Fair Advertising FAQ: A Guide for Small Business
Advertising is essential to any business. But it's important to ensure your advertisements are in line with state and federal law. Below we provide answers to common questions about advertising and the Federal Trade Commission.
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What truth-in-advertising rules apply to advertisers?
Under the Federal Trade Commission Act:
- advertising must be truthful and non-deceptive;
- advertisers must have evidence to back up their claims; and
- advertisements cannot be unfair.
Additional laws apply to ads for specialized products like consumer leases, credit, 900 telephone numbers, and products sold through mail order or telephone sales. And every state has consumer protection laws that govern ads running in that state.
What makes an advertisement deceptive?
According to the Federal Trade Commission Act and the Federal Trade Commission (FTC), an ad is deceptive if it contains a statement - or omits information - that:
- is likely to mislead consumers acting reasonably under the circumstances; and
- is "material" - that is, important to a consumer's decision to buy or use the product.
What makes an advertisement unfair?
According to the Federal Trade Commission Act and the FTC, an ad or business practice is unfair if:
- it causes or is likely to cause substantial consumer injury which a consumer could not reasonably avoid; and
- it is not outweighed by the benefit to consumers.
How does the FTC determine if an ad is deceptive?
A typical inquiry follows these steps:
The FTC looks at the ad from the point of view of the "reasonable consumer" - the typical person looking at the ad. Rather than focusing on certain words, the FTC looks at the ad in context -- words, phrases, and pictures -- to determine what it conveys to consumers.
The FTC looks at both "express" and "implied" claims. An express claim is literally made in the ad. For example, "ABC Mouthwash prevents colds" is an express claim that the product will prevent colds. An implied claim is one made indirectly or by inference. "ABC Mouthwash kills the germs that cause colds" contains an implied claim that the product will prevent colds. Although the ad doesn't literally say that the product prevents colds, it would be reasonable for a consumer to conclude from the statement "kills the germs that cause colds" that the product will prevent colds. Under the law, advertisers must have proof to back up express and implied claims that consumers take from an ad.
The FTC looks at what the ad does not say -- that is, if the failure to include information leaves consumers with a misimpression about the product. For example, if a company advertised a collection of books, the ad would be deceptive if it did not disclose that consumers actually would receive abridged versions of the books.
The FTC looks at whether the claim would be "material" -- that is, important to a consumer's decision to buy or use the product. Examples of material claims are representations about a product's performance, features, safety, price, or effectiveness.
- The FTC looks at whether the advertiser has sufficient evidence to support the claims in the ad. The law requires that advertisers have proof before the ad runs.
What kind of evidence must a company have to support the claims in its ads?
Before a company runs an ad, it has to have a "reasonable basis" for the claims. A "reasonable basis" means objective evidence that supports the claim. The kind of evidence depends on the claim. At a minimum, an advertiser must have the level of evidence that it says it has. For example, the statement "Two out of three doctors recommend ABC Pain Reliever" must be supported by a reliable survey to that effect. If the ad isn't specific, the FTC looks at several factors to determine what level of proof is necessary, including what experts in the field think is needed to support the claim. In most cases, ads that make health or safety claims must be supported by "competent and reliable scientific evidence" -- tests, studies, or other scientific evidence that has been evaluated by people qualified to review it. In addition, any tests or studies must be conducted using methods that experts in the field accept as accurate.
Are letters from satisfied customers sufficient to substantiate a claim?
No. Statements from satisfied customers usually are not sufficient to support a health or safety claim or any other claim that requires objective evaluation.
My company offers a money-back guarantee. Very few people have ever asked for their money back. Must we still have proof to support our advertising claims?
Yes. Offering a money-back guarantee is not a substitute for substantiation. Advertisers still must have proof to support their claims.
What kind of advertising claims does the FTC focus on?
The FTC pays closest attention to:
- ads that make claims about health or safety, such as:
ABC Sunscreen will reduce the risk of skin cancer.
ABC Water Filters remove harmful chemicals from tap water.
ABC Chainsaw's safety latch reduces the risk of injury.
- ads that make claims that consumers would have trouble evaluating for themselves, such as:
ABC Refrigerators will reduce your energy costs by 25%.
ABC Gasoline decreases engine wear.
ABC Hairspray is safe for the ozone.
Ads that make subjective claims or claims that consumers can judge for themselves (for example, "ABC Cola tastes great") receive less attention from the FTC.
What penalties can be imposed against a company that runs a false or deceptive ad?
The penalties depend on the nature of the violation. The remedies that the FTC or the courts have imposed include:
Cease and desist orders. These legally-binding orders require companies to stop running the deceptive ad or engaging in the deceptive practice, to have substantiation for claims in future ads, to report periodically to FTC staff about the substantiation they have for claims in new ads, and to pay a fine of $11,000 per day per ad if the company violates the law in the future.
Civil penalties, consumer redress and other monetary remedies. Civil penalties range from thousands of dollars to millions of dollars, depending on the nature of the violation. Sometimes advertisers have been ordered to give full or partial refunds to all consumers who bought the product.
Corrective advertising, disclosures and other informational remedies. Advertisers have been required to take out new ads to correct the misinformation conveyed in the original ad, notify purchasers about deceptive claims in ads, include specific disclosures in future ads, or provide other information to consumers.
What can my company do if a competitor is running an ad that I think is deceptive?
Explore your legal options under federal and state statutes that protect businesses from unfair competition. For example, the Lanham Act gives companies the right to sue their competitors for making deceptive claims in ads.
File a complaint with the National Advertising Division (NAD) of the Council of Better Business Bureaus, if your competitor's ad is running nationally or regionally. The NAD is a private, self-regulatory group affiliated with the BBB. It investigates allegations of deceptive advertising and gives advertisers a mechanism for resolving disputes voluntarily.
Call your local BBB or file an online complaint with the Better Business Bureau if the ad is local. Many BBBs have procedures for resolving disputes between businesses.
Contact the radio station, television station, or publication where the ad ran. Let them know that they're running an ad you think may be deceptive.
Contact your state Attorney General's Office or your city, county, or state Office of Consumer Affairs. To get their phone numbers, check your telephone directory.
Contact the FTC. By mail: Federal Trade Commission, Consumer Response Center, 600 Pennsylvania Avenue, NW, Washington, DC 20580; by telephone: toll-free 1-877-FTC-HELP.
If my company files a complaint about a competitor with the FTC, will the FTC resolve the dispute?
The FTC is authorized to act when it appears that a company's advertising is deceptive and when FTC action is in the public interest. Although the FTC cannot intervene in an individual dispute between two companies, the agency relies on many sources - including complaints from consumers and competitors - to find out about ads that may be deceptive. To file a complaint against a competitor who you believe has engaged in false advertising, contact:
Federal Trade Commission
Consumer Response Center
600 Pennsylvania Avenue, NW
Washington, DC 20580
Toll-free 1-877-FTC-HELP (382-4357)
Can I find out if the FTC already has an investigation against a company?
The FTC can tell you if it has already taken formal action (e.g., filed or settled a lawsuit) against a particular company or against similar kinds of advertisements or products. But the FTC cannot disclose whether an investigation is going on. To find out if a company or product has been the subject of a recent FTC action, search the FTC's website (www.ftc.gov).
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