INTRODUCTION

In a market economy, businesses are encouraged to compete in pursuit of their own self-interests—making a profit. But what if a business does not compete fairly? What if it lies or cheats? Some argue that in the long run the market will punish the dishonest business. People will eventually discover its tactics and fewer people will buy from it.

But what about the businesses and consumers who were victims of the dishonest business? If you were in their shoes, would you be satisfied knowing that eventually the unscrupulous business may be forced out of the marketplace? All but the advocates of a completely unrestricted market system admit that some ground rules—regulations—are necessary to keep businesses operating within acceptable limits.

TASK

In this lesson, you will examine the ground rules for the advertising of goods and services, who sets them, and who enforces them. You 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

 What Is a Deceptive Ad?

To sell their products, advertisers try to make them look as good as possible. This can involve the use of puffery and weasel words. Puffing is the use of opinions and exaggerated statements. The words "better", "best", "greatest", and "finest" are typically used in puffery advertisements. The information is not intended to be factual. All three of the following advertising claims use puffery:

"Coke is it."
"The best part of waking up is Folger’s in your cup."
"Hoover makes the most powerful vacuum cleaner in America."

A "weasel word" is used in advertising to make a claim look legitimate to the casual listener or reader. On closer examination it, too, proves to be empty and meaningless. For example, a medication that claims to "help control acne" does not actually claim to stop or cure acne. "Help" and "control" are weasels. Commonly used weasel words include: "helps", "acts", "works", "can be", "up to", "as much as", "refreshes", "comforts", "fights", "the feel of", "looks like", "tastes like", and "strengthened".

The dictionary says “deception” refers to a form of trickery involving the selling of goods or services to consumers. But 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. Sellers are allowed some leeway in describing their products, and such statements are typically considered innocent misrepresentations.

Over time, government regulations and court cases have established rules for determining when advertising claims cross over the line to become 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.

What does this mean? As noted previously, puffing and weasel words are generally defended as legal because reasonable consumers are too savvy to believe them. An advertiser also can’t be charged with deception because a very small number of people believe something outlandish such as that "Danish pastry” is made in Denmark.

Advertisements that contain factually wrong statements are clearly deceptive. If a company advertises that its medicine will “cure” cancer, its advertisement is deceptive unless the company has specific proof that the statement is true. This proof must usually come from extensive scientific studies of the product.

An advertisement does not have to be untrue to be deceptive. For example, ads for a loaf of bread claimed that it had half as many calories per slice as its leading competitors. The advertiser failed to say, however, that each slice of its bread was also half as thick as the competitors. The ads were ruled to be deceptive.

When an ad targets a specific audience, the court assesses the effect of the claim or practice on reasonable members of the targeted group. The courts have established that some people are particularly vulnerable to deceptive advertising and deserve special protection. If a company markets a cure to the terminally ill, the practice will be evaluated from the perspective of how it affects an ordinary member of that group. There is concern that the terminally ill might be particularly susceptible to exaggerated cure claims. By the same token, if the same product is being promoted to well-educated doctors, it would be judged in light of the knowledge and sophistication of that group.

It is generally accepted that children do not always have the experience to identify exaggerations and untruths. Other groups that may need extra protection are the elderly, those with limited language skills, persons who are mourning the death of a loved one, people who are trying to lose weight, and people who are trying to stop smoking.

Who Are the Regulators?

In the United Sates, there are two types of advertising regulation. The first is government regulation through federal and state laws. The second is regulations that are self-imposed through standards set by advertisers themselves. 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.

Government. The main governmental regulatory agency for advertising is the Federal Trade Commission. The FTC regulates unfair and deceptive practices on a case-by-case basis and occasionally with industry-wide regulations.

The FTC has the power to require that advertisers prove their claims. If an advertiser says that “tests prove” or “physicians recommend,” they must be able to show test results or the statements from doctors. The agency also requires that this information be available to any consumer who asks for it.

If the FTC determines that an advertisement is deceptive, it can stop the ad and order the sponsor to issue corrections. Corrective advertising provides information that was omitted from a deceptive ad. Some companies are fined for their illegal acts. It is extremely rare, but someone could also be jailed for a deception.

