1) how advertising challenges are brought, (2) what message is conveyed to consumers, (3) what is the likelihood the message will mislead consumers, (4) the accuracy of the advertising claims, and (5) what remedy, if any, is appropriate (cf. Petty and Kopp, 1995; Petty, 1997). Each of these stages is discussed in turn below.

Challenging Deceptive Advertising

Advertising is policed for deception through industry self-regulation, government regulation, or private lawsuits (most commonly by competitors, but sometimes by consumers or consumer organizations). In the US, advertising legal challenges arise from all three sources. Media also can play an important role, through self-regulation, screening out ads that might mislead consumers. Twenty years ago the major US television networks reviewed about 50 000 advertisements and received challenges to less than 100 of those advertisements. More recent figures are not available, but in the late 1980s networks cut the number of people employed to scrutinize ads for problems (Gordon, 1988). Some individual television stations (Rotfeld et al., 1990) and magazines also review advertising before accepting it (Rotfeld and Parsons, 1989).

The primary mechanism for industry self-regulation in the US is the NAD of the CBBB. It receives about 200 advertising complaints each year and opens about half that number into formal cases (Boddewyn, 1988). These cases can be appealed to the National Advertising Review Board, also a part of the CBBB, but that rarely happens. Rarer still, if the advertiser does not comply with its ruling, the NAD can refer the case to the appropriate government authority. This happened for the first time in 1992 (Sunshine Makers, Inc., 1992).

The Federal Trade Commission is the main source of formal US legal regulation of advertising. It opens about 50 advertising investigations and issues 10-15 orders annually. It can try advertising cases administratively, before its own Administrative Law judges, or it can seek injunction in federal district court (Petty, 1992). In addition, state attorneys general also have attempted to regulate advertising in recent years (Richards, 1991).

Also, competitors sue one another for misleading advertising under the Lanham Act—the trademark protection law—at least as frequently as the FTC brings cases (Petty, 1992: 58, 98-99). Thus, private lawsuits by competitors are the third source of US advertising regulation. Rarely do consumers sue to challenge advertising in the US, and when they do they are relegated to state, rather than federal, courts.

Outside the United States, the EC adopted its directive on misleading advertising in 1984 (Council Directive, 1984), requiring member states to adopt its provisions into national law. It requires laws to challenge misleading advertising before either a court or an administrative authority by “persons or organizations regarded under national law as having a legitimate interest in” prohibiting misleading advertising. The United Kingdom insisted that the directive also recognize the validity of self-regulation. The UK’s Advertising Standards Authority (ASA) is the largest, most active, and best financed self-regulatory system in the world, and is supported by the government. Its authority is derived from the British Code of Advertising Practices (Baudot, 1989: 116-26; Boddewyn, 1988: 267-94). Consistent with the directive, ASA decisions can be appealed to a court for review (Newell, 1989). Legal actions in Great Britain generally follow only after self-regulatory solutions are sought. A similar process is followed in Ireland (Boddewyn, 1985).

Italy, Belgium and Switzerland likewise have active industry self-regulation (Maxeiner and Schothofer, 1992). Italian law allows competitors (not consumers) to sue privately, but courts seldom find advertising to be misleading. So self-regulation handles about 80% of all advertising disputes (Schricker, 1990: 631-6). In the Netherlands both private lawsuits and industry self-regulation are active arbiters of advertising challenges. But like the UK, the Dutch self-regulatory body can be overruled by the courts (Dommering, 1992: 269).

Scandinavian countries actually have displaced industry self-regulation with a consumer ombudsman who functions much like the US FTC by receiving advertising complaints, attempting to resolve them, and litigating if necessary. Many of its guidelines were based on prior industry self-regulation, so industry supports and cooperates with the ombudsman (Boddewyn, 1985).

