United States: Advertising Law Compliance For Start-Up Companies

Last Updated: May 30 2018
Article by Julia Huston

Publicly launching its first product or service is an exciting time in the life of a start-up company.  In this blog post, we provide some "rules of the road" that will hopefully prevent that all-important first product launch from turning into a legal disaster.  Elsewhere, we have blogged about trademark, patent, domain name, and copyright strategies for start-ups and early-stage companies.

What Rules Apply?

There is no single set of rules that govern advertising, but rather a hodgepodge of federal and state statutes and regulations issued by various agencies (some of which are industry-specific and some of which apply to everyone).  Let's start with the big picture principles.

Lanham Act

In order to comply with the federal Lanham Act, codified at 15 U.S.C. Sec. 1125(a)(1)(B), a company must not engage in false advertising, which can consist of making a false statement or making a statement that is misleading and is shown to actually deceive consumers.  Since few companies knowingly make false statements, most disputes involve fact patterns at the margin – such as statements that can be interpreted different ways, statements that imply something that may not be true, and statements that claim that studies establish something where the studies are of questionable reliability.

Your competitors can sue you for false advertising under the Lanham Act based on advertising claims that you make about their products or your own.  Comparative advertisements are particularly risky, as your competitor is unlikely to appreciate being poked in the eye.

FTC Act

The Federal Trade Commission (FTC) takes an even broader view of what constitutes unlawful advertising, and can open an investigation and/or file a lawsuit against a company that the FTC believes is engaging in unfair or deceptive advertising practices.  If there is anything worse than being sued by a competitor, this is it.  FTC cases often end in heavy fines and judgments or consent decrees that put the company under the supervision of the FTC for as long as 20 years.

Under the FTC Act, codified at 15 U.S.C. Secs. 45(a)(1) & 52(a), any unfair or deceptive advertising is unlawful.  The FTC takes the view that advertising claims must be substantiated at the time that they are made, meaning that the company must be in possession of reliable proof that any reasonable interpretation of its advertising claims is true.

Mini-FTC Acts

The states have adopted so-called mini-FTC Acts, which are largely designed to protect consumers from unfair and deceptive acts and practices. This is where the class action plaintiffs and their lawyers come in.  In general, if you are engaging in conduct that puts you at risk of liability under the federal laws described above, you should be prepared to defend against similar claims brought by groups of consumers.  Indeed, the risk of liability in class actions often informs the decision of how to settle false advertising claims brought by competitors or state or federal governments in other forums.

FTC's Guide to Endorsements and Testimonials

The FTC has issued detailed Guides Concerning the Use of Endorsements and Testimonials (16 C.F.R. Part 255).  This document contains many traps for the unwary, particularly for companies that make statements about their products or other topics on social media.  To summarize just a few of the key takeways:

  • You cannot retweet or otherwise disseminate a statement made by a consumer if you would not be able to make that statement yourself. Essentially, it becomes your own advertising claim and you must be able to substantiate it as readily as any other claim that you make.  This is not intuitive to many companies, as they think they should be able to disseminate truthful consumer statements even if the consumer is reporting results that are not typical.  Because that consumer's statement is true, right?  But the law requires more of you, as the advertiser, and you are at risk if you do not comply.
  • If someone is receiving a benefit in exchange for saying something nice about your product, even as trivial as a coupon or a chance to win something, that fact must be disclosed CLEARLY AND CONSPICUOUSLY. As you can imagine, the FTC has strong feelings about what that requires.  In general, hyperlinks to detailed disclosures will not be considered to be effective, and the FTC prefers that real-time disclosures such as #Ad, Sponsored or PaidAd appear at the beginning rather than at the end of social media posts, in part because they will not be cut off when they are recirculated by others.
  • If you pay or otherwise provide an incentive for a blogger or other third party to talk about your product, and they fail to make appropriate disclosures when they do so, you can be liable even if you never circulate that statement yourself.

If your company is going to engage with the public via social media and/or pay or incentivize endorsers, it is imperative that the people responsible for your advertising – which includes email blasts as well as posts on Facebook, Instagram and Twitter – be intimately familiar with the FTC guidelines regarding endorsements and testimonials.

FTC's Green Guides

If you will be adverting the environmentally friendly aspects of your products, be sure to comply with the FTC Green Guides (16 C.F.R. Part 260).  This guidance provides, in part:

  • Don't make broad, unqualified claims that your products are "eco-friendly" or "environmentally friendly" unless you can prove that they have specific and far-reaching environmental benefits in every way that consumers might perceive as important. Hint:  The FTC considers such claims to be nearly impossible to substantiate.
  • Don't make an unqualified degradable claim unless your entire product or package will completely return to nature within one year after customary disposal.
  • Don't make unqualified claims regarding compostable, recyclable, recycled content, or source reduction unless you know exactly what the FTC requires for such claims.
  • In case you are thinking of making up your own "seal of approval" that applies only to your products – don't. Or at least don't do it without the advice of counsel, as the FTC and the courts have not looked kindly upon this type of conduct and you will need to proceed carefully to mitigate the risk.

