The Unfair Trade Practice of False Advertising
by Dayle L. Wallien

  
Both business owners and consumers should be cognizant of the liability that a business can incur by false advertising.  Businesses may be liable for damages both to their competitors and to consumers if the business is found to have falsely advertised a product or service.  Further, the business could be subjected to penalties by the state in which the false advertising occurred.  

I.    WHAT IS ENCOMPASSED BY THE TERM “FALSE ADVERTISING?”

 False advertising can include advertising that is truly false, or can be advertising that is true, but is likely to mislead or confuse consumers. In the latter instance, objective evidence demonstrating misled or confused consumers is necessary to support a case.  More specific instances of false advertising are described below.

             1.         What is not false advertising?

Puffery is exaggerated advertising upon which no reasonable buyer would rely.  Accordingly, it is generally not regarded as false advertising.  Puffery can also include representations of product superiority that are vague or highly subjective. For example, the 2^nd Federal Judicial Circuit of Appeals has held that an advertised claim that "thorough research" had been conducted was puffery and therefore did not constitute actionable false advertising. Lipton v. Nature Co., 71 F.3d 464, 474 (2d Cir.1995) (internal quotation and citations omitted). The same circuit has upheld a district court’s finding that an advertised statement that "countless hours of research" had produced a superior product was found to be puffery and therefore non-actionable. Bose Corp. v. Linear Design Labs, Inc., 467 F.2d 304, 310-311 (2d Cir.1972).

However, false descriptions of “specific or absolute characteristics of a product” or “specific, measurable claims of product superiority” based on product testing are not considered to be puffery and are actionable if the statements or descriptions are false. See for e.g., United Industries Corp. v. Clorox Co., 140 F.3d 1175, 1180 (8th Cir. 1998).

             2.         Materiality

Further, to constitute false advertising, a statement in an advertisement must not only be false, it must be "material" in that "it is likely to influence purchase decisions." Nat'l Basketball Ass'n v. Motorola, Inc., 105 F.3d 841, 855 (2d Cir. 1997) (citations and internal quotation marks omitted). In that case, Motorola sold "SportsTrax" pagers, which provided users with updated information about in progress sports events. Motorola had advertised that event information was transmitted "direct from each arena," while it was in fact collected and sent from TV and radio broadcasts. The NBA sued Motorola, alleging that the press release constituted false advertising. An appellate court upheld the lower court ruling dismissing the case based on the determination that the press-release statement was not material as consumers did not care whether updates they received came directly from the site of the event or instead came through information gathered from a news source broadcasting from the site.

II.    CLAIMS ALLEGING FALSE ADVERTISING

              1.         Alaska State Law

Most states have a statute in place to protect consumers from false advertising.  Alaska law protects both consumers and other businesses from unlawful acts and practices in advertising through AS 45.50.471, the Alaska Unfair Trade Practices and Consumer Protection Act.  The pertinent provisions of AS 45.50.471(b) as applied to advertising include:

             (2) falsely representing or designating the geographic origin of goods or services;

             (3) causing a likelihood of confusion or misunderstanding as to the source, sponsorship, or approval, or another person's affiliation, connection, or association with or certification of goods or services;

             (4) representing that goods or services have sponsorship, approval, characteristics, ingredients, uses, benefits, or quantities that they do not have or that a person has a sponsorship, approval, status, affiliation, or connection that the person does not have;

             (5) representing that goods are original or new if they are deteriorated, altered, reconditioned, reclaimed, used, secondhand, or seconds;

             (6) representing that goods or services are of a particular standard, quality, or grade, or that goods are of a particular style or model, if they are of another;

             (7) disparaging the goods, services, or business of another by false or misleading representation of fact;

             (8) advertising goods or services with intent not to sell them as advertised;

             (9) advertising goods or services with intent not to supply reasonable expectable public demand, unless the advertisement prominently discloses a limitation of quantity;

             (10) making false or misleading statements of fact concerning the reasons for, existence of, or amounts of price reductions;

             (11) engaging in any other conduct creating a likelihood of confusion or of misunderstanding and which misleads, deceives or damages a buyer or a competitor in connection with the sale or advertisement of goods or services;

             (12) using or employing deception, fraud, false pretense, false promise, misrepresentation, or knowingly concealing, suppressing, or omitting a material fact with intent that others rely upon the concealment, suppression or omission in connection with the sale or advertisement of goods or services whether or not a person has in fact been misled, deceived or damaged.

Penalties for violation for this chapter can be stiff.  Potential penalties can include the following:

1)         A person or entity allegedly harmed by a violation of the statute may bring a civil action to recover for each unlawful act or practice three times the actual damages or $500, whichever is greater (AS 45.50.531) plus, full costs and full reasonable attorney fees (AS 45.50.537);

 2)         the attorney general, upon petition to the court, may recