By Daniel Garcia
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Over the past couple of weeks, I have written about marketing regulations that applied to businesses, ranging from emails, shipping, and refund requirements. Every aspect of those articles had one commonality, and this article is no different: the use of technology. Customers are interacting with businesses in entirely different ways than most of our parents or grandparents had by visiting business websites through their cell phones, and those businesses advertising to them through social media apps or emails. Emails account for a large percentage of marketing done by small business owners (81%), and many customers are looking to have their orders shipped rather than visit stores when the pandemic has subsided (68%). While businesses still advertise over print media, many have moved to online advertising or maybe a combination of the two. Whether the advertising is online or physical, they must be truthful, non-deceptive, and cannot be unfair.
Why is it relevant today?
The FTC’s role is to protect consumers from unfair and deceptive acts or practices which encompasses advertising, marketing, and sales online. Their primary focus, in advertisements, is product claims about health and safety or claims that consumers will have trouble evaluating themselves. For example, an ad claiming X liquid will save your car 20% more gas if you mix it with your fuel is a claim a consumer will have trouble evaluating themselves. COVID-19 has caused businesses to change their market strategy or produce products that are in demand to help combat the spread of the virus. While many companies have focused on assisting the public and being honest with their products, the FTC has seen an increase in misleading claims. Recently, on June 4, 2020, the FTC sent 35 letters (they previously sent approximately 160) to marketers who are advertising unsupported claims that their products can effectively prevent or treat COVID-19. Among those products are immunity-boosting injections, essential oils, vitamins, herbal treatments, and supplements. You can view the article from the FTC, where it mentioned the companies here and all the companies that the FTC has issued warning letters (almost 200) to here. These types of advertisements have increased because of the pandemic. Not every company misleads their customers; some are advocating for factual claims from their vendors. For example, Etsy released an article that suggested to their existing seller that they should be honest about the masks made, specifically that they are not as effective as surgical or N-95 masks. Still, the FTC is sending cease and desist letters to companies to halt their marketing campaigns that are misleading or not supported by scientific evidence, and other penalties may lie ahead if they fail to comply (explained below).
Why is this important for small business owners?
Whether or not a small business is advertising products relating to COVID-19, the underlying rules apply to all advertisements that are not supported by evidence or are misleading in their product claims. There are three main points that small business owners cannot do when advertising to consumers:
- Advertise non-truthful and deceptive products or services,
- Advertise claims unsupported by evidence, and
- Promote unfair advertisements.
The FTC and courts have imposed various penalties for false and misleading ads, including cease and desist orders, civil penalties, and corrective ads. For failing to follow a cease and desist orders from the FTC can require them to substantiate claims in the future and include fines up to $43,280 per day per ad if the company violates the law in the future. Also, the FTC can require businesses to pay civil penalties from thousands to millions of dollars and issue refunds to consumers. However, I have five dos and don’ts that will help a small business keep their advertisements in compliance with the FTC rules.
Dos and Don’ts
Applying these three main rules for advertising, truthful and non-deceptive, claims supported by evidence, and fair advertisements, I will cover a few specific dos and don’ts for small business owners.
1. Bait advertising: Sell the product you’re advertising. Do not switch the product at the time of sale.
Bait advertising is offering to sell a product or service which the advertiser does not intend or want to sell. The purpose is to attract customers with the advertised product and then sell them a different product which benefits the advertiser usually by selling a product that costs more. Some factors that the FTC uses to determine if there is a bait which small businesses should utilize to avoid these schemes are:
- Refusing to show, demonstrate or sell the product offered,
- The failure to have the product sufficiently available for purchase at all outlets for sale (unless the advertisement states supply is limited or product available at only X location),
- Refusal to take orders for the advertised product, and
- Using a plan to deter or prevent sales associates from selling the advertised product.
While businesses do not attempt to sell the advertised product in bait advertising if a company switches a product after a consumer buys a product and fails to either send the advertised product or make a refund, this is also a bait advertising scheme. A small business owner should not make a statement or illustration in an advertisement if it creates a false impression about the product or service that the purchaser will receive in the end.
2. Deceptive pricing: Give an honest original price. Do not inflate the original price for a “deeper discount.”
Small business owners should not use an artificially inflated price for advertising a “deep discount” for a product if there was not a legitimate basis for promoting the price comparison. The product should have been offered to the public for a reasonably substantial time at the “original price” for it not to be an artificial, fictitious price. For example, a business cannot raise the price of X product from $10 to $40 for two days after advertising a deep discount sale. If it is publicly and actively for sale to establish a higher fictitious price, it is a deceptive price comparison. Here are points to consider:
- Do not advertise an original product price if it was never offered at that price.
