Deceptive Advertising: Crossing the Line

EDUCATOR'S VERSION

This lesson printed from:
http://www.econedlink.org/e663

Posted November 1, 2006

Standards: 4, 16

Grades: 9-12

Author: Patricia Bonner

Posted: November 1, 2006

Updated: April 3, 2014

DESCRIPTION

Businesses use advertising to tell consumers about the goods and services they are selling. Businesses hope that their advertisements will convince people to buy their products. In this lesson, students examine the ground rules for advertisements of goods and services, why we need rules, who sets them, and who enforces them. They research cases in which, deceptive advertising has been charged and analyze whether the negative incentives for this illegal practice are sufficient to deter future violations.

KEY CONCEPTS

Competition, Incentive, Legal and Social Framework, Regulation, Role of Government

STUDENTS WILL

  • Distinguish between exaggeration and illegal deception in advertising.
  • Learn how governmental and self-imposed regulations are used to discourage deceptive advertising and maintain a fair marketplace for both buyers and sellers.
  • Research cases in which deceptive advertising has been charged.
  • Assess whether the negative incentives in such cases are sufficient to deter future violations.

INTRODUCTION

Show the students two ads in a current magazine or newspaper for a product that they might purchase. Use one ad that focuses on price --for example:

  • A clothing ad announcing $XX off.
  • Rent 2 get 1 free video rentals coupon.

Use a second ad that is more subjective --for example:

  • A movie promo praised by a movie critic
  • An ad with an image that suggests a certain pair of jeans or perfume will make the wearer sexy.

Display the ads one at a time and ask:

1. What does this ad promise (or suggest) will happen if you buy the good or service advertised?

[Answers will depend on the ad.]


2. How many of you believe the ad? Why or why not?

[Responses may be diverse. Some students may be skeptical of ads in general. They may point out that the purpose of advertising is to make products look or sound good to potential buyers. They may relate an experience in which they were misled by an ad. On the other hand, there may be students who have purchased a product based on advertising and found that the promise was fulfilled—this is especially likely to be true of ads promoting price reductions. At the extreme, some students may falsely believe that ads must be true to be printed or aired.]

[Note to teacher: Tell the students it is good to be skeptical of advertising. There are rules that govern what can and cannot be claimed in advertising, but some ads slip over the line and are deceptive. In this lesson, the students will examine cases in which advertising crossed the line. Explain that in this lesson the students will examine the ground rules for the advertising of goods and services, who sets the rules and who enforces them. They will research cases in which deceptive advertising has been charged and analyze whether the present penalties for this illegal practice are sufficient to deter future violations.]


PROCESS

 Divide the students into teams of 2-3 persons. A total of 12 teams works well as it corresponds with the 12 suggested case studies in Activity 1, but you can use any number. If you decide to use the 12 cases, assign each team a number from 1 to 12.

Working in their teams at the computer, the students should read and follow the instructions in the student version. When they get to Activity 1, the case study they will research will correspond with their team number.

What Is a Deceptive Ad?

In this first section of the lesson, it is explained that advertisers want to make what they are selling look as good as possible. This can involve the use of puffery and weasel words. Definitions and examples are provided for both techniques. The students are warned that puffing and weasel words are generally not considered deceptive in the eyes of the law. It is assumed that most “reasonable consumers” know a seller will exaggerate a bit.

Over time, government regulations and court cases have established rules to determine when advertising claims cross over the line and become to illegal deception. Advertising is generally considered deceptive under federal law if it involves these elements:

1. A representation, omission, or practice that is likely to cause a substantial segment of potential customers to have a false belief about the advertiser’s or a competitor’s product.
2. The deception is material—it is likely to influence the purchasing decision. Consumers are likely to have chosen differently if there had not been the deception.
3. Someone has been or is likely to be injured as a result of the deception. The party harmed is usually a business that has lost sales to the advertiser or by a lessening of the goodwill associated with its products.

Examples are provided of what does and does not constitute deception. Children and other groups that receive special protection because they are considered especially vulnerable to deceptive ads are identified.

