False Advertising

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FALSE ADVERTISING

"Any advertising or promotion that misrepresents the nature, characteristics, qualities or geographic origin of goods, services or commercial activities" (lanham act, 15 U.S.C.A. § 1125(a)).

Proof Requirement

To establish that an advertisement is false, a plaintiff must prove five things: (1) a false statement of fact has been made about the advertiser's own or another person's goods, services, or commercial activity; (2) the statement either deceives or has the potential to deceive a substantial portion of its targeted audience; (3) the deception is also likely to affect the purchasing decisions of its audience; (4) the advertising involves goods or services in interstate commerce; and (5) the deception has either resulted in or is likely to result in injury to the plaintiff. The most heavily weighed factor is the advertisement's potential to injure a customer. The injury is usually attributed to money the consumer lost through a purchase that would not have been made had the advertisement not been misleading. False statements can be defined in two ways: those that are false on their face and those that are implicitly false.

Development of Regulations

One early attempt to create advertising industry standards was made in 1911 when the trade journal Printer's Ink proposed that false advertising be classified as a crime. As a result, false advertising became a misdemeanor in 44 states. Statutes were based on the model statute suggested by Printer's Ink. These statutes are still in effect; however, they are rarely used because it requires proving that the false advertising exists beyond a reasonable doubt, a difficult standard to meet.

In place of the Printer's Ink statute, states adopted the Uniform Deceptive Trade Practices Act of 1964 (revised 1966), which lists a dozen different items that are prohibited in the advertising trade. The only remedy available under this act is injunctive relief—a court order that admonishes the guilty party for its actions— which may explain the low number of states that have adopted it. (As of 2003, only 12 states have adopted the statute in some form.) Other states have different statutes regarding false advertising. Most of these statutes require the courts to interpret state laws using federal guidelines provided by the federal trade commission (FTC). According to the FTC, which amended its standards to help regulate cigarette labeling, three elements are necessary to show that an advertisement is false or unfair. The ad has to offend public policy; be immoral, unethical, oppressive, or unscrupulous; and substantially injure consumers.

Types of False Advertising

Today's regulations define three main acts that constitute false advertising: failure to disclose, flawed and insignificant research, and product disparagement. The majority of these regulations are outlined in the Lanham Act of 1946 (15 U.S.C.A. § 1051 et seq), which contains the statutes that govern trademark law in the United States.

Failure to Disclose It is considered false advertising under the Lanham Act if a representation is "untrue as a result of the failure to disclose a material fact." Therefore, false advertising can come from both misstatements and partially correct statements that are misleading because they do not disclose something the consumer should know. The Trademark Law Revision Act of 1988, which added several amendments to the Lanham Act, left creation of the line between sufficient and insufficient disclosure to the discretion of the courts.

American Home Products Corp. v. Johnson & Johnson, 654 F. Supp. 568, S.D.N.Y. 1987, is an example of how the courts use their discretion in determining when a disclosure is insufficient. In this case, Johnson and Johnson advertised a drug by comparing its side effects to those of a similar American Home Products drug, leaving out a few of its own side effects in the process. Although the Lanham Act does not require full disclosure, the court held the defendant to a higher standard and ruled the advertisement misleading because of the potential health risks it posed to consumers.

Flawed and Insignificant Research Advertisements based on flawed and insignificant research are defined under section 43(a) of the Lanham Act as "representations found to be unsupported by accepted authority or research or which are contradicted by prevailing authority or research." These advertisements are false on their face.

Alpo Pet Foods v. Ralston Purina Co., 913 F.2d 958 (D.C. Cir. 1990), shows how basing advertising claims on statistically insignificant test results provides sufficient grounds for a false advertising claim. In this case, the Ralston Purina Company claimed that its dog food was beneficial for dogs with canine hip dysplasia, demonstrating the claims with studies and tests. Alpo Pet Foods brought a claim of false advertising against Purina, saying that the test results could not support the claims made in the advertisements. Upon looking at the evidence and the way the tests were conducted by Purina, the court ruled not only that the test results were insignificant but also that the methods used to conduct the tests were inadequate and the results could therefore not support Purina's claims.

