In 1914, Congress passed the Federal Trade Commission Act, creating and empowering the FTC to regulate "unfair methods of competition in commerce." The statute was based on one advocated by the advertising trade publication Printers' Ink, and subsequently adopted by most of the states, that defined "untrue, deceptive or misleading" advertising.
One of the nation's largest advertisers complained that the phrasing of the act was ambiguous, but the 7th U.S. Court of Appeals ruled in the 1919 case Sears, Roebuck v. FTC that Congress had made the agency's charge vague on purpose to leave judgments to its five commissioners. The U.S. Supreme Court overturned part of that interpretation in the 1920, but reiterated that Congress had intended such determinations to be the commission's right.
The FTC did not hit its stride until FTC v. Algoma. In that 1934 case, the U.S. Supreme Court noted that advertisers were "not relieved by innocence of motive from a duty to conform." That was interpreted to mean that the FTC could not put advertisers out of business, as the original Printers' Ink code had recommended, but it could stop misrepresentations in advertising simply if they appeared fraudulent or misleading. Intent did not matter.
In the Wheeler-Lee Act Amendments of 1938, Congress strengthened the FTC's purview, giving the agency authority over "any false advertisement" for food, drugs, medical devices or cosmetics. In Moretrench v. FTC, the 2nd U.S. Circuit Court ruled that the FTC's finding of unlawful misrepresentation in an ad was appropriate even though the statements apparently were made in good faith.
The U.S. Supreme Court put its stamp of approval on the FTC's efforts against misleading advertisements again in the 1965 FTC v. Colgate-Palmolive, which dealt with a TV spot for Rapid Shave, in which what was purported to be a piece of "tough, dry sandpaper" was shaved by a razor. However, the commercial's creators used a piece of Plexiglas sprinkled with loose sand because real sandpaper looked smooth on grainy, b&w TV.
After consumer complaints, the FTC banned the use of all mock-ups unless they were disclosed. The court did allow mock-ups to be used if they were not employed falsely to prove a product claim, a distinction the public did not readily discern.
The FTC has a variety of legal tools to enforce its decisions. It publishes industry guides, which provide interpretations and general statements of policy. It may issue an advisory opinion, which, if obeyed, protects an advertiser from being sued. If an advertiser fails to comply with the FTC's warnings, the agency can halt the ads through a consent decree— an agreement in which a party voluntarily discontinues an objectionable advertising practice—or with a cease-and-desist order, which carries fines of up to $10,000 per day.
If the public health is at risk, the FTC may issue an injunction. In cases involving cease-and-desist orders and injunctions, the FTC must identify a "specific and substantial" interest and follow a specific administrative procedure that gives the advertisers several opportunities to appeal.
Beyond halting deceptive ads, the FTC can also order alterations to ads, such as adding an affirmative disclosure (i.e., stating facts necessary to keep ads from being deceptive) or a corrective statement, to counteract a long-term, misleading advertising campaign.
Warner-Lambert Co., for example, was required to make statements in its advertising to correct a long-running campaign claiming its Listerine mouthwash could help prevent colds. In 1974, the marketer was ordered to include in its advertising the line that Listerine "will not help prevent colds or sore throats." (Oddly, the ads had the unanticipated reverse effect of increasing mouthwash sales, as consumers strained to see or read the required correction notice.)
Unfairness in advertising is defined as any practice that "causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves." A company is more likely to be unfair in the way it treats its customers than in its advertising, but certain acts involving health and safety attract FTC scrutiny.
In one case, the FTC faulted a razor manufacturer for distributing free blade samples in newspapers, creating a possible hazard for small children. In 1994, the FTC closed a lengthy investigation into the use of Joe Camel, a cartoon character that appeared in cigarette advertising for R.J. Reynolds Tobacco Co. A minority of commissioners charged that the ads inspired impressionable children and adolescents to smoke, a claim that could not be proven scientifically. The company eventually abandoned the character after a spate of litigation orchestrated by 40 states.
Deceptive advertising must possess a "tendency" or "capacity" to mislead a consumer or must be "likely" to mislead. Statements in question must be material to an advertisement and likely to affect a purchasing decision. Incidental deceptions are not a serious concern unless they contribute to an overall impression of falsity, according to the FTC. Falsehoods are classified either as express (i.e., determined from the plain meaning of the words) or implied (i.e., a false meaning attributed to the words by the consumer even though the ad's claims are, on face, true).
As in other aspects of law, the deception must be apparent to a "reasonable" person. No reasonable person, for example, would believe that all passengers on an airplane would faint if one passenger took off his shoes, the premise of an ad for Dr. Scholl's foot deodorant.
Some advertising is deceptive per se, so apparent that anyone can tell, but the FTC usually depends on experts and public opinion research to gauge deceptiveness. Exceptions are made for children, the aged, the ill and otherwise healthy adults who might be especially vulnerable (e.g., obese individuals, who may be particularly susceptible to misleading weight-loss ads).