ADDITIONAL INFORMATION FOR THE TEACHER: Claims for false advertising can be brought by a competitor under the Federal Trademark Act, 15 USCA § 1125 (also known as the Lanham Act). The law says that: 'Any person who, on or in connection with any goods or services ... uses in commerce any ... false or misleading description of fact, or false or misleading representation of fact, which ... in commercial advertising or promotion, misrepresents the nature, characteristics, qualities, or geographic origin of his or her or another person's goods, services, or commercial activities, shall be liable in a civil action by any person who believes that he or she is or is likely to be damaged by such act.'

The Lanham Act was enacted in 1946 and amended in 1988. Neither the original act nor the amendment provides much guidance on interpretation. As a result, court decisions over time have resulted in the three elements identified above and provided to the students in this lesson.

In 1983, FTC Chairman James Miller prepared a FTC Policy Statement on Deception for Congress that summarized the agency's views on deception based on previous court decisions. The purpose of the letter was to provide some guidance to the public as to when practices were crossing the line into illegal practice.

Consumers cannot bring suit under the Lanham Act because its stated purpose is to 'protect persons engaged in ... commerce against unfair competition,' as opposed to protecting consumers. State law has traditionally provided consumers with remedies for losses incurred from misrepresentation.

Why would firms engage in false advertising? Profit-maximizing firms may be willing to incur fines when the fine is less than the profit gained from false advertising. Also, many firms still take the risk of engaging in false advertising, regardless of the potential customer loss, because the benefits outweigh the risks for them. For example, in 2001 Sony ran an advertising campaign for several of its upcoming movies creating a ‘fake' critic that made comments about the movies. By the time consumers and regulation agencies found out about the deceptive advertising, Sony's ticket sales looked pretty good. 

Who Are the Regulators?

Two general types of advertising regulation in the Unites States are described. The first is government regulation through federal and state laws. The main government regulatory agency for advertising is the Federal Trade Commission. But state regulations are often more 'consumer friendly' and have more 'teeth' in court.

The second type of regulation is self-imposed through standards set by advertisers themselves. The National Advertising Division (NAD) has established a National Advertising Review Board comprised of advertisers, advertising agencies, and the general public to deal with advertising complaints. A Children’s Advertising Review Unit (CARU), as the name implies, reviews advertising in all media directed to children 12 years old and younger.

Governmental and self-imposed regulations use negative incentives to discourage deceptive advertising. A negative incentive is a penalty that people receive for a specific behavior.

Activity 1: Research Ads That May Have Crossed the Line

THe students are told it is often difficult to draw a line between advertising that is deceptive and that which is not. They are directed to research one of the following cases, using the web links provided as a starting point. Using the information they gather, they are to fill in the block on their worksheet that corresponds with their worksheet number.

For your reference, summaries of the cases are provided below as well on a completed worksheet.

1. FTC vs. Hasbro, 1993 and 1996

Basbro/Griffin Bacal -- 1993
Hasbro, Inc. -- 1996

In 1993, the FTC charged Hasbro and its advertising agency, Griffin Bacal, with misrepresenting GI Joe toys in television ads and packaging. In a consent agreement, the companies were prohibited from misrepresenting any performance characteristic of any toy they manufacture or promote in the future. Hasbro paid a $175,000 penalty. Both companies were told they could be penalized $10,000 per incident for any future violations of this agreement. In 1996, Hasbro, Inc. agreed to pay $280,000 for such violations. A Hasbro commercial showed children operating Hasbro’s “Colorblaster” paint sprayer toy with very little effort. In fact, Hasbro used a motorized air compressor during filming to provide the pressure necessary to operate the toy with ease and to achieve the results shown in the commercial.

2. FTC vs. New Balance Athletic Shoes, Inc. and Hyde Athletic Industries, Inc, 1996

New Balance Athletic Industry, Inc.
FTC Vs. New Balance and Hyde Athletic

The Federal Trade Commission charged these manufacturers with misrepresenting that ALL of their athletic footwear is made in the United States when in fact a substantial amount is made wholly abroad. In the settlement agreement, both companies were prohibited from stating or implying, in any manner, that footwear made totally abroad was made in the United States. The proposed settlements did not address 'Made in USA' claims for shoes made partially from domestic parts and labor and partially from foreign parts and labor.