Product Disparagement Product disparagement involves discrediting a competitor's product. The 1988 amendment to the Lanham Act extends claims for false advertising to misrepresentations about another's products.

Trademark Infringement

Trademark infringement is similar to product disparagement, and is described in section 32(1) of the Lanham Act. This section states that:

anyone who shall, without the consent of the registrant—(a) use in commerce any reproduction, counterfeit, copy or colorable imitation of a registered mark in connection with the sale, offering for sale, distribution or advertising of any goods or services or in connection with which such use is likely to cause confusion, or cause mistake, or to deceive … shall be liable in a civil action by the registrant.

A trademark is a symbol, phrase, or some other device that distinguishes ownership of a product or service. A trademark also stands as a mark of quality, which means that consumers rely on trademarks when making purchases. If one company adopts a trademark similar to a competing company, the public may think the trademark's owner either sponsored or approved the use of the trademark. Therefore, the reputation of the original holder of the trademark is compromised and consumers are deceived and confused by false advertising.

In determining whether there is a likelihood of confusion under the Lanham Act, the courts use the Polaroid test, which includes eight factors established in Polaroid Corp. v. Polara Electronics Corp., 287 F. 2d 492 (2nd Cir. 1961). They are the strength of the plaintiff's mark, similarity of uses, proximity of the products, likelihood that the prior owner will expand into the domain of the other, actual confusion, defendant's good or bad faith in using the plaintiff's mark, quality of the junior user's product, and sophistication of consumers. These eight factors do not all have to be satisfied to prove a case; the major factor the courts focus on is the potential to confuse consumers.

The Polaroid test is for cases that involve commercial exploitation. When an advertising dispute involves first amendment violations, the issue at hand is often the use of parody.

Parody

For parody cases, a balancing test that is more useful than the Polaroid test was established by Cliffs Notes v. Bantam Doubleday Dell Publishing Group, 886 F.2d 490 (2nd Cir. 1989). The court held that Bantam's production of Spy Notes, which was a parody of Cliffs Notes study guides, was not a violation of the Lanham Act because Bantam clearly conveyed in advertising that Spy Notes was a parody. Therefore, there was no confusion. As a result, the balancing test used by the court in Cliffs Notes requires that "a parody must convey two simultaneous—and contradictory—messages: that it is the original, but also that it is not the original and is instead a parody." If a parody does not have both messages, it is likely to confuse the consumers.

Another claim involving parody is the 1995 case of Hormel Foods Corp. v. Jim Henson Productions, 73 F.3d 497 (2nd Cir. 1996). In this case, Hormel brought Jim Henson Productions to court for trademark infringement and false advertising under the Lanham Act. At the time the case was initiated, Henson was producing the movie Muppet Treasure Island with a new character: an exotic wild boar named Spa'am. Henson's intention was to make the audience laugh at the intended parody between the Muppet's wild boar and Hormel's tame luncheon meat.

Hormel's claims of false advertising and trademark infringement under the Lanham Act and its common-law claims of trademark dilution and deceptive practices were all denied by the court for several reasons, the main one being that Henson had clearly, in all his advertising, identified Spa'am as a character from a Muppet motion picture. This usage was not confusing under the Polaroid test and therefore was not a solid basis for a false advertising or trademark infringement claim. Henson's usage also satisfied the balancing test requirements set up by Cliffs Notes.

Remedies for False Advertising

Had Hormel won its claim against Henson, three remedies would have been available to it: injunctive relief, corrective advertising, and damages.

Injunctive Relief Injunctive relief is granted by the courts upon the satisfaction of two requirements. First, a plaintiff must demonstrate a "likelihood of deception or confusion on the part of the buying public caused by a product's false or misleading description or advertising" (Alpo). Second, a plaintiff must demonstrate that an "irreparable harm" has been inflicted, even if such harm is a decrease in sales that cannot be completely attributed to a defendant's false advertising. It is virtually impossible to prove that sales can or will be damaged; therefore, the plaintiff only has to establish that there exists a causal relationship between a decline in its sales and a competitor's false advertising. Furthermore, if a competitor specifically names the plaintiff's product in a false or misleading advertisement, the harm will be presumed (McNeilab, Inc. v. American Home Products Corp., 848 F.2d 34 [2nd. Cir. 1988]).

