Have you ever driven by one of those businesses that was “Going Out of Business!” but never actually went out of business?
Or what about the sign on that store that screams “50% Off – Today Only!” but that is every day?
Of course it does because we have all seen this sort of misrepresentation and fraudulent advertising time and again. But that also begs the question, err, questions:
- What is false advertising?
- Is there a line between boasting vs. lying?
- Are there penalties for the small business that engages in false advertising?
- Are there consumer protections against false, misleading advertising?
Let’s find out!
What exactly is False Advertising?
False advertising is what it sounds like: a promotion or ad that makes false or fundamentally misleading representations.
The rule is this: While you are free to make subjective claims such as “Best Bagels in Town!” It is illegal to make objectively false claims, such as “Voted the Best Bagel by the New York Bagel Association!”
What’s the difference? An objective claim is independently verifiable, while a subjective claim is merely an opinion.
Being voted best bagel is a fact. It can be confirmed by the bagel association and its data from the contest. Saying you're the best bagel in town is your opinion based on your (or your customers') personal taste.
Need another example? Advertising “50% off!” when the sale is only 10 percent off is false advertising. Saying you have the best sale out there is an opinion, and as such, is permissible.
Is False Advertising a Crime?
Yes, it is considered a crime to falsely advertise. It is illegal for a business of any type or size–solopreneur, small business, large corporation, non-profit–to purposefully publish an ad that is false or contains untrue, misleading, or otherwise deceptive statements or claims. There are both federal and state laws, as well as regulatory agencies, policing such claims.
Truth in advertising is, actually, a real thing.
What Are the Penalties for False Advertising?
Penalties for false advertising range in severity–everything from a reprimand from a government agency to stiff fines (most common) to potential jail time (for egregious acts) are possible.
Essentially it is a matter of damages. Usually, when someone is the victim of a false or misleading ad, the damage is financial–they didn’t get the car for the advertised price or the business wasn’t really offering three for a dollar, whatever. This would be a civil case and the punishment most likely financial.
But sometimes, the damage is more than that and, in those cases, the fraudulent act can rise to the level of a criminal offense. For instance, say that a food label fails to mention that the homemade fudge was made with nuts and the person who bought the fudge had a severe nut allergy and died after she ate it. That is likely a case of criminal negligence, which can, yes, lead to jail time.
Most Common Types of False Advertising
Yes, advertising is intended to put the best spin possible on a product; indeed, most ads try to make the product or service sound almost irresistible to the consumer. The trick for the business owner is that there is a fine line (or should be) between what is called the “mere puffery” that we all expect in an ad versus making claims that are downright false and/or misleading.
Here are the most common types of false advertising:
Bait and Switch
This classic has many versions, but they all go something like this: The business advertises something at an incredible price but which, in reality, it has no intent of selling for that price. It may be that when the customer gets to the store, they are told that the store is “sold out,” or they are told that a different item of much better quality is available, etc. Whatever the ruse, the idea is that the advertiser lures a potential customer in with the bait–the low, low price or the hard-to-get item–and then the salespeople foster a switch to an item that’s not hard to get or not on sale.
Either way, the ad is false and misleading.
Not Really On Sale
An item advertised as being “on sale” actually has to be on sale, meaning that it had to have been sold at a higher price within the previous three months. An item that is always on sale is not on sale.
If you use a picture to give a false impression as to the nature and quality of your product or service, that too is false and misleading advertising. A picture must be a reasonable representation of the thing being advertised.
Deceptive Food Labeling
You cannot claim your product or dietary supplement is something that it is not: “100% organic" when it is indeed not organic, for example. Note: such labeling may also get a company in hot water with the Food and Drug Administration (FDA). Specifically, the Federal Food, Drug, and Cosmetic Act (FFDCA) enforces honesty and disclosure on food labels and in drug advertisements.
False or Dishonest Claims
False means false. If you say that your organic almond bar “contains no sugar” and it does, that is false and illegal.
Disclaimers aside, the product or service must be able to do what the ad says it can do. A “miracle car wax” that claims it can remove paint scratches must be able to remove paint scratches, not just cover them up or make them dull.
Is There a Difference between Boasting and False Advertising?
Now, you may be asking, are you not allowed to engage in boasting about how great your product, service, or business is without giving someone a false advertising case? “Puffery” as it were? And the answer is yes, you most certainly can, well, puff away.
So what is the difference? Essentially, legally, “puffery” is subjective and is permissible in advertising. But outright lying and false claims are objective and are illegal.
Example of puffery: I grew up near a hamburger shop that had a big sign that read, “Best Hamburgers in the World!” I thought it was so cool that I just happened to live near a place that actually had the best burgers on the planet. Obviously that is acceptable puffery (especially if you are nine years old). The point is—whether that burger place had the best hamburgers in the entire world is a matter of opinion, not fact; hence it is subjective.
Example of an illegal claim: You may remember about a decade ago that there was an app called Luminosity. Luminosity was a series of brain games. Brain games are legal and all well and good. But what was not well and good was the advertising campaign the marketing execs at Luminosity came up with wherein they claimed that by using the app, people could delay memory loss and even keep Alzheimer’s at bay.
