U.S. Federal Trade Commission (FTC)

Sunscreen
Copyright: farakos / 123RF Stock Photo

Earlier this month, the Federal Trade Commission (“FTC”) issued a decision against California Naturel, Inc. related to its advertising of “all natural” sunscreen on both its website and the product packaging itself. On its website, California Naturel was not only advertising its sunscreen as “all natural” but was describing the sunscreen as containing “only the purest, most luxurious and effective ingredients found in nature.” The FTC found that this advertising conveyed that California Naturel’s sunscreen contains only ingredients that are found in nature.  But because California Naturel admitted that eight percent of its sunscreen formula consists of a synthetic ingredient, the FTC determined that California Naturel’s advertising constituted false and misleading advertising and that such advertising is likely to materially impact consumers’ purchasing decisions.

In response to California Naturel’s arguments, the FTC decided that the product’s ingredient list and the disclaimer on California Naturel’s website were insufficient to cure the deceptive advertising. With respect to the ingredient list, the FTC noted that the synthetic ingredient was buried within a list of over 30 ingredients and that nothing identified the ingredient at issue as synthetic. With respect to the website disclaimer, the FTC found that it was not prevalent enough given its location at the bottom of the website—particularly in contrast to the prevalence of the “all natural” advertising elsewhere on the website and on the product packaging itself.

Under its authority to issue a remedy for false and misleading advertising, the FTC issued an order prohibiting California Naturel from advertising its products as “all natural” or making other similar representations. More information about the FTC’s decision against California Naturel can be found here.

One likely result is that companies will get sued by its competitors. Such a lawsuit will cost money to defend, cause a distraction to the company, and has the potential to embarrass the company with consumers.

Another potential result is more troubling – an enforcement action by the FTC. Such actions, like competitor lawsuits, are expensive to defend, cause distraction, and have the added problem of communicating to consumers that the government thinks the company is making false statements.

A recent FTC enforcement action decision reinforces the necessity for companies to validate the advertising claims made about their products, particularly if such claims relate to health benefits.

In May 2015, the FTC filed a lawsuit against COORGA Nutraceuticals Corporation and its owner claiming that the Defendants violated the law in claiming that their “Grey Defense” dietary supplements reversed or prevented gray hair. The United States District Court for the District of Wyoming recently granted summary judgment in favor of the FTC, issued an injunction against the company and its owner, and asked the Defendants to pay nearly $400,000.

COORGA marketed Grey Defense to consumers as not only a product that could stop, reverse and prevent the natural graying of hair, but also that it was scientifically proven to do so. The Court found that the COORGA did not have the required scientific evidence to support such claims.  In addition to finding that the company was liable, the Court also found the owner liable because he controlled COORGA’s advertising.  The Court took COORGA’s owner to task for “arrogantly” relying on internet research to validate the company’s claims.  The Court found that this conduct constituted “reckless indifference” and issued an injunction against the company relating to advertising claims across a broad range of products in addition to finding Defendants liable for $391,335.

As this and other FTC enforcement cases make clear, a company must ensure that if it makes scientific claims about its products that it has the testing to back up those claims.

You’ve done your due diligence and you are sure that the content of your advertisement is accurate and fully substantiated with reliable data. All good, right? Not necessarily.

It’s a good first step – but the FTC and advertising laws are not limited to content, they also require that the context and presentation of the advertisement not be misleading or deceptive. The FTC recently re-affirmed this rule in explaining its standards for so-called “native advertising.”

Copyright: adiruch / 123RF Stock Photo
Copyright: adiruch / 123RF Stock Photo

Native advertising is advertising that matches the design, style, and behavior of the digital media in which it is disseminated. One aim of a native advertisement is to blend in with the organic content of a website. Native advertising has been on the uptick in the past several years as advertisers try to convince increasingly savvy internet users to click on their advertisements. According to the FTC, however, a well-designed native advertisement may well be impermissibly deceptive.

In its recent pronouncement, the FTC did not rewrite the rules applicable to contextual advertising; but it made clear that the rules apply to native advertising just like all other advertising.

So what are the rules and what should be done to ensure compliance with them?