In contrast, Germany, Austria, and Spain base ad regulation on private lawsuits by competitors and consumer organizations. Indeed, advertising litigation is more prevalent in Germany than in any other country, but roughly 90% of these disputes end in a settlement between the parties (Maxeiner and Shotthofer, 1992: 170). The German Weberat is the primary self-regulatory body, and it complements the legal system by focusing on questions of taste and opinion, rather than deceptiveness (Horn et al., 1982: 284-7; Grimes, 1971: 1778-93).

France, Luxembourg, and Belgium also allow recognized consumer organizations to bring lawsuits challenging advertising. These three countries and the rest of Western Europe generally fall somewhere in between the two extremes of Italy and Germany, with a more even balance of private lawsuits, self-regulation, and some government regulation (Petty, 1997).

In all countries, the advertiser can be held liable for its advertising. In the US, the FTC also pursues advertising agencies that were active participants in creating the ads and knew or should have known of the legal problems. Similarly, under the US Lanham Act, advertising agencies may be sued, though it is rare. In Europe, ad agencies may be sued in Belgium (in lieu of an advertiser located in another country), Denmark, Ireland, Italy, France (if negligent), Germany, Austria, Portugal, Switzerland, and the UK. In Germany, Ireland, Italy, Switzerland, and the UK, the magazine, TV station, etc., also may be held liable (Maxeiner and Schotthofer, 1992). In the US, agencies can be held liable but media generally are not, although the FTC has started encouraging media to take more responsibility for the ads they publish (Galloway et al., 2005).

Message Conveyed to Consumers

To find an advertisement misleading, it must first be “interpreted” to determine what message is communicated to consumers. For explicit claims, the regulator need only look at the advertisement itself. However, such literal interpretation may miss messages that are implied (Preston and Richards, 1986).

For example, when newspaper ads proclaimed “Hertz has more new cars than Avis has cars,” the trial court interpreted the ads literally and counted the cars owned by each company. It found the ad to be literally false and ordered a permanent injunction and required Hertz to place corrective notices in the same newspapers where the ad ran. In contrast, the court of appeals recognized that the message conveyed to consumers was that Hertz had more cars available for rent than Avis. This interpretation was found true since Avis was in the process of selling a large number of cars that it still owned, and they were no longer available for rent. The court dismissed the complaint.

In the US, implied deceptive claims can be condemned even if the literal statements in the advertising are true. A variety of methods are used by all these authorities to “interpret” the ad to determine what message is conveyed, from simply looking at the ad and drawing conclusions to conducting consumer surveys or having marketing experts evaluate them (Petty, 1992; Richards, 1990: 31-4).

The 1984 EC Directive on Misleading Advertising is silent on interpretation and the regulation of implied claims (Council Directive, 1984). Not surprisingly, most European countries also do not explicitly address these issues. Most simply have the judge or other authority examine the advertisement and apply their personal judgement to interpret it. However, the newly adopted Directive Concerning Unfair Business to Consumer Commercial Practices that Member States must enact into law by early 2008, declares:

A commercial practice shall also be regarded as misleading if, in its factual context, taking account of all its features and circumstances, it causes or is likely to cause the average consumer to take a transactional decision that he would not have taken otherwise … (Directive 2005/29/EC)

That language closely mirrors the policy followed by the USFTC. At present, Germany and the US are the only countries that routinely use consumer research to help determine the meaning of advertising.

Two varieties of implied claims that illustrate the need to look beyond the explicit are omissions of material (i.e., important) information and visual claims. In the US the FTC pursues omissions more readily than courts under the Lanham Act (Petty, 1992). And state attorneys general are more likely than the FTC to find omissions and require additional disclosures (Beales, 1991). Many EC countries also regulate misleading omissions (Petty, 1997), so it is not surprising that the new Unfairness Directive condemns the omission of material information that the average consumer needs to make an informed decision in the marketplace.