Many states also have laws that regulate deceptive advertising. Their standard is “a tendency or capacity to deceive consumers, even if they do not actually deceive.” This more generous definition allows many state and local governments to try to protect normal consumers as well as more vulnerable groups such as children. As a result, many states have more power than the federal government to stop deception.

Industry. Industry standards are adopted by individual business firms, by advertisers' associations, and often by the media—such as newspapers, magazines, radio, television and the Internet. Publishers and broadcasters realize that dishonest advertising reflects unfavorably on them as well as the businesses doing the advertising.

The National Advertising Division has established a National Advertising Review Board comprised of advertisers, advertising agencies, and the general public to deal with complaints. When the Board receives a complaint from a competing business or consumer, it examines the complaint. If the ad is deemed deceptive, the board puts pressure on advertisers through persuasion, publicity, or, in extreme cases, legal action. A Children’s Advertising Review Unit (CARU), as the name implies, reviews advertising in all media targeting children 12 years old and younger.

Activity 1: Research Ads That May Have Crossed the Line

It is often difficult to draw a line between advertising that is deceptive and that which is not. After your teacher assigns you to a group and case, research one of the following cases using the web links provided as a starting point. Use the information you gather to fill in the sections of the worksheet that correspond with your case number.

1. FTC vs. Hasbro, 1993 and 1996

Hasbro, Inc. -- 1996

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

3. FTC vs. Apple Computer, 1999

In the Matter of Apple Computer
Apple Computer Settles FTC Charges

4. FTC vs. Bumble Bee Seafoods, 2000

Bumble Bee Seafoods, Complaint
Bumble Bee Seafoods, Analysis

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

Ficticious Advertising David Manning

6. FTC vs. Interstate Bakeries Corp., 2002

Interstate Bakeries Complaint
Wonderbread Marketers Settle FTC Charges

7. FTC vs. Exxon, 2003

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

8. State of New Jersey vs. Blockbuster, 2005

Blockbuster Sued Over Late Fees
Blockbuster: Assurance of Voluntary Compliance

9. NAD Forum: Proctor and Gamble, January 6, 2005

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

10. NAD Forum: Pepsi, January 2005

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

11. CARU Forum: McDonalds, 2005

McDonalds vs. Children's Advertising Review Unit McDonalds Corporation Participates in CARU's Self-Regulatory Forum

12. Kyle Gray and CSPI vs. PepsiCo, 2005

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

If your teacher wants you to research other cases, here are some good places to look:

Federal Trade Commission
National Advertising Division
Children’s Advertising Review Unit(CARU)

Activity 2: Report Your Findings

Share your case findings on your case with your classmates. Summarize what you learn on the same worksheet you used above.

THINK ABOUT IT

Using the information on your worksheet and what you have read, think about, and then answer, these questions:

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

 

  1. Why did consumers file cases?
     
  2. Why did businesses file cases?
     
  3. Why did the FTC and state protection agencies file complaints?
     
  4. Why do industry groups get involved in cases?
     
  5. Why is the standard of proof lower for deceptive advertising to children?
     
  6. Identify another vulnerable group and explain why there is concern that it might be more easily misled.
     
  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?
     
  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?


Print your responses and save them for class discussion.

CONCLUSION

Dishonest or deceptive ads hurt both consumers and businesses. Consumers are cheated, and businesses lose sales. For these reasons, both government and industry have taken steps to make sure that advertising is truthful and accurate. Regulations and negative incentives are the primary tools used to discourage deceptive ads in the marketplace. But the cases, you have examined in this lesson show that there are limits to the effectiveness of these tools. 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.

ASSESSMENT ACTIVITY

You will be evaluated on your completion of the worksheet and your responses to the THINK ABOUT IT questions.

EXTENSION ACTIVITY

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

  • 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 you. Most public libraries have reference books with contact information for corporations.

As you do your search, remember that 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 the following organizations that attempt to curb deceptive advertising in the marketplace.