- Do not advertise an original product price if it was not openly offered to the public.
- Do not advertise an original product price if it was not maintained for a reasonable
length of time then immediately reduced
A business does not necessarily have to advertise the product at the original cost; it just has to be openly and actively offered for sale. For example, if a business never advertised a toolset but sold to the public for $40 for four years, it is openly and actively offered for sale and not an inflated price. Deceptive pricing also applies if a small business owner is selling items for less than what competitors sell them for and chooses the highest competitor price if it is not representative of the market price. A small business owner should not advertise the higher rate of competitors, which exceeds the amount for which substantial sales of the product are offered.
3. Deceptive statements: Give an accurate description. Do not deceive the consumer about what they are buying.
If an advertisement is likely to mislead a reasonable customer either by representation, omission, or practice, the advertisement will be considered deceptive. An ad can be misleading either through explicit or implicit claims. Explicit claims are statements written in the advertisement, whereas implicit claims are made indirectly or by inference. For example, a claim that “ABC mouthwash kills the germs that cause COVID-19” is explicit in the sense that it states ABC kills the germs but also can be implied that ABC mouthwash prevents COVID-19. If the statement is misleading to sell products or services, it is not only misleading, but also illegal. A small business owner, however, can disclose that the mouthwash does not prevent COVID-19 (see below). Recently, the FTC has filed a suit against a company, Louisiana, LLC, for deceptive advertisements. While this example is extreme, it sets an excellent example of what not to do. This company took advantage of the economic stimulus package by sending fake checks, guised as a form of an auto stimulus package, sending consumers to their relief headquarters to sell products. This LLC falsely claimed a connection to a legitimate economic stimulus program for sales. A “cynical form of deception,” as the FTC put it. You can read more here.
4. Disclosures: Make clear and conspicuous disclosures. Do not try and hide them.
Small business owners love to offer deals because it brings in more consumers. However, if those deals have important restrictions or conditions, this information should be disclosed to the consumer. Also, small business owners can make disclosures to inform consumers of the limitations of their products, for example, “ABC mouthwash does not prevent COVID-19.” The disclosure must be “clear and conspicuous,” which means do not hide the disclosure. Inadvertently, this can happen online where websites may not format correctly on mobile screens or social media apps, so business owners should make sure that disclosures are clear and conspicuous but also in all formats that customers can view the advertisement. Here are some tips to keep disclosures clear and conspicuous:
- If required, keep the disclosure as close to the claim as possible.
- Make sure the disclosure is viewable on any device and platform not to cut off the
disclosure as if it wasn’t there.
- Design the advertisement, so the disclosure is seen without needing to scroll.
- Repeat disclosure before the consumer buys the product.
- Use plain language for disclosures as not to confuse consumers.
If a small business cannot make a disclosure clearly and conspicuously, they should not go forward with that advertisement. The FTC also released a detailed article for effective disclosures in digital advertising, which includes numerous examples, both effective and not.
5. Substantiate claims: Do back up claims with evidence. Do not make frivolous statements.
Depending on the product advertised, the substantiation needed to support the claim will vary. For example, recently, many companies have been claiming their products prevent or cure COVID-19, like the ABC mouthwash example above. These types of advertisements are related to health and safety, so the FTC requires the claims to be supported by competent and reliable scientific evidence. For other types of substantiation to support their claim and not run afoul of the FTC’s regulations, like the gas-saving liquid example above, the business would need objective evidence to support their claims.
Ready to advertise?
The FTC is evident in what it would like when businesses advertise to customers --- be truthful and non-deceptive, back up claims with proper evidence, and keep advertisements fair. When releasing ads, ask yourself these questions to determine if it is within the regulations set forth by the FTC. A small business owner should read the rules issued on the different topics found after each subheading and the FTC guide for small business owners found here. Moreover, states and cities may have additional requirements that are more restrictive than the FTC’s, so a small business owner must read their local regulations to be fully aware.
Still not sure if the advertisement is ready for publication or whether the disclosure is adequate? Law firms can help a small business owner identify any potential problems they have with their ads or whether their disclosures or evidence backing claims are effective. They may also utilize firms to identify state and city-specific requirements. A small business owner can contact the law firm Wilson Sonsini to determine their needs and compliance.
Key Take-Away
I’ve said it before, and I’ll say it again, honesty is the best policy. It does not pay to deceive your customers. Being honest with consumers about the product is, the price, the disclosures, and the claims are all ways to keep trust but also stay in compliance with the regulations. Online advertising will eventually replace print marketing, but the rules will remain the same. Adjusting to online platforms to stay in compliance can be daunting; these dos and don’ts will help small businesses navigate those waters. Advertise those products and don’t fall to a cynical form of deception for profit. Best of luck!
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