Advertising messages communicated visually are perhaps more difficult to address than omissions of fact. Advertisers are skilled at using visual imagery, while lawyers, regulators, and judges who review advertising challenges are trained to analyze words more than images. But visual content certainly can deceive, so it is regulated in some cases (Richards and Zakia, 1981). For example, the FTC and the Texas State Attorney General both challenged Volvo advertisements as deceptive for showing a “monster” truck rolling over a line of cars, all of which were crushed except the surreptitiously re-enforced Volvo. In contrast, the FTC refused to pursue animated visual claims by Perrier that, arguably, falsely told consumers Perrier water was unprocessed, by showing historical figures such as Napoleon dipping a cup into an unrefined natural spring and drinking the Perrier water (Petty, 1993).

Germany occasionally has condemned visually misleading advertising. Similarly France challenged the advertising of TANG drink mix that showed an empty orange peel, a glass of TANG surrounded by green leaves, and the slogan: “the taste of fresh squeezed oranges.” This advertising was found to falsely claim TANG contained orange juice, despite a fine print listing of TANG’s artificial ingredients (Baudot, 1989: 136-7). French courts also condemned an ad for a legal advisor shown wearing a robe, creating the impression the advisor was an attorney (Maxeiner and Schotthofer, 1992: 125).

Likelihood of Misleading Consumers

After determining the messages perceived by consumers, regulators must decide whether those messages are likely to mislead. Ivan Preston (1982) uses the word “deceptiveness” to refer to the potential to mislead consumers, as distinguished from actual deception. The FTC is empowered to regulate ads even when no one is yet deceived; it need not wait until someone gets hurt. For example, in the Volvo and Perrier cases, above, the FTC apparently believed consumers would be misled by the Volvo demonstration, but not by the animated Perrier demonstration.

For more than six decades the FTC’s standard was described as requiring only that a representation have a “capacity or tendency to deceive” (FTC v. Sterling Drug, Inc., 1963). But during the Reagan Administration, the new Policy Statement on Deception fundamentally changed that standard, declaring the representation must be “likely” to deceive (Cliffdale, 1984). This effectively shifted the standard from a possibility ads would deceive, to a probability they would deceive. In addition, the old standard required evidence of a capacity or tendency to deceive almost anyone, including “the ignorant, the unthinking and the credulous” (Aronberg v. FTC, 1942). But over time the FTC stopped going so far as to protect the feebleminded, and the Policy Statement stated the Commission would only protect consumers “acting reasonably under the circumstances” (Cliffdale, 1984). These changes appear to reduce the level of consumer protection.

The US State Attorneys General tend to apply the old “capacity or tendency” standard (Beales 1991). The US Lanham Act follows that general approach, without going so far as to protect truly gullible consumers. This is the same standard now recognized in most of Europe.

Yet another question that must be answered is whether that deceptive advertising claim is “material” (i.e., important) to consumers. For example, the FTC charged Kraft with deceiving people about the calcium content of its cheese, compared to milk and imitation cheese slices. Kraft argued since its product is a good source of calcium, the relative amount of calcium per slice was not material to consumers’ purchase decisions. Kraft, however, lost that argument (Kraft Inc. v. FTC, 1992). Similarly, Doan’s Pills, mentioned earlier, unsuccessfully argued the claim of superior back pain relief was immaterial to consumers given the truthfulness that the product was an effective pain reliever (Novartis Corp. v. FTC, 2000).

Materiality also received a new definition in the Policy Statement on Deception, changing from “the natural and probable result of the challenged practices it to cause one to do that which he would not otherwise do” (Bockenstette v. FTC, 1943) to “information that is important to consumers, and, hence, likely to affect their choice of, or conduct regarding, a product” (Cliffdale, 1984). So a deceptive claim is material, if it affects product-related behaviour, such as where consumers shop, even if it does not ultimately change the consumers’ purchase decisions. But in most cases the FTC assumes that if a claim is used in an ad it must be designed to affect consumer decisions, and hence is material (Richards and Preston, 1992). Similarly, under the Lanham Act, the likelihood of deceiving consumers is presumed (Petty, 1992: 96-7).