According to the FTC, the rule is as follows:

“Deception occurs when an advertisement misleads reasonable consumers as to its true nature or source, including that a party other than the sponsoring advertiser is the source of an advertising or promotional message, and such misleading representation is material.”

Pretty simple – all expect for what qualifies as “material.” Fortunately, the FTC provides a definition of what they consider material:

“[A] misleading representation is material if it is likely to affect the consumers’ choices or conduct regarding the advertised product or the advertisement, such as by leading consumers to give greater credence to advertising claims or to interact with advertising with which they otherwise would not have interacted.”

In other words, if the context and design of the advertisement misleads consumers into believing it is not an advertisement paid for by the advertiser, it very well may be deceptive under the FTC’s rule.

So what factors can an advertiser consider in developing a native advertisement?

Consider the entire context surrounding the advertisement. In assessing whether an advertisement is misleading, the FTC will consider the net impression of the advertisement, not just the statements in isolation. The FTC will “scrutinize the entire ad, examining such factors as its overall appearance, the similarity of its written, spoken, or visual style to non-advertising content offered on a publisher’s site, and the degree to which it is distinguishable from such other content.”

Consider the target of the advertisement. In some circumstances, the target audience for an advertisement will be an important consideration. For example, the FTC may apply different considerations to advertisements directed at children versus those directed at educated, sophisticated consumers.

Consider using a clear disclosure. Time and again, the FTC has suggested or required the use of a clear disclosure that an advertisement disguised as something else is, in fact, an advertisement. The classic example is the use of the word “ADVERTISEMENT” in sufficiently large and clear text on an advertisement in a newspaper that is disguised as a news article. Such disclosures will not always be sufficient – it will always depend on the full context of the advertisement.      

Don’t rely on the consumer “figuring it out” later on. The FTC considers deception harmful and illegal even if the consumer can later figure out that what he or she just clicked on was an advertisement by, for example, looking at the landing page or speaking to a sales representative. Curing the deception after the fact is, under the FTC’s guidelines, likely insufficient.

Read and know the rules. A good starting place is to read the FTC’s Enforcement Policy Statement on Deceptively Formatted Advertisements. And when in doubt, consult with an attorney experienced in advertising law.

Companies that advertise their products as “Made in the USA” should be aware of the Federal Trade Commission’s (“FTC”) stance regarding such advertisements.  The FTC regulates both express claims (e.g. advertising with the phrase “Made in the USA”) and implied claims (e.g. advertising with the phrase “true American quality” or with a U.S. flag symbol).  Before a company decides to advertise in this manner, the FTC requires that the company have a reasonable basis to substantiate the claim at the time it is made.

Made in the USA Banner
Copyright: lifeking / 123RF Stock Photo

So what is a “reasonable basis” for this type of claim?  The FTC itself provides guidance to companies interested in advertising their products as “Made in the USA” in a lengthy Federal Registration Notice: 62 Fed. Reg. 63756.  But even with this guidance, the issue is not black and white.  The FTC explains that a product must be “wholly domestic” or be “all or virtually all” made in the United States in order for a “Made in USA” claim to be substantiated.  But “all or virtually all”—defined by the FTC as meaning that all significant parts and processing that go into the product are of United States origin (i.e. there is only a de minimus amount of foreign content)—may be a difficult standard to apply in some circumstances.

The FTC finds a number of factors relevant to the issue—such as whether final assembly/processing occurs in the United States, the portion of total manufacturing costs attributable to parts and processing in the United States, and how far removed any foreign content is from the finished product.  See 62 Fed. Reg. 63756 at 63765.  In general, the more that occurs in the United States, the better the claim that the product is “Made in the USA.”  In an attempt to provide clarity regarding the “all or virtually all” standard, the FTC’s staff has issued a separate publication meant to convey additional guidance.

Further complicating the issue though, certain states may also have specific prohibitions related to advertising products as “Made in the USA.”  For example, Cal. Bus. & Prof. Code § 17533.7 makes it unlawful to mark products with that or similar phrases if the product, or any part of the product, is “entirely or substantially” made outside of the United States (though there are a couple exceptions).

Advertising products as “Made in the USA” can be tricky.  Before advertising, make sure to consult an attorney to ensure compliance with the FTC’s guidance as well as any state-specific requirements.