Four years later, the court devised a four-part test, known as the Central Hudson test after the case in which it was created, for determining when commercial speech may be regulated without violating the First Amendment. The four parts are:
- The speech must concern a lawful product or service.
- The speech must not be false or misleading.
- The government must have a substantial interest in regulating the speech.
- The regulation must be narrowly tailored and must actually serve the governmental interest at stake.
In general, it has become increasingly difficult to ban advertising in the U.S. In June 1999, the U.S. Supreme Court unanimously invalidated a federal ban on radio and TV spots for legal casino gambling (Greater New Orleans Broadcasting Association, Inc. v. U.S.).
The Federal Trade Commission
Although numerous state and federal agencies play a role in advertising regulation, the Federal Trade Commission is the largest such unit charged with oversight of advertising nationwide. Its congressional mandate is to prevent "unfair or deceptive" practices, "unfair methods of competition," and "false" and "deceptive" advertisements. In examining advertisements alleged to be unfair or deceptive, the commission looks to the overall impression of the ad on a "reasonable" consumer.
For an ad to be considered deceptive, the disputed representation (or omission) must be material; that is, it must be something that will influence the consumer's purchasing decision.
One classic case involved three one-minute TV spots created in 1959 by Ted Bates & Co. for Colgate-Palmolive Co.'s Rapid Shave shaving cream. The spots claimed that Rapid Shave's moisturizing action worked so quickly it could soften even sandpaper in the 60 seconds it took to air the commercial; however, the agency did not use real sandpaper in the demonstration, but rather a Plexiglas mockup of sandpaper.
The U.S. Supreme Court in 1965 agreed with the FTC that the commercial had misrepresented the moisturizing capability of the shaving cream (which actually did soften real sandpaper, but in 80 minutes rather than one) and that the misrepresentation was both material and deceptive.
An ad can also deceive through innuendo or implication, by using technical or foreign language or by omission of a material fact. One court found an ad offering new cars for "$49 over factory invoice" inherently misleading as the invoice price changed continually depending on a number of factors, making the term invoice price essentially meaningless to consumers.
Even the inclusion of qualifying language or a disclaimer may not protect an ad from being deemed misleading. The court in the above case rejected proposed disclaimers to clarify what a factory invoice was, including one that explained that the actual dealer cost was lower than the invoice price.
It is not necessary to prove that anyone was actually deceived by an ad for it to be deemed deceptive. If the FTC finds that an ad has a "tendency to deceive," taking into account the relative susceptibility of the audience, the ad is considered unlawful.
Finally, if an advertisement makes a claim about a product, that claim must be capable of substantiation. The proof of the claim must have a reasonable basis and not be contrived or based on distorted facts or statistics. Where the claim involves a matter of human safety, there must be "substantial scientific test data" to back it up.
Agencies' legal duties
In addition to abiding by the rules of regulatory agencies, advertisers must be aware of the general legal issues that affect them. For instance, an advertising agency undertakes certain legal duties that arise from its contracts with its clients.
Contract law also plays an important role within the agency and can prevent "account piracy" when an employee leaves. Many agencies include a restrictive covenant in the employment contract of new employees, so that employees agree not to work for or contact the agency's clients for a specified period of time after they leave the agency. Such agreements will generally be upheld in court as valid contract provisions as long as the time period is "reasonable," usually no more than two years.
Because advertising agencies act on behalf of their clients, they take on additional legal duties based on that relationship that are not dependent on the provisions of their contracts. Among the duties to clients imposed by law is the duty of loyalty, the duty to preserve a client's trade secrets, the duty to avoid conflicts of interest and accountability regarding client funds.
Advertisers and agencies should also be aware of the body of law known as "common law" that has developed through judicial decisions. Common law causes of action that affect advertisers include actions for defamation and product disparagement. Issues regarding invasion of privacy and its flipside, the right of publicity, are two areas of common law that most directly affect advertisers because they concern a person's right to control the use of his or her name or image.
"Appropriation" (sometimes called "misappropriation"), for example, is a common law cause of action for the unauthorized use of a person's name or image for commercial purposes. An individual has the legal right, based on a right to privacy, to control how his or her name or image is used and to prevent others from using it for their own purposes. By the end of the 20th century, almost every U.S. state recognized a right to privacy, either through statute or as part of its common law.
An individual's right of publicity was first recognized in the U.S. in the 1950s. It is similar to appropriation but usually applies to celebrities or others whose names or images have commercial value. The right of publicity prevents the unauthorized commercial use of an individual's name, likeness or other recognizable aspects of his or her personality or identity.