The crisp autumn breezes and reemergence of everything
pumpkin-flavored makes us think that it's the perfect time for
an All About Advertising Law seasonal refresher.
Today's topic: how far liability can extend in false
advertising actions. Exactly who can be held responsible for
a particular advertisement? These days it seems like
practically everyone, except perhaps the viewer.
We all know that a company which makes claims about its product
directly is open to enforcement from the FTC, but what about other
parties involved in creating the advertisement -- like a
product's spokesperson, an advertising agency, the inventor, a
product's endorser and the producers of a commercial? It
may surprise you to know that the FTC and courts have extended
liability on this issue as far as the harvest moon.
Generally speaking, any party involved in the
"creation" of a marketing claim is open to liability
regardless of the primary source of the product's
advertisement. This means that many parties (including producers,
endorsers, advertising agencies, companies that review and approve
distributor advertising and product inventors) have been held
liable under the theory that they were involved in the creation of
the advertisement. For example, in the Porter & Dietsch case, a drug store
retailer was held liable for false claims about a diet pill, even
though the retailer had no involvement in generating the
advertisement itself. Instead, the diet pill manufacturer
provided the marketing materials to the retailer and the retailer
simply disseminated the ads in its own name. The retailer in
Porter argued that it was exempt from liability because it
did not play any role in the development of the advertisements, but
the court found that once the retailer actively involved itself in
the promotion of the product, it had a meaningful opportunity to
evaluate the appropriateness of any advertising claim. As a
result, the retailer was liable under Section 5.
Catalogues, shopping networks and affiliate marketers have also
taken a hit on the theory that they rebroadcast claims (made by the
original advertiser) in order to sell the product. In its
complaint against Nu Skin International, the FTC alleged
that a multilevel marketing company was liable for false
advertising because it "condoned and approved" misleading
advertising materials disseminated by its distributors. In
FTC v. Chinery, the FTC argued that a
licensor was liable because its review of the advertising materials
could have given it requisite knowledge of misleading claims. For
catalogue companies, the Sharper Image was held strictly liable
for unsubstantiated claims of items (including an exercise device
and dietary supplement) sold in its catalogues.
And the list goes on. For advertising agencies, there is
also potential strict liability for claims, as well as a "knew
or should have known" standard for substantiation. As
applied to producers, the court in Modern Interactive Technology held an
infomercial producer liable for deceptive claims made for a weight
loss system. Spokespeople can also be held liable as an
active participant in the advertising if they knew or had reason to
know that the claims they are rebroadcasting were false.
You may be wondering how entities aside from the advertiser can
protect themselves from this kind of liability. An indemnification
agreement can be one risk limitation strategy, but it will not
protect a company from FTC scrutiny. A better approach is to
exercise caution with any product claim and to always make a good
faith attempt to request and review substantiation materials before
you publish, advertise, distribute or sell a particular
product. The FTC has indicated that it's better to have
made an attempt (even if it's flawed effort) to review
substantiation materials than to never have asked for the materials
at all. So when it comes to liability for false advertising claims,
don't get caught in the seasonal cold: it's best to
exercise caution at every stage of ad distribution.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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As we have previously discussed, if you want your electronic contracts to be enforceable, it is a best practice to require the counterparty to affirmatively accept the contract by checking a box or clicking a button.
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