The 1984 European Community Directive on Misleading Advertising also adopts a deceptiveness standard. It defines misleading advertising as that which deceives or is likely to deceive persons to whom it is addressed or whom it reaches and which by reason of its deceptive nature, is likely to affect their economic behaviour or which, for those reasons, injures or is likely to injure a competitor.

The new Unfairness Directive seems to narrow this definition to that which causes, or is likely to cause the average consumers to make a different transactional decision, as opposed to shopping at a different store.

The US, Belgium, France, Greece, Ireland, Italy also recognize the defence of “puffing”—claims of quality too vague to be relied upon by consumers. Puffing occurs when advertisers obviously exaggerate, state opinions, or make vague quality claims such as that a product is “best.” For example, in France a competitor challenged Samsonite luggage advertising that showed a pair of bulldozers “playing” with a suitcase that was shown undamaged. The lower court found the commercial misleading because many suitcases had been used and damaged during the filming of the commercial. The court of appeals held that the average consumer would recognize this as exaggeration, and not take it as literal truth (Rijkens and Miracle, 1986: 150). Denmark, Portugal, and Germany do not recognize this defence, and France requires that superlatives be verified (Maxeiner and Schotthofer, 1992). A claim not believed by consumers is unlikely to play a material role in their purchase behaviour.

Accuracy of the Advertising Claims

Once the conveyed meaning of an ad is determined, it is compared to the reality of the product (or service) attribute or characteristic. Historically, challengers had the burden of proving falsity, rather than advertisers needing to prove the truth of their claims. This rule is still applied in the US for Lanham Act cases, but beginning in the 1970s for the FTC, state attorneys general, and NAD, as well as in Europe under the 1984 Directive, the burden has shifted. In order to clarify this change and describe what is reasonable substantiation, given the wide variety of possible products and claims, the FTC wrote a policy statement regarding advertising substantiation (Thompson Medical Co., 1984).

There are a few important principles of this policy. Most important, the advertiser must have evidence of the claim’s accuracy before the claim is made. If an advertiser is charged with deceptive advertising and has no such evidence in hand, the advertiser is liable even if subsequent evidence proves the claim was accurate. Additionally, if the advertiser led consumers to believe a claim is based on a specific type of evidence (e.g., “According to tests by an independent laboratory. …”), the advertiser must have that exact evidence. In all other situations the advertiser must have at least a “reasonable basis” for believing the claim to be true. In deciding what is reasonable, the FTC will look at several factors including, among other things, what type of product is involved and what experts in that field consider reasonable forms of proof (Thompson Medical Co., 1984).

Remedies

Once a problem with advertising is found, a solution is needed. Self-regulation throughout the world has no legal authority to impose a remedy, but many such systems are buttressed by the threat of formal legal action if a self-regulatory recommendation is not followed. The typical remedy requested by self-regulation is to stop or modify the ad to eliminate the problem.

In the US, the normal FTC and Lanham Act remedy also requires stopping or modifying the advertisement. Something like 85% of deceptive advertising cases at the FTC end with consent order, whereby the advertiser voluntarily agrees to change its advertising (Richards and Preston, 1987). Unlike industry self-regulation, such consent orders have the force of law and advertisers can be fined for violating them, just like any other FTC order. Those orders also may “fence-in” the advertiser, to prohibit similar types of claims for similar types of products in the future.

The consent order ends a case while it is still in process, before any final decision is reached about a claim’s deceptiveness. For cases where a decision actually is reached by the FTC commissioners, though, there really are only three possible outcomes. The oldest and most common is the Cease and Desist Order, which merely requires the advertiser to stop making the claim. This remedy stops the damage but can allow advertisers to keep any ill-gotten gains (Ward, 1992). Another remedy especially useful where deceptiveness arises from a material omission in the ad is Affirmative Disclosure, requiring information be added to future advertising (Richards and Preston, 1992). The third option is Corrective Advertising, a form of affirmative disclosure designed to correct deceptive beliefs held by consumers resulting from a long history of using a deceptive claim (Wilkie et al., 1984). This third approach, though, is rarely used.