3. FTC vs. Apple Computer, 1999

In the Matter of Apple Computer
Apple Computer Settles FTC Charges

Apple Computer settled with the FTC on charges that its 'Apple Assurance' program was deceptive. The program offered consumers free live access to technical support personnel for as long as they owned their Apple product. Apple later began charging these consumers $35 for such access. The agreement required Apple to reinstate its promise to customers and provide live, free technical support for as long as they own their Apple products. The agreement also required Apple to reimburse each Apple Assurance consumer who paid a fee for technical support.

4. FTC vs. Bumble Bee Seafoods, 2000

Bumble Bee Seafoods, Complaint
Bumble Bee Seafoods, Analysis

The FTC received a complaint against Bumble Bee for selling cans of tuna with labels that included the statement: '75¢ OFF Next Purchase. Details Inside Label.' The inside of the label which cannot be read until the label is removed after purchase disclosed that consumers were not eligible for the 75¢ off unless they purchased five additional cans. The FTC determined the practice was misleading. The company was told to stop the practice. It was also ordered to establish a coupon program offering 75¢ off the purchase of any two cans or multi-packs of the tuna.

5. Group of Film Goers vs. Sony Pictures Entertainment, 2001

Ficticious Advertising

A class action suit was filed against Sony by a group of filmgoers who accused the studio of citing a fake movie critic in ads for several films. While Sony did not admit any wrongdoing, it did agree to a $1.5 million settlement of the suit. Moviegoers who saw the films praised by the fake movie critic can request a $5 ticket reimbursement. Any funds remaining after claims are satisfied will go to charity. On its own,the company temporarily suspended the two marketing executives who created the fake critic.

6. FTC vs. Interstate Bakeries Corp, 2002

Interstate Bakeries Complaint
Wonderbread Marketers Settle FTC Charges

The marketers of Wonder Bread, Interstate Bakeries, Corp. (manufacturer) and Campbell Mithun (ad agency) claimed that the added calcium in the bread could improve children’s brain function and memory. The FTC determined the company was unable to prove the claims. A settlement was reached forbidding the company to make certain types of health benefit claims in the future, unless they have adequate substantiation.

7. FTC vs. Exxon, 2003

Ads for Exxon Gasoline are Deceptive, FTC Says
Exxon Corporation: Complaint

The FTC charged Exxon Corporation with misleading consumers by claiming its Exxon 93 Supreme gasoline would make engines cleaner and reduce auto maintenance costs. Exxon failed to prove these claims. The case was one in a series of cases challenging deceptive advertising claims for high octane fuel. Amoco Oil Company, Sun Company, and Unocal Corporation had previously settled with the FTC. In this case, consumers may be paying as much as 20 cents a gallon more for the premium gasoline. The company was told to stop making the claims.

8. 47 states vs. Blockbuster, 2005

Blockbuster Sued Over Late Fees
Blockbuster: Assurance of Voluntary Compliance

Attorneys general in 47 states sued Blockbuster, Inc for claiming it no longer charges late fees on video rentals. Blockbuster promoted a 'No More Late Fees' policy but did not tell customers about other fees they would be charged if they kept videos or games. Customers who kept a rental for one week past the due date had no additional charge. After that, they were charged a restocking fee of $1.25. If an item was kept for more than 30 days, Blockbuster charged the customer the retail value of an item. Blockbuster agreed to stop the practice. It must also 1) post notices in stores telling customers the conditions of the program; 2) refund or credit customers for items purchased; and 3) pay $630,000 to the states to reimburse them for the expenses of litigation.

9. NAD Forum: Proctor and Gamble, July 2005

www.nadreview.org/docView.aspx?DocumentID=5198

The National Advertising Division (NAD) has recommended that P&G modify its advertising for Bounty Paper Towels. A concern was raised by Georgia-Pacific Corporation, manufacturer of Brawny Paper Towels. The ads in question presented a side-by-side, wipe-and-tear demonstration aimed at portraying Bounty’s wet-strength advantage. NAD concluded that the product demonstration was essentially a laboratory/technical test shown in the context of “normal consumer use.” NAD determined the demonstration was misleading. Though P&G disagreed with NAD’s conclusion, it has agreed to comply with NAD's recommendation in future advertising.

