Customers were snapping up copies of a DVD featuring guitar lessons that had been getting high marks from online reviewers and bloggers. The sales success for Legacy Learning Systems, the DVD’s distributor, showcased the promotional reach and power of the Web.
But the Nashville company also drew a federal complaint under truth-in-advertising laws — a business risk that is constantly evolving as the Internet revolutionizes communications. The Federal Trade Commission claimed that Legacy's $5 million surge of orders stemmed from deceptive advertising. Bloggers touting the guitar lessons were posing as ordinary consumers expressing independent views, but were actually company marketing affiliates working on commission, the agency alleged.
Small business owners can run afoul of advertising regulations if they assume that online communications, such as blogs and Twitter, are so informal that they don't amount to advertising messages, said attorney Randall Miller, who has represented companies of all sizes in marketing cases.
"Facebook, bloggers, e-mail — it's all advertising,'' said Miller, a partner at Arnold & Porter LLP. "There's no question that all of that stuff is potentially actionable.''
Whatever form of communication they use, business owners can avoid trouble by following the same basic principles that would apply to a full-page ad in the local newspaper, said Mary Engle, associate director of advertising practices at the FTC.
“The ad needs to be truthful and not misleading," Engle said. “They need to have support or a valid basis for anything they have in the ad.’’
That core requirement for proof of advertising claims is called "substantiation.'' For example, marketers of weight-loss products must back up their ads with valid studies. It's not enough to gather testimonials or endorsements by satisfied customers. In fact, testimonials included in an ad can put a company on the wrong side of the law. Even if the company itself makes no claim that its product causes weight loss, a testimonial by a happy customer who dropped 20 pounds could be seen as deceptive.
“It’s considered a claim that other people will get that result, too,’’ Engle said.
But what about a fan who boasts about lost pounds on the company Facebook page? Some courts have indicated that businesses may be held responsible for the content of testimonials if they've encouraged customers to post about their experiences, Miller said.
Such thorny questions can be challenging for big corporations with expert attorneys. For small business owners, many advertising strictures can come as unwelcome surprises.
Engle said the FTC recognized back in 2001 that small businesses needed some detailed guidance about advertising compliance as the changing Web created inexpensive new ways for them to communicate with consumers. In 2009, the FTC revised its guidelines on endorsements, warning companies that consumers have a right to know if online reviewers have received commissions or free products.
Without admitting violations of that policy, Legacy Learning agreed to pay $250,000 to settle the FTC's 2011 complaint, and now requires its marketing affiliates to post prominent disclosures about their financial ties to the company near each review.
The FTC is now considering a further set of guidelines for the burgeoning environment of online social media and mobile devices.
In the meantime, Miller advises small businesses to keep files containing the evidence for each statement made in every ad or online claim. That way, they won’t need to scramble for proof if they’re later sued. Substantiation is particularly important when a small company compares its product with a competitor’s, said Miller. The rival is very likely to challenge the ad in court, he said.
Advertisers must guard against misleading the public, even when making statements that are literally true, Miller said. They can be accused of making an implied claim. For example, dental floss makers sued a manufacturer for saying that clinical studies showed its mouthwash reduced the risk of gum disease as effectively as flossing. The floss manufacturers said this statement implied that consumers could forego flossing, and use the mouthwash only, Miller said.
Truth-in-advertising rules apply not only to consumer promotions, but also to private letters offering goods or services to potential business partners, such as contractors or consulting clients. “That’s just as much advertising as a toothpaste commercial,’’ Miller said.
As another defensive measure, small firms should also monitor their competitors’ advertising. If rivals make questionable statements that give them an unfair market advantage, the small company should take action, Miller said. Often, a single phone call from an attorney will spur the competitor to pull the ad. If not, the small firm can sue, or complain to government agencies, he said.
Businesses small and large are under scrutiny by a network of federal agencies, state prosecutors, consumer groups, competitors, and even bloggers, all on the lookout for untruthful marketing.
The same media networks that amplify marketing efforts also help regulators catch advertisers who break the law.
Web surfing supplies the FTC with investigative leads, such as bloggers' complaints that a product doesn’t live up to its ads, Engle said. “There’s this kind of public outing,’’ she said.
Laws apply to big and small companies
The FTC keeps a database of consumer complaints from the Better Business Bureau and other sources, and shares it with law enforcement agencies including state attorneys general, local district attorneys, and the FBI.
The FTC often focuses its enforcement actions on large companies with big consumer impacts. For example, it accused footwear maker Skechers of misrepresenting the health benefits of its “toning’’ shoes. Skechers agreed in May to pay $50 million to settle the federal complaint and a consumer class action suit.
"Facebook, bloggers, e-mail — it's all advertising. There's no question that all of that stuff is potentially actionable."
But Engle said the agency also files complaints against small businesses, especially those causing extensive harm, such as scam operations raking in millions for unproven diabetes “cures.’’
Even tiny firms must keep current on truth in advertising laws — both state and federal. In March, a California marketing consultant was ordered to pay more than $1.1 million to settle a civil complaint under California's health care marketing laws. A consortium of 11 county district attorneys claimed that he falsely touted a spinal traction device as a patented, breakthrough back pain remedy developed by NASA and approved by the FDA. The prosecutors accused Benjamin Altadonna of teaching his professional health-care clients how to pressure vulnerable patients to sign up for expensive treatments using the device.
Small businesses are less likely than large ones to become the targets of class action lawsuits, said Timothy Blood, the attorney who represented consumers in deceptive marketing claims against footwear maker Skechers. The company was accused of using flawed studies to back up claims that its "toning'' sneakers helped purchasers lose weight. Skechers denied wrongdoing, but agreed to refund as much as $45 million to customers under the $50 million settlement Blood and the FTC negotiated jointly.
Blood said class action law firms don’t often sue small outfits, because the potential financial recovery might not even cover the litigation costs.
“Small businesses are much more likely to be the victims of false advertising," Blood said. Small outfits have to compete with large companies that have the marketing budgets to fund studies, he said. "Small businesses can't spend $10 million on a bunch of junk science,'' Blood said.
In fact, the FTC and state prosecutors often pursue false advertising cases on behalf of small businesses that are injured, either as purchasers or as competitors. Protecting fair markets is one of the aims of the agency, whether the overhyped product is a medical treatment, a waterproof watch, or a shoe, Engle said.
“Even if it's not something that's going to kill you, it’s important that everyone is held to a level playing field," Engle said.