Fair Advertising FAQ: A Guide for Small Business
Without advertising, small businesses would have no way of letting anyone know their products and services exist. Advertising is critical to business operations. Small business owners devote as much time and effort to selling their brand as they do to creating their products. That's the whole point of being an American business.
The government encourages small businesses to expand and advertise. At the same time, regulations restrict the types of advertising you can have. No matter what type of business you are, you must obey fair advertising laws.
Frequently Asked Questions About Advertising
There are dozens of FAQ help lists about advertising and the law. Here are some of the most common about fair advertising and what makes an ad "deceptive and misleading"—the kind that gets businesses into trouble.
Who regulates truth in advertising?
The Federal Trade Commission (FTC) is a government agency that oversees advertising and commerce. Under the Federal Trade Commission Act, the FTC creates guidelines and enforces federal laws to protect consumers from false or misleading advertising claims. These truth-in-advertising laws also provide penalties for overt fraud and scams perpetrated by criminals.
What does the law say?
The FTC Act section 45(a) says that:
"Unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce, are hereby declared unlawful."
What does that mean?
It means that advertising for products and services must be truthful and honest. A business may not deceive buyers about the safety of their products, the content, the warranty, or make any unreal or deceptive claim that may affect their decision to buy the product.
In other words, an advertisement or business practice must follow certain rules:
- They cannot mislead by statement or omission. It cannot include statements that are affirmatively false nor exclude information the consumer needs to decide reasonably about the product.
- They cannot cause substantial consumer injury that the consumer would otherwise avoid, which is not outweighed by benefit to the consumer.
- All claims made must have independent evidence backing them up.
- Any omission made must be in good faith with no intent to deceive.
Who does the law apply to?
Anyone who advertises comes under the FTC's mandate. Different types of advertising have different specifications. If you are selling your own product, you are responsible for claims about the advertised product. However, third parties, such as website designers, app providers, or marketplace operators, may be responsible for misleading representations if they know about the misrepresentation.
Advertisers and designers must review information used to support advertising claims. They may not rely on the advertiser's assurance that the claim is true. Catalogs and marketplaces should request data to back up manufacturer claims before presenting the product.
For instance, if an online marketplace sells dietary supplements for a company, it cannot rely on the company's claims of safety or efficacy. Nor can it run a disclaimer saying it takes no responsibility for the product's effects on the consumer. Under truth-in-advertising laws, the marketplace may be liable for any claims made by anyone on their site.
What are truth-in-advertising standards?
Claims must include substantiation. That means your claims must have a basis in fact. If you say "9 out of 10 people love our product," you must have studies backing you up. If you claim a celebrity uses your product, it must be true.
Some other FTC advertising guidelines include:
- Disclaimers and disclosures must be obvious and easy to understand. A disclaimer alone is not enough to prevent a deceptive advertising claim.
- Demonstrations must show the product under normal use.
- Environmental claims have a history of being deceptive. The FTC has specific guidelines, called "Green Guides," for how to make legitimate environmental claims in advertising. It is best not to make such claims unless your product meets specific environmental and ecological standards.
- Health claims or any medical claims, be they prescription or over-the-counter, must have reliable scientific evidence to back up any claims. The FTC coordinates health claim advertising with the Food and Drug Administration (FDA). This area probably receives the closest scrutiny of any type of advertising.
- Endorsement disclosures must be verifiable. The FTC provides endorsement guides for social media influencers and podcasters who receive products and compensation for promoting products. If there is a "material connection" between the manufacturer and the endorsement, it must be clearly stated in the endorsement.
What is the purpose of these laws? Don't people know ads are fake?
Not always. Studies by the FTC and others have shown that the average consumer gives more weight to advertising that contains endorsements, scientific claims, or promises to help the buyer in some way. Consumer protection laws have evolved to prevent advertisers from using this tendency to promote bogus products.
In the late 19th and early 20th centuries, manufacturers were free to put just about anything they wanted into healthcare products and make wild claims about the results. To end that, Congress enacted a number of laws affecting labeling, print advertising, and now online advertising.
How does the FTC discover violations of truth-in-advertising?
The FTC learns of violations in advertising laws through complaints made to their agency at FTC.gov. States have their own consumer protection agencies that may also investigate and prosecute advertising misrepresentations. Enforcement actions depend on the type of violation and the nature of the business.
How does the FTC determine if a claim is a false claim?
The FTC evaluates alleged deceptive advertising from the "reasonable consumer" viewpoint. They look at an ad from the perspective of an untrained, average buyer. The investigator considers several factors:
- An express claim is the one you make in the ad itself. Saying, "This weight loss pill will take off five pounds in a week," is an express claim.
- An implied claim is what the images or statements in the ad suggest. If your spokesmodel says, "I needed to lose five pounds for my wedding, and I took this weight loss pill," while posing in her wedding gown, the implied claim is that the pill helped her lose the weight.
- They look at what the claim omits and what it implies by omission. If the claim is that a weight loss pill takes off five pounds in a week but the instructions tell you that you must also drink three quarts of water per day, then the ad omits an important fact. The reasonable consumer would assume that all they need to do is take the pill.
- The FTC requires "competent and reliable" evidence for all claims. For special cases, that evidence is more stringent.
What advertising needs better support?
All advertising claims need valid support. The FTC demands better claim evidence and greater truthfulness for any product that:
- Is marketed to children
- Claims to be environmentally friendly
- Makes any health or wellness claims
- Is "made in the USA"
The FTC provides specific business guidance for these areas. If your company produces or markets these products, you should review the requirements before developing a marketing plan.
What penalties can violators face?
Depending on the nature of the violation and the type of business involved, the FTC can apply any or all of these penalties:
- Cease and desist orders: Unrelated to a prelitigation "cease and desist" warning letter, this is a court order that requires the company to stop using the advertisement or terminate the deceptive practice. Cease and desist orders may include requirements to provide FTC staff with updated proof of claims and pay fines of up to $11,000 per day per ad for future violations.
- Civil penalties: The FTC may sue the violator on behalf of consumers. Settlements may include fines and refunds to customers who purchased the product or service based on the fraudulent ad.
- Corrective advertising: Courts may order companies to make public corrections, include disclosures or disclaimers on future ads, or provide information about the product. For example, following decades of litigation, a tobacco company must post corrective advertising in all stores explaining they manufactured cigarettes to be more addictive. Most corrective advertising is not this draconian.
Who else oversees false advertising?
Some agencies in the federal and state government that review false advertising and fraudulent products include:
- The Better Business Bureau: The BBB is more concerned with business disputes and bad business practices, but it does have a false advertising department. You can also leave a consumer review of a business on the BBB website.
- The state attorney general's office: Attorney generals will investigate any business that impacts state revenue. Victims should report telemarketing scams, pyramid schemes, and similar financial crimes to the attorney general since state law can handle these on a criminal basis.
- Local law enforcement: Municipal officers can be brought in for any situation that involves local businesses. Although they may not be able to handle the case directly, they need to be aware if the business is carrying out illegal activities.
Still have questions about fair advertising?
When you have a small business, you may need some assistance. A business attorney near you will be able to give you advice and help avoid problems in the future. If you have questions about fair and truthful advertising, don't wait until you're in court to look up someone who can give you the right answers.
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