Because FTC advertising adjudications may last several years, the FTC Act was amended in the mid-1970s so the agency could obtain court-ordered injunctions in advertising cases where violations are clear cut. That new clause, known as Section 13(b), allowed the FTC to effectively surrender jurisdiction to a court, and the courts interpreted this as inviting them to fashion their own remedies (Ward, 1992). So in addition to preliminary (before the full adjudication) and permanent injunctions, courts ordered other outcomes such as consumer redress, requiring advertisers to repay customers for losses caused by the ad. This has become a powerful fourth remedial option for especially egregious cases of deceptive advertising.

The principal remedy in Lanham Act cases is a preliminary injunction. In order to obtain a preliminary injunction, the plaintiff has a higher burden than the FTC, and must prove that: (1) the plaintiff likely will win the lawsuit because the advertising is false, (2) the defendant’s advertising is likely to cause or has caused injury to the plaintiff, and (3) the plaintiff’s injury without the injunction is likely to be higher than the defendant’s injury with the injunction (balancing of the hardships). Courts in LanhamAct cases rarely order damages (monetary compensation), which must be proven with specificity. State attorneys general, by contrast, may obtain an injunction and often recover costs of their investigation (McKinney and Caton, 1990-1).

The 1984 EC Directive on Misleading Advertising similarly calls for injunctions. It permits interim injunctions while the case outcome is pending. It also authorizes requiring the advertiser to publish the decision in appropriate cases; essentially a form of corrective advertising. Not surprisingly, the primary formal remedy in most European countries is an injunction. When self-regulation is ignored in the UK, its Director of Fair Trading is authorized to seek an injunction. In Germany, approximately 80% of misleading advertising cases include an injunction during the trial, which often becomes permanent (Schricker, 1990: 630).

Most European countries also have a provision allowing the advertiser to simply publish a retraction (called rectification in the Netherlands) but this remedy is rarely used. Plaintiffs also may request that a court’s decision be published at the advertiser’s expense. Most European countries allow for the awarding of money for damages if they can be proven, but such awards also are rare in advertising cases (Maxeiner and Shotthofer, 1992), Germany allows consumer groups to sue for damages, but it requires proof of intentional or negligent misconduct (Grimes, 1971: 1791). Finally, a few countries invoke criminal penalties, at least on occasion. In Great Britain, fines are typically ordered (and possible jail time) for explicitly false advertising claims. Similarly, France and Greece can impose jail time or criminal penalties (Maxeiner and Shotthofer, 1992). In the US the FTC Act does not permit criminal penalties, though there are occasions where criminal penalties may arise under a separate set of laws concerning mail fraud. Also, some states do have criminal laws on the books, but these rarely are applied.

Unfairness

While the substantial majority of advertising challenges involve deceptiveness, advertising regulation also addresses persuasive effects beyond product purchase and the intrusiveness of advertising. Both the FTC and Europe generally address such issues as “unfair.” The breadth of this authority is illustrated by the European 1979 revision to the proposed directive concerning unfair and misleading advertising, defining unfair advertising as that which:

Casts discredit on another person by reference to his nationality, origin, private life or good name; or
Injures or is likely to injure the commercial reputation of another person by false statements or defamatory comments concerning his firm, goods, or services; or
Abuses or manifestly arouses sentiments of fear; or
Promotes discrimination on grounds of sex, race or religion; or
Abuses the trust, credulity or lack of experience of a consumer, or influences or is likely to influence a consumer or the pubic in general in any other improper manner

This language was based on the International Chamber of Commerce advertising code followed by most self-regulatory bodies in Europe ( http://www.itcilo.it/english/actrav/telearn/global/ilo/guide/iccadv.htm). However, this part of the proposal was not adopted in the new Unfairness Directive. Rather the directive condemns misleading and aggressive practices that are contrary to professional diligence and likely to change transactional decisions such as harassing, threatening, or coercive behaviour.