10. NAD Forum: Pepsi, January 2005

www.nadreview.org/docView.aspx?DocumentID=4866

The National Advertising Division (NAD) announced that Frito-Lay, Inc. was able to substantiate its advertising claims for its Lay's Stax® Original Potato Crisps. The truth and accuracy of the advertiser's claims was brought to the attention of the NAD by The Procter & Gamble Company, maker of Pringles® Original Potato Crisps. NAD determined that Frito-Lay’s independent double-blind test provided a reasonable basis for its claim that "America prefers the taste of Lay's Stax® Original Potato Crisps over Pringles® Original Potato Crisps."

11. CARU Forum: McDonalds, 2005

McDonalds vs. Children's Advertising Review Unit

The Children’s Advertising Review Unit (CARU) recommended that McDonald’s Corporation clearly depict all options available as part of its Mighty Kids Meals in future commercials. In its routine monitoring of children’s advertising, CARU found commercials that featured only a double cheeseburger, a small fries and a 16-ounce container of soda. CARU was concerned that children might believe that these were the only options available when, in fact, the company also offered alternate entrees, fruit/vegetable items, and drinks. McDonald’s disagreed with CARU’s determination, noting that the company provides extensive information about menu selections in the restaurants. The advertiser also noted that the commercials had completed their on-air rotation. The company stated it would take the recommendations into consideration in its future advertising.

12. Kyle Gray and CSPI vs. PepsiCo, 2005

Tropicana to Change Labeling of Fruit-Flavored Drinks
Tropicana Settlement Agreement

Under state consumer protection laws, a New Jersey consumer Kyle Gray and the nonprofit Center for Science in the Public Interest (CPSI) sued PepsiCo, claiming that its Tropicana Peach Papaya drink had no peach juice and no papaya juice. The beverage, in fact, had only a very small amount of pear juice with water and corn syrup being the main ingredients. In a settlement, PepsiCo agreed to make some changes to its labels which will help consumers understand that the beverage is a flavored drink and not 100 percent juice. PepsiCo has agreed to pay Gray $2,500, to make a $100,000 donation to the American Heart Association, and to provide an additional $50,000 to cover the legal expenses of those who filed the suit.

Activity 2: Report Your Findings

The students are told to share their case findings with their classmates so that everyone has a summary of the cases studied.

To make this an orderly process and make sure all students participate, have each team divide equally the number of cases the class has researched. For example, a team of two would divide the 12 cases in half with each student having responsibility for 6. Students on teams comprised of 3 people would each have responsibility for 4 cases.

Instruct the teams to position themselves at different locations around the classroom with a sign in front of their desks indicating the name and number of the case they researched.

One student from each team should remain at the desk to share information with classmates while other team members move around to the other stations to collect information. When a team member has finished collecting data on her assigned cases, she should switch with their teammate who is sharing information.

[Note to teacher: An alternative approach for sharing information is to have each team report their findings to the class as a whole. The first five questions in the Conclusion section of this lesson offer a format to this approach.]

THINK ABOUT IT

The students are also challenged to do some critical thinking. They are instructed to prepare and print out responses to these questions which will be used in class discussion. Answers are provided below.

The complaints in the cases you researched were filed by consumers, businesses and other interested parties.

 

  1. Why did consumers file cases? [Because they felt they were in some way cheated or misled.]
     
  2. Why did businesses file cases? [Because they felt a competitor’s complaint misled consumers and hurt their product’s image or sales.]
     
  3. Why did the FTC and state protection agencies file complaints? [Because they believe government has a responsibility to enforce laws and make sure there is fair play in the marketplace.]
     
  4. Why do industry groups get involved in cases? [Because it is in the best interests of industry to be viewed as supporting a fair marketplace. Businesses want a fair chance at success.]
     
  5. Why is the standard of proof lower for deceptive advertising to children?[Because they are considered a vulnerable group that has less knowledge and expertise needed to evaluate advertising.]
     
  6. Identify another vulnerable group and explain why there is concern that it might be more easily misled. [Groups may include the elderly, those for whom English is a second language, persons trying to quit smoking or lose weight, those who are terminally ill, and those who have just experienced the death of a loved one. Children and those with limited language skills may have difficulty separating truth from fiction. For others, the issue is their emotional state and how this might influence their decision process.]
     