The Federal Trade Commission disagreed and sued, claiming that the company had no sound, scientific research backing up such medical claims and that people making purchasing decisions based on such claims were being misled. In the end, although it didn't get to the Supreme Court, Luminosity settled with the FTC to the tune of $2 million.
Who Protects against False Advertising?
Untrue, deceptive, or false advertising falls under the purview of the Federal Trade Commission (FTC) and is considered an “unfair trade practice.” On the state level, as seen below, false advertising is similarly illegal and, importantly, can be considered illegal both civilly (meaning fines are the penalty) and criminally (meaning, well, you know what that means!).
What the Federal Government Does about False Advertising
The federal government has broad authority and a wide range of tools to reign in fraudulent advertisers.
Like the IRS, the Federal Trade Commission or FTC will typically begin with a cease-and-desist letter demanding that the company end its fraudulent practices. If that is ignored, the feds will usually file a lawsuit asking a court to issue an injunction which would prevent the company from further use of the disputed claims.
Also in its bag of tricks against deceptive advertising and deceptive trade practices are fines, monetary damages, and remediation. As the Luminosity case revealed, the financial consequences of proven false advertising claims can be quite substantial. In addition, the agency can order the offending company to admit its errors and even advertise such.
One final federal law to know about is the Lanham Act. The Lanham Act is also known as the Trademark Act of 1946. It is the law that governs trademarks and unfair competition. According to the United States Patent and Trademark Office, “A trademark can be any word, phrase, symbol, design, or a combination of these things that identifies [a company’s] goods or services. It’s how customers recognize [that company] in the marketplace and distinguish it from competitors.”
If, for instance, you started a software company and named your product “Windows,” Microsoft just might think that that is wrong, and of course they would be right. Why else would you name your product Windows except to confuse the public and hopefully siphon off some Microsoft customers who mistakenly thought your new product was their old one?
So the Lanham Act and trademark registration prevents that sort of thing (hopefully). Now that we’ve covered the federal consequences for false advertising, let’s get into what happens on the state level if you falsely advertise.
What State and Local Governments Do about False Advertising
In 1965, Bernice Wyszynski saw an advertisement by a local car dealer for a 1962 Pontiac Tempest. What really caught her eye was that the car was being advertised by the Stephens Pontiac Cadillac dealership for “1,395 bananas.”
According to the dealership, the ad should have read “1,395 $Bananas” but the dollar sign was left off by accident. But all Mrs. Wyszynski saw was an ad for a car for 1,395 bananas, or, roughly, $140. So she went down to the dealership with, yep that’s right, almost 1,500 bananas and demanded the car.
The dealership refused.
Mrs. Wyszynski then filed a complaint with the Connecticut State Consumer Protection Department. After several days of unwanted, bad publicity, the dealership relented and sold her the car for, well, bananas. Literally.
Almost every state, and in fact many major cities, have a similar agency intended to protect its citizens against false and misleading ads and unfair trade practices. These agencies have their own set of consumer protection laws modeled after the Federal Trade Commission Act (FTCA.) These laws do several things to protect consumers, but most importantly, they give their state agencies and their Attorney General authority over such matters while also giving individuals the right to sue.
In New York City, the Consumer Affairs division operate under the auspices of the Unfair Trade Practices law which states that an Unfair Trade Practice is, “Any false, falsely disparaging, or misleading oral or written statement, visual description or other representation of any kind made...that has the capacity, tendency or effect of deceiving or misleading consumers.”
California’s False Advertising Law (FAL) prohibits a business from making false statements or statements “likely to mislead consumers about the nature of a product or service.”
And when it comes to advertising litigation, actions can be taken both individually (think Mrs. Wyszynski) as well by governments and agencies. Aggrieved individuals can sue the offending company under a variety of legal theories: Unfair competition, false advertising, fraud, and more. It may even be that a class-action lawsuit can be brought (with the aid of a law firm.) A consumer rights, business, or litigation attorney can assist in this regard.
Keep in mind if federal law is being invoked, a complaint will typically first have to be filed with the appropriate agency.
How to Make Sure Your Ads Are Legal
So, how can you make sure that your small business ads do not fall on the wrong side of the law?
First and foremost, avoid making outright false or misleading claims. Do not advertise statements that are objectively untrue. Yes, sure, you can boast and make subjective claims–you won’t get in trouble for that (even if your hamburgers are not the best in the world). But you will get in legal trouble if you claim they are “100% beef” but actually contain filler, pork, and soy meal.
Similarly, when mentioning the competition or a competitor's product in your ads, be sure that all such claims are objectively true. For example, it would be fine to state in your ad, “We will beat any competitor’s price!” as long as that is true, but if in fact you do not match a competitor’s lowest price, such a claim would not be OK.
When advertising a sale, you need to make sure that the items on sale really are less than the usual price for the past three months and that you have enough of those items in stock to handle the rush. If there are limits, mention the limits in the ad.
Protect Yourself from False Advertising Claims
When it comes to false advertising, the bottom line is to be honest. Boast all you want, but the essential rule is easy to follow: Don’t lie.
And that’s not just a bunch of bananas.