In contrast to this specific listing of a few concerns, the modern US approach is largely captured by a 1994 amendment to the FTC Act, defining unfairness as:

The act or practice causes or is likely to cause substantial injury to consumers,
Which is not reasonably avoidable by consumers themselves, and
Is not outweighed by countervailing benefits to consumers or to competition (Federal Trade Commission, 2005).

As in Europe, unfairness has proven controversial in the US. For decades the FTC applied a relatively sweeping definition of “unfair” as “immoral, unethical, oppressive, or unscrupulous” acts (Statement of Basis, 1964). Virtually any ad disliked by commissioners might fit within one of those descriptors. For this reason, some businesses suggested the FTC held far too much power.

The new definition reflects a fundamental shift in approach, incorporating a cost-benefit analysis (e.g., Schechter, 1989). Under this standard even an ad that causes actual injury to consumers cannot be regulated as unfair if other considerations outweigh that “cost.” So, for example, if a particular marketing practice created a more competitive market and benefited the market as a whole, the fact that a few consumers would be hurt might not justify stopping the practice.

Persuasive Effects on Purchase Behaviour

Most persuasiveness concerns dealing with unfairness are aimed at curbing advertisers’ ability to take advantage of vulnerable consumers, like children (Curran and Richards, 2000). In FTC v. Keppel & Bro. (1934), the Supreme Court upheld the FTC’s decision that using a lottery to sell candy unfairly encouraged gambling among children, who were ill equipped to understand the nature of odds. More recently, the FTC adopted its “900-Number” Industry Rule banning 900-Number service directed at children under the age of twelve, presumably because children may not comprehend the associated charges, running up large bills.

On the other side of the pond, Article 16 of the European Directive Concerning Television Broadcasting (1989) requires that television advertising not:

Directly exhort minors to buy a product or a service by exploiting their inexperience or credulity;
Directly encourage minors to persuade their parents or others to purchase the goods or services being advertised;
Exploit the special trust minors place in parents, teachers or other persons

Even before this was adopted, self-regulation in most European countries applied similar rules to protect children. French law also limits the use of children as endorsers in ads, prohibits the use of heroes to sell to children, and bans ads that extol a product as a status symbol (Maxeiner and Schotthofer, 1992).

Other vulnerable groups, like the elderly, also can raise unfairness issues. In the early 1970s the FTC pursued a few cases where the exploitation of emotional desires and weaknesses were alleged to be unfair practices. For example, in Arthur Murray Studio of Washington (1971) salespeople pressured elderly widows to purchase exorbitant numbers of dance lessons, using high pressure sales tactics and preying on their loneliness. The FTC declared this unfair. For additional discussion of advertising to vulnerable audiences.

Unfairness can reach beyond inherently vulnerable groups, however. For example, in J.B. Williams Co. (1972), an FTC Consent Order prohibited Vivarin, an over-the-counter stimulant, from advertising that use of any such product would solve an individual’s marital, sexual, or personality problems, or improve their personality, physical appearance, marriage, or sex life. Sometimes cases also involve unfair omissions of information. In International Harvester Inc. (1984), tractor ads did not mention safety, but the FTC found that failing to disclose information on a dangerous safety problem was unfair because consumers could not avoid the problem without such knowledge.

The new European Unfairness Directive condemns harassing or coercing consumers into purchase, making an inaccurate claim about risks to the consumer’s personal security, or threatening that the salesperson will lose his job if the consumer does not buy. Austria, Germany, the Netherlands, and Greece prohibit using psychological pressure to buy, such as using gratitude for a free gift or the exploitation of emotions like compassion, fear, or superstition. Several European countries also ban solicitations that are considered too aggressive or surprising or invasive of consumers’ privacy (Maxeiner and Schotthofer, 1992). The Unfairness Directive establishes a minimum level of protection, allowing these more stringent protections to continue.

