Starting And Managing Your Business101: Avoid Misleading Advertisements

 By: Richard E. Korb[1]

Advertisements are crucial to a business’s success because they inform consumers about the business’s services and products. Advertisements allow businesses to communicate events, locations, prices, offers, and other information necessary to enable a commercial transaction. However, businesses are not allowed to use ads to lie, deceive, or mislead the public in their quest for profits. Examples of such misleading advertisements include, but are not limited to, cereal makers using television to convince children that certain cereal brands will grant magic powers, phone companies offering free cell phone service but then charging extra fees, and tobacco companies lying about the health effects of their products.Thus, we must avoid misleading advertisements.

An advertisement is a statement made in connection with the sales of a service or good. Most ads, including those found in magazines, television, radio, webpages and packaging are reasonable attempts to persuade consumers to purchase from a business. Indeed, the Supreme Court has ruled that advertisements are part of a business’s right to free speech and free press (Bates v. ETAC v. State Bar of Arizona 1976) However, even though federal, state and local governments are forbidden from banning advertisements outright, they may regulate what is spoken, shown or displayed on an ad.

California in particular has a few numerous statues defining and restricting misleading advertisements. The most direct statue is California Business and Professions Code Section § 17500, which states that any “use of a statement in an advertisement media concerning real or personal property offered for sale which is untrue or misleading, and which is known, or which by the exercise of reasonable care should be known, to the untrue or misleading” (CCT v General Foods Corp 1983) is illegal. More broadly, section § 17200 prohibits unfair competition practices such as fraud. False advertising is included in this section of California’s Business Code and thus “any violation of the false advertising law, moreover, necessarily violates the unfair competition law” (CCT v General Foods Corp 1983). A business found guilty of violating the false advertising law is also guilty of violating the unfair competition law, though not vice versa. A third statue in the Sherman Food Drug and Cosmetic Law prohibits false or misleading advertisements in the sale of food, drugs, cosmetics or health devices. Doing so will result in a third violation, in addition to the two statues already mentioned. A violation of these laws will result in a fine to restore the victim’s financial status and a court order to either remove the misleading statement or the misleading ad.

These laws, taken together, reveal three general principles by which courts determine whenever or not a business is guilty of misleading advertising: 1) The statement is untrue or misleading 2) The statement is known to be untrue or misleading and/or there are reasonable circumstances whereby the advertiser could have known the statement to be untrue or misleading 3) There is a good chance that members of the public would be deceived if they heard or saw the statement. Be aware that misleading advertising is illegal in both California and the United States in general. In other words, either the state of California or the federal government, represented by the Federal Trade Commission (FTC), may file suit against a business in California which engages in such deceptive behavior.

For example, in FTC v CyperSpace (2006), CyperSpace, promised consumers a billing structure in which CyperSpace would provide smooth internet access in exchange for payment whenever the consumer went online. The company had advertised this by mailing small “gift” checks to possible customers. The customer was notified that when they cashed in the check, they could subscribe to CyperSpace’s internet promotion. CyperSpace, however, charged its consumers monthly, regardless of whenever the consumer went online or not. The Federal Trade Commission filed a lawsuit on behalf of the consumers and CyperSpace was forced to pay the excessive charges. The most interesting aspect of the case, however, was that CyperSpace defended their practice by claiming that they had placed a notice of their intentions at the bottom of their checks. CyperSpace had also conducted a survey. A majority of users who had seen the notice had understood that CyperSpace’s rate was monthly, not service-based. The Court, however, dismissed CyperSpace’s argument because the notice was in very small font, in a hard to find location and that the survey in question was among those who had seen the notice, not of those CyperSpace had advertised to. Since the majority of CyperSpace users weren’t even aware of the notice, the court decided that CyperSpace was in violation of the misleading advertising law.

In recent years, the public had become concerned about the number of frivolous lawsuits, lawsuits without any real public good behind them, which were aimed at small businesses. In one case, a small group of attorneys created a fraudulent front organization. Then, using that fake organization, the attorneys would contact small businesses, inform them that were violating laws and ask for thousands of dollars in settlement to avoid a lawsuit (In Re Tobacco II 2009). The California voting public responded by passing Proposition 64, which changed the language of the unfair competition laws mentioned above.

Before Prop 64, the unfair competition laws allowed anyone to represent another if they believed that an ad was misleading. After the proposition passed, California Business and Professions Code Section 17203 and 17204 were changed in such a way that the requirements for suing a business for misleading advertising were harder to meet. Proposition 64 removed the phrase “acting for the interests of itself, its members or the general public” and instead requires that “any person may pursue representative claims or relief on behalf of others only if the claimant meets standing requirements of Section 17204 and complies with Section 382 of the Code of Civil Procedure…”. In other words, in order for a person to sue a business for misleading advertising, that person must show that they were injured by the misleading statement AND that the person depended on the misleading statement when deciding to purchase from that business. This change provides a very solid defense for small businesses looking to defeat a misleading advertisement claim.

As Laster v T-Mobile 2009 shows, the latter is a crucial part of the revised unfair competition laws. The Lasters, among other T-Mobile customers, had been contacted by T-Mobile and informed of a discounted cell phone service. It sounded like a good deal, so the Lasters signed up, via contract, for the new cell phone deal. When the Lasters’ phone bill came, however, they were surprised that T-Mobile had added extra fees to the Lasters’ charges. The “discounted” phone came with enough fees that it was almost as expensive as a regular cell phone from T-Mobile. The Lasters sued and lost. Although the Laster’s had been financially injured by the phone company, the Lasters had never mentioned in their court complaint that they had relied on any written or verbal communication from T-Mobile when deciding to purchase T-Mobile’s deal. Moreover, the contract the Lasters had with T-Mobile stated that prices were subject to change. Since the Lasters had signed the contract, it was presumed that the Lasters had read and understood that the prices might change, even though the couple had believed that the discount was a fixed price.

Knowing the bounds of proper vs. misleading advertising, or unfair competition in general, can save you financial and legal headaches and costs. If you have any questions, please contact Richard Korb, an experienced business attorney for a free consultation and further advice on advertising or other aspects of business law at 510-524-0903.