For more information about the current state of the law in this area, see David Kluft's excellent blog post titled Environmental False Advertising in 2017/2018.

FTC's .Com Disclosures

Any company that advertises on the internet – which is pretty much every company – needs to comply with the FTC's .Com Disclosures.  This guidance provides detailed information regarding how to make clear and conspicuous disclosures on websites, blogs, social media posts and the like and provides some useful examples in an appendix.

Importantly, the FTC does not really care if you can't fit your entire disclosure within the allowable number of characters on Twitter.  If a disclosure is required, the FTC says that you should do it right or not at all.  In most cases, that means including the most important elements of the disclosure in the same visual display as the advertising claim, as opposed to providing a hypertext link to another document.

Industry-Specific Statutes and Regulations

You should be familiar with the rules of every federal and state agency that might regulate your products and comply with them.  For example, the Food and Drug Administration (FDA) has issued very specific regulations about what is required to make "less sugar" claims in foods.  But, for God's sake, under no circumstances should you approach the agencies and ask their advice unless you are looking to take "no" for an answer.

For example, some companies make the mistake of asking the FDA whether they can make certain statements in their advertising and customer communications about the benefits of their products that might be considered "off label."  Bad idea.  If you have to ask, there is a high risk that the FDA will say no, and as a practical matter no agency is incentivized to find a path forward to help you market your product in the most effective manner.

Mark Mansour has set forth more tips for food and dietary supplement makers, with particular attention to the FDA and FTC, in a prior blog post here.  Other blog posts have summarized recent advertising cases involving weight loss and cognitive functioning claims.

In connection with a widely publicized case involving so-called toning shoes, Neil Austin observed that the FTC's substantiation standard of requirement of "competent and reliable scientific evidence" for certain health and fitness-related claims depends on the nature of the claim and can be difficult to predict.  In that case, the FTC held that muscle strengthening claims must be supported by "at least one adequate and well-controlled human clinical study . . . that conforms to acceptable designs and protocols [and] is of at least six-weeks duration," whereas weight loss claims require "at least two adequate and well-controlled human clinical studies . . . conducted by different researchers, independently of each other, that conform to acceptable designs and protocols" (without any mention of duration).  You get the idea.  It is extremely easy for an advertiser to misstep in this area.

Given the risks involved, it is important for the sellers of regulated products to vet their advertising claims with an attorney experienced in advertising law if they feel they may be operating in the "gray area" or want to evaluate their potential liability.

Do's and Don'ts

For most start-up companies, pragmatism and risk management are the guiding principles.  With that in mind, here are some tips for your first product launch:

  • Assume that anything you say publicly will be considered advertising, and make sure that your advertising complies with all of the applicable rules. Your advertising includes:
    • Email blasts
    • Posts on Facebook, LinkedIn, Instagram, Twitter, and other platforms
    • Product packaging
    • Your website
    • Blogs
    • Flyers and materials that you disseminate to customers
  • Make sure that every statement in your advertising is true and substantiated, and that every reasonable interpretation or "takeaway" from your ad is likewise true and substantiated.
  • Closely supervise the 20-somethings that are drafting your social media posts and other advertising content.
  • Don't let your advertising firm, if you are lucky enough to afford one, run your campaign without satisfying yourself that the ads comply with the applicable rules. Ask questions and challenge assumptions.
  • Establish protocols for reviewing and approving social media posts and other public-facing communications from the outset. Once individuals feel empowered to speak on behalf of the company, it can create a permissive culture that is difficult to change.
  • Refrain from high-risk conduct unless you conduct a risk assessment and are prepared to weather any storms that result. The following conduct is more likely to draw objections than more run-of-the mill advertising:
    • Comparative advertisements
    • Advertisements that say negative things about your competitors
    • Inflammatory rhetoric, even if you think it is puffery
    • Reliance on studies/facts as to which there is not consensus in the industry
    • Ambiguous statements where not all interpretations can be proven true
  • Confer with experienced advertising counsel in close cases.
  • Respond promptly and courteously in the event that you get an objection.
  • Be aware that your insurance policies, including for general liability and director/officer liability, may provide coverage for advertising-based claims. If you receive an objection and you think insurance coverage may apply, put your insurer on notice immediately.
  • If you wish to bring a false advertising claim against a competitor, be aware of the different procedures and venues that are available, including the National Advertising Division of the Council of Better Business Bureaus.

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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