Other regulatory agencies
While the FTC is the main government agency regulating ads, the U.S. divides jurisdiction by sectors and several sectors have different reviewers. Airline ads are generally regulated by the U.S. Department of Transportation, phone ads by the Federal Communication Commission and in some cases the FTC, lease ads by the Federal Reserve, securities ads (including those of banks and insurers) by the Securities & Exchange Commission, alcohol ads by both the Alcohol Tax and Trade Bureau (formerly the Bureau of Alcohol, Tobacco & Firearms) and the FTC (and also by states), and political ads generally by the Federal Election Commission (though also by the FCC). The FCC also regulates the number of ads that can be aired on children’s TV shows.
The Food & Drug Administration regulates advertising for prescription drugs, a category that has boomed since the FDA began allowing direct-to-consumer prescription drug ads in August 1998. The FTC is responsible for the advertising of over-the-counter drugs, various vitamin supplements, cosmetics and foodstuffs included in its 1906 enabling legislation; the FDA retains jurisdiction over the labeling of these products. The FDA, however, oversees health claims for foods, which has become more important as marketers seek to promote their products as low carbohydrate, a claim the FDA has yet to recognize.
Finally, the Department of Housing & Urban Development monitors discriminatory practices in advertising related to the sale and rental of housing. Splitting the oversight between two agencies has created growing issues in recent years thanks to two trends. First, marketers have increasingly offered products crossing category lines, sometimes creating confusion on who regulates what. Second, attempts to regulate e-mail spam, ensure privacy and limit telemarketing calls by marketers of different type have created some confusion on who enforces the regulations.
When the Federal Trade Commission moved to implement a do-not-call list to stop unwanted telemarketing calls, it had to enlist the help of the FCC to ensure that all companies were covered. The splitting has also prompted some political arguments over who should oversee specific sectors and how they should be regulated. For example, tobacco critics, unhappy with FTC regulation, want the FDA to take over.
Although misrepresentation has long been a concern of regulators, the protection of an advertiser's right of free speech is a much newer aspect in the law. The protection has been growing, increasingly bringing court fights over new state and federal attempts to regulate marketing.
Most experts assume that the authors of the U.S. Bill of Rights did not consider commercial speech, which includes advertising along with other forms of "lesser protected" speech, as being deserving of protection as individual political speech.
The breakthrough in commercial speech protection occurred in 1978 in First National Bank of Boston v. Bellotti. In an effort to oppose a proposed graduated personal income tax, a Boston bank sought to purchase print and broadcast advertising opposing the tax. Massachusetts had a statute prohibiting banks and most other corporations from spending money to influence an election, and the state's attorney general threatened to prosecute the bank if the advertising appeared. The U.S. Supreme Court found that the Massachusetts statute "abridges expression that the First Amendment was meant to protect."
In 1980, in Central Hudson Gas & Electric Corp. v. Public Service Commission, a case involving advertising to promote the use of electricity, the U.S. Supreme Court held that advertising promoting illegal products or activities was not protected nor was advertising that lied or was misleading. For government regulators, there must be a substantial reason for wanting to limit such speech, such as the public interest, and the regulations must advance that interest and go no further.
In recent years, the U.S. Supreme Court has questioned government curbs on "truthful" advertising, ruling out a ban on listing the strength of beer in one case and limits on some gambling ads in another, while also repeatedly questioning attempts to justify limiting ads directed to adults by saying it’s to protect kids. The court, however, has repeatedly split in explaining the reasoning of its decisions, and the result has been more court cases to determine what is and what isn’t OK.
The split has also extended to whether farmers, growers or producers that contribute to industry ad campaigns, such as the "Drink Milk" effort, are supporting legal industry marketing programs or instead are being illegally forced to speak against their will. A major high court ruling on the issue is expected to resolve several conflicting lower court decisions on the question.
While much government regulation has traditionally focused on specific ads, there has been increasing attention by regulators and critics to the role media ownership plays and its effects on advertising and programming.
Proponents of easing regulations argue that Americans have a lot more media choices, thanks to the Internet and cable, than they did years ago and that some longtime ownership curbs are outdated. Critics argue that the Internet and cable don’t really provide alternative sources for local news and have questioned whether consolidation has homogenized content and allowed more violence and questionable material on the air.
Much higher concentration of radio markets allowed by a 1996 law and the FCC’s attempt to ease regulations over cross-ownership of TV, radio, cable and newspapers has brought a backlash and raised concerns, as have some big media deals.
The Justice Department, the FTC and the FCC share oversight, and some congressmen upset with the FCC action as well as what they see as growing obscenity and violence on the airwaves have questioned both advertising and ownership.
Consumer protection is another, newer aspect of the government regulation of advertising. Consumer awareness increased during the 1950s and 1960s, especially in the U.S, as an outcome of the broadening role of women in society and commerce and the efforts of a new generation of crusaders, chief among them Ralph Nader. His career as an activist was launched with the publication in 1965 of Unsafe at Any Speed, a book that provided the primary impetus for the National Traffic & Motor Vehicle Safety Act of 1966.
To respond to changing consumer expectations, the FTC stepped up its regulatory efforts during the 1970s. Government-sponsored consumer advocates, either independent or operating within an existing state agency such as an attorney general's office, began advocating and litigating for consumer rights. Most consumer activism centered on four concepts of the marketplace: ensuring products whose quality was consistent with their prices and claims; protecting against unsafe goods; providing truthful, adequate information about goods and services; and ensuring choice among a variety of products.