Corrective Advertising Corrective advertising can be ruled in two different ways. First, and most commonly, the court can require a defendant to launch a corrective advertising campaign and to make an affirmative, correcting statement in that campaign. For example, in Alpo, the court required Purina to distribute a corrective release to all of those who had received the initial, false information.

Second, the courts can award a plaintiff monetary damages so that the plaintiff can conduct a corrective advertising campaign to counter the defendant's false advertisements. For example, in U-Haul International v. Jartran, Inc., 793 F.2d 1034 (9th Cir. 1986), the plaintiff, U-Haul International, was awarded $13.6 million— the cost of its corrective advertising campaign.

Damages To collect damages, the plaintiff generally has to show either that some consumers were actually deceived or that the defendant used the false advertising in bad faith. Four types of damages are awarded for false advertising: profits the plaintiff loses when sales are diverted to the false advertiser; profits lost by the plaintiff on sales made at prices reduced as a demonstrated result of the false advertising; the cost of any advertising that actually and reasonably responds to the defendant's offending advertisements; and quantifiable harm to the plaintiff's good will to the extent that complete and corrective advertising has not repaired that harm (Alpo).

Consumer Protection

Although most false advertising claims brought against advertisers are by competitors, consumers can also file such claims. No hard-and-fast rules exist for all consumer-initiated cases; courts deal with claims brought by consumers on more of a case-by-case basis than they do with claims brought by competitors. The issues surrounding consumer rights were discussed during the drafting of the 1988 Trademark Law Revision Act, but were not resolved.

In cases where consumers have sued, they have most often been held to the same standards as competitors: they need to show that they have a reasonable interest in order to be protected. This standard was demonstrated by the class action lawsuit of Maguire v. Sandy Mac, 138F.R.D. 444 (D.N.J. 1991). In that case, the class included both resellers, who had purchased a ham product from the defendant, and consumers, who had ultimately bought the ham products. The lawsuit claimed that the defendant sold ham products falsely represented as meeting u.s. department of agriculture standards. The court ruled for the plaintiffs, saying that "the plaintiff and the proposed class, the consumers, have a reasonable interest in being protected from criminal misrepresentations."

Another way consumers are protected is by state laws on deceptive trade practices. Some state laws define these practices as showing goods or services with the intention of not actually selling them as advertised. In Affrunti v. Village Ford Sales, 232 Ill. App. 3d 704, 597 N.E.2d 1242 (3rd. Dist. Ct. App. 1992), a consumer filed a lawsuit against an automobile dealership that sold him a car for more money than it was actually advertised for. Ronald Affrunti went to Village Ford Sales, a used-car lot, and looked at a blue 1986 Celebrity with 29,000 miles on the odometer. The car did not have a sticker price, so he asked the salesman, Fred Galaraza, for a price. Galaraza answered that he would have to check in his office. After showing Affrunti several other used cars, and without going to his office, Galaraza quoted a price of $8,600 for the Celebrity. Affrunti and Galaraza settled on a final price of $8,524, which included a trade-in and a discount for a front-end alignment. Upon returning home, Affrunti came across an advertisement by Village Ford Sales for a 1986 blue Celebrity with 29,999 miles on the odometer for $6,995. Affrunti called the dealership. Galaraza checked and said, "By God, it's the same!" Affrunti asked to redo the deal based on the advertised price. Galaraza put him on hold. When Galaraza came back on the line, he said the car in the ad had been sent to auction, and they could not redo the deal because it was not the same car.

At trial, the sales manager testified that prices listed in advertisements are not necessarily the listed cars' actual prices; dealers can sell the cars for higher prices. After hearing the evidence, the judge ruled that the dealer had an obligation to inform the plaintiff of the advertised price of the car, and awarded Affrunti the difference between the purchase price and the advertised price, which amounted to $1,529. On appeal, the Illinois Appellate Court ruled that "the defendant's failure to disclose the advertised sale price constituted deceptive conduct under the consumer fraud Act." The appellate court also added attorneys' fees to Affrunti's award, bringing the total up to $1,937.50.