Persuasive Effects beyond Purchase

Persuasiveness concerns beyond purchase cover a variety of issues: social equality, unsafe product behaviour depicted in advertising, and fair competition through comparative advertising. Though arguably within its authority, the first of those really never has been addressed by the FTC (Petty etal., 2003), but the US Equal Credit Opportunity Act and the Fair Housing Act prohibit racially discriminatory advertising for credit and housing, respectively. In Europe, the Television Broadcast Directive prohibits discriminatory advertising generally for that medium.

The Directive likewise bans advertisements that unreasonably show minors in dangerous situations. Similarly, Denmark, Ireland, the UK (self-regulatory) and the Netherlands require that advertising not cause physical or mental harm to children. The Netherlands expands this concept with specific regulation of sweets, banning promotion of: excessive consumption, meal replacement, and ridicule of those who do not eat sweets. Children’s ads even must remind the audience to brush teeth after eating sweets. Portugal requires advertisements to mention safety precautions (Maxeiner and Schotthofer, 1992). Perhaps the most obvious example of safety concerns are the restrictions on tobacco and alcohol advertisements in most developed countries.

The FTC also has been concerned with depictions of unsafe product use behaviour (Petty, 1995). In Mentholatum Co. (1980), the Commission prohibited showing people wearing dentures for prolonged periods of time, contrary to product instructions. While that case concerned adults mimicking behaviour in ads, other cases involve mimicry by children, such as unsafe bicycle riding, using adult appliances, and eating wild nuts and berries (Petty, 1995).

Finally, comparative advertising has given rise to concerns in most countries. The US long has permitted comparative claims, and in the 1970s the FTC contacted the major television networks to persuade them to allow naming competitor products in advertising. It was felt this would lead to greater information for consumer decision-making. So the FTC rarely challenges such claims, but they constitute a majority of Lanham Act and NAD cases (Petty, 1992).

With some resistance the EC has come to allow comparison advertising, but with more restrictions than the US. Like the US, the EC prohibits comparisons that are misleading, unsubstantiated, or confusing about the source of the products. In addition, the EC requires that they concern essential elements of comparable products that are fairly chosen, and that they not be denigrating or unduly negative. The US merely requires that comparisons not be disparaging or falsely negative (Spink and Petty, 1998).

Intrusive effects

Regulations are a common recourse for limiting advertising intrusions into peoples’ lives, and this has become even more common in the wake of new technologies. For example, a recent FTC decision entailed a company using misspelled domain names to hijack consumers browsing the Internet, then effectively forcing consumers to view web pages for adult entertainment, etc. (FTC v. Zuccarini, 2002). The FTC also has addressed other forms of intrusive advertising like the Telemarketing Sales Rule (2005), which prohibits not only deceptiveness but also bans automatically dialed calls to cell phones and telephone harassment (Petty, 2000). The newly added Do-Not-Call Registry allows consumers to avoid the intrusive telemarketing calls by placing their telephone numbers on the Registry (Smolla, 2005).

Other recent rules related to intrusiveness include the Children’s Online Privacy Protection Rule (2005), derived from the Children’s Online Privacy Protection Act of 1998, rules regarding Privacy of Consumer Financial Information (2005) in accordance with the Gramm-Leach-Bliley Act, and Rules Implementing the CAN-SPAM Act of 2003 (2005). Each of the statutes behind those rules guaranteed important privacy rights, but left the FTC to determine the specifics. Those rules fill in the details. When companies announce a privacy policy, the FTC also has targeted violations of that policy.

The EC Unfairness Directive condemns persistent and unwanted solicitations by any remote media. This includes automatic calling devices and fax machines under the Distance Selling Directive (Directive 97/7/EC), and e-mail under the Privacy and Electronic Communications Directive (Directive 2002/58/EC), without prior consent or the ability to object easily and without cost.