  7. Does where a claim is filed --for example, with the FTC, the NAD, or a court-- seem to have any impact on results in these cases? [Answers may vary depending on the specifics of the cases examined but it can generally be concluded that: The FTC usually just threatens a financial penalty for future violations. If the practice is repeated, the FTC then assesses a financial penalty. Complaints filed in court by consumers were those with the biggest financial penalties. There were no financial penalties in cases handled by NAD and CARU.]
     
  8. Do you think the penalties in these cases are sufficient negative incentives to stop these companies and others from being deceptive in the future? [Some students may point out that despite the penalties, violations continue to occur. They may have noticed that some companies are repeat offenders. Others may argue the amount of deception might be a lot worse if we didn't have the penalties and we can't really measure how much deception is being stopped by current penalties.]

Conclusion:

When the students have completed their research and worksheets, ask these questions (which include the THINK ABOUT IT questions in the student version).

If time is limited, you may want to start with question 5. Questions 1 through 4 offer a framework for having students make oral reports to the class as a whole.

1. In this lesson you learned that the Federal Trade Commission is the agency responsible for the enforcement of federal laws on deceptive advertising. Which of the cases you researched were submitted to the FTC?

If you use the case studies identified in the student version, students will report these cases summarized on their worksheets:

  • FTC vs. Hasbro and the advertising agency, Griffin Baca, 1993 and 1996.
  • FTC vs. New Balance Athletic Shoes, Inc and Hyde Athletic Industries, Inc, 1996
  • FTC vs. Apple Computer, 1999
  • FTC vs. Bumble Bee Seafoods, 2000
  • FTC vs. Interstate Bakeries Inc. (manufacturer of Wonder Bread) and Campbell Mithun (ad agency)
  • FTC vs. Exxon, 2003


2. States also have regulations prohibiting deceptive advertisements. Which of your cases were filed at the state level?

Again, responses depend on cases studied. Those identified in the student version are:

  • 47 states vs. Blockbuster, 2005
  • Kyle Gray (individual New Jersey consumer) and Center for Science in the Public Interest (CSPI) vs. PepsiCo, 2005


3. What other legal avenues were used by those who believed they had been harmed by deceptive advertising?

The one example included in the suggested 12 lessons is the class action suit filed by film goers against Sony Pictures Entertainment in 2001.

4. You have read that certain industry groups also take action when deceptive advertising is suspected. The most active organizations are the National Advertising Division (NAD) and the Children’s Advertising Review Unit (CARU). Both organizations monitor ads for deceptive practices. NAD also provides a forum where a business can air a complaint against another business.

Which cases were handled through these organizations?

  • NAD Forum: Georgia-Pacific Corporation (manufacturer of Brawny Paper Towels) vs. Procter and Gamble (maker of Bounty Paper Towels), 2005
  • NAD Forum: Procter & Gamble Company (maker of Pringles® Original Potato Crisps) vs. PepsiCo/Frito-Lay, Inc. (maker of Lay’s Stax® Original Potato Crisps), 2005
  • CARU Forum: McDonalds, 2005

5. The complaints in the cases you researched were filed by consumers, businesses and other interested parties. Answers to the questions that follow will vary in detail but the responses will have some common elements.
a. Why did consumers file cases? [Because they felt they were in some way cheated or misled.]
b. Why did businesses file cases? [Because they felt a competitor’s complaint misled consumers and hurt their product’s image or sales.]
c. Why did the FTC and state protection agencies file complaints? [Because they believe government has a responsibility to enforce laws and make sure there is fair play in the marketplace.]
d. Why do industry groups get involved in cases? [Because it is in the best interests of industry to be viewed as supporting a fair marketplace. Businesses want a fair chance at success.]

6. In the cases involving advertising to children, the standards for proving deception are lower.
a. Do you think the standard was lower in the cases you researched? [Answers will vary. Students may think that a “reasonable adult consumer” would have realized that Hasbro GI Joe toys couldn’t do what they were shown doing.]
b. Why is the standard of proof lower for ads to children? [Because they are considered a vulnerable group that has less knowledge and expertise needed to evaluate advertising.]
c. What other groups are considered vulnerable populations and why? [Groups may include the elderly, those for whom English is a second language, persons trying to quit smoking or lose weight, those who are terminally ill, and those who have just experienced the death of a loved one. Children and those with limited language skills may have difficulty separating truth from fiction. For others, the issue is their emotional state and how this might influence their decision process.]