Many other agencies are involved with intrusiveness issues. Local agencies often are concerned with ads that intrude on the sanctity of public areas. Not long ago, for instance, the Buildings Department in New York City ordered a 15-story ad removed from the historic Flatiron building, calling it a safety hazard (Lueck, 2005), and several years earlier in Palm Harbor, Florida, an 8-foot wooden flamingo advertising a carpet cleaning service was ordered removed because it represented “visual clutter” (Marbin and Journey, 1991).

Summary

The law is constantly, but slowly, changing and adapting to new social realities, political dynamics, and new methods of advertising. This chapter has focused on fundamental advertising law concepts that form the basis for this evolution. Many regulatory agencies have some authority over advertising for specific industries. The US alone has the Food and Drug Administration, the Federal Communications Commission, the Postal Service and the Securities and Exchange Commission, among others. Furthermore, there are many federal laws other than the FTC Act that in some way involve advertising regulation. Less likely to spring to mind when thinking about ad regulation, are products sector-related such as the Plant Variety Protection Act (1980) which prohibits certain ad claims in the sale of plant materials. More obvious are those like Copyright Law (2005), which protects creative advertising materials from being closely copied without permission, and the Trademark Law (2005), which prohibits the registration of deceptive trademarks and prevents the use of marks confusingly similar to existing marks.

Most advertising laws and regulations are intended to protect either consumers or businesses, or both. While the FTC’s original mission was to protect businesses from unfair methods of competition, two of its very first cases involved consumer deception. The commissioners quickly realized that business tactics aimed at cheating consumers usually have the consequential effect of cheating competitors (Clarence N. Yagle, 1916). They were wise enough then to realise that business interests and consumer interests are inextricably commingled.

Since then the two interests were treated as discrete, and even as being two opposing ends of a continuum, although public policy swings over time to favour one interest or the other. For example, in the early 1980s, under the Reagan Administration, the prevailing school of economic thought was replaced by the introduction of “Chicago School” economists into the FTC (Richards, 1991). These economists felt that in a well-intentioned effort to protect consumers it was possible to over-regulate businesses, which could lead to reducing competition and the free flow of information, thereby ultimately harming consumers.

Advertising regulation covers much more than dealing with deceptiveness. The other three domains of advertising regulation are:

Persuasive effects beyond purchase behaviour. Advertising not only urges purchase, it encourages consumption which may contribute to materialism, excess smoking or drinking, racial or gender stereotyping, among other things.
Intrusive effects. Billboards frequently are banned or restricted, not because of their message, but because they are aesthetically unpleasing. Unsolicited e-mail and fax are restricted because they are intrusive.
Effects on political behaviour. Advertising for political candidates, and concerning political causes, also are subject to regulation. Some laws are designed to insure one party (or cause) gains no unfair advantage over another by using advertising. Some ensure more information to the electorate. Whatever the intent, however, it is the political—as opposed to commercial—nature of the advertising that distinguishes these effects from those above.

While this chapter has focused on advertising regulation in the United States, the European Community (EC) approach has also been discussed and advertising regulation worldwide is evolving in similar ways.

Although some of their attempts to deregulate arguably went too far, they called attention to the interrelatedness of consumer and business interests. While they shone the light on over-regulation as a threat to consumers, a corollary to this is that under-regulation, while outwardly appearing to favour business interests, can be equally dangerous to business interests. The trick, of course, is finding the optimal level of regulation, to serve the best interests of society as a whole. Clearly, some regulations go too far and some not far enough. But because there are dangers in excessive regulation, and because the US has a First Amendment limiting government interference with speech, regulation alone cannot address every potential problem of advertising. Therefore, ethics and morality, or perhaps just a long-term view of corporate reputation, should rule where the law is powerless to stop abuses of the power and influence of marketing communication.