7. Were there any cases in which a claim was denied or dismissed? Why? [In the NAD Forum, Pepsi was able to provide results of a double-blind test proving its claim that “America prefers the taste of Lay’s Stax® Original Potato Crisps over Pringles® Original Potato Crisps*]

Most deceptive advertising cases—-regardless of where they are filed—-are settled voluntarily. The alleged violator may or may not agree with the charge, but it usually agrees to 1) pull the ad if it is still running and 2) not repeat the deceptive practice.

8. Does where the claim is filed seem to have any impact on the financial penalty?

Answers may vary depending on the specifics of the cases examined but it can generally be concluded that:

  • The FTC usually just threatens a financial penalty for future violations. If the practice is repeated, the FTC then assesses a financial penalty.
  • Complaints filed in court by consumers were those with the biggest financial penalties.
  • There were no financial penalties in cases handled by NAD and CARU.


9. Were any of the violators told to make up for a loss to consumers or competing businesses?

Again, answers vary in the specifics but generally:

  • In a few cases involving the FTC and the courts, a violator was told to make up a consumer loss—for example, reimbursing Apple consumers who had paid for tech support, coupons for Bumble Bee tuna, and restitution to movie goers who bought tickets to specific Sony movies.
  • Competing businesses are rarely compensated for their losses in terms of image or sales.


10. Was anyone personally penalized for the actions of the company—for example, put in jail? [Jail is extremely rare; however, SONY did decide on its own to temporarily suspend the two marketing executives who created the fake movie critic.]

11. Do you think the penalties in these cases provide sufficient negative incentives to stop these companies and others from being deceptive in the future? [Some students may point out that despite the penalties, violations continue to occur. They may have noticed that some companies are repeat offenders. Others may argue the amount of deception might be a lot worse if we didn't have the penalties and we can't really measure how much deception is being stopped by current penalties.] Using this visual (SONY Net Profits), remind the students of case 5, in which Sony agreed to a $1.5 millions settlement for using fake critiques. Point to the $397 million net profits on the visual that SONY made from the films included in the class action suit.

12. Can you explain in terms of costs and benefits why a company such as SONY might be willing to risk using deceptive advertising? [Profit-maximizing companies might view the financial penalties as a relatively small cost when compared to the potential increase in sales and profits.]

13. What implication does this have for policymakers who want to discourage deceptive advertising? [Penalties will have to be substantially larger to create a negative incentive.]

ASSESSMENT ACTIVITY

Assessment is based on students' completion of the worksheet and their answers to discussion questions. These are the answers for the worksheet. Responses to the THINK ABOUT questions are provided as part of the conclusion.

These assessment rubrics will assist you in establishing evaluation criteria.

CONCLUSION

gavel and flagDishonest or deceptive ads hurt both consumers and businesses. Both government and industry have taken steps to make sure advertising is truthful and accurate. Regulations and negative incentives are the primary tools used to discourage deceptive ads in the marketplace. Through these cases, it becomes apparent that there are limits to their effectiveness. There is no guarantee that all ads are honest and true. Consumers must be constantly on guard and have a healthy skepticism for what is claimed by sellers in the marketplace.

EXTENSION ACTIVITY

Have the students:

1. Watch television, listen to the radio, surf the Internet, or look at a magazine to find an advertising claim that they consider deceptive. Write a letter asking for evidence that supports the claim. To find the address for the business, students can:

  • Do a web search for a company web site. Look for a “Contact Us” link that provides addresses.
  • Visit the online directory of several hundred corporations maintained by the Federal Citizen Information Center's (FCIS) page Corporate Consumer Contacts.
  • Ask a librarian to help them. Most public libraries have reference books with contact information for corporations.

As they do their search, keep in mind the name of the manufacturer or parent company is often different from the brand name. The Thomas Register of American Manufacturers—a book available at many public libraries—lists the manufacturers of thousands of products.

2. Research and prepare a report on one of these organizations that attempts to curb deceptive advertising in the marketplace.

It might also be interesting to have the students compare the number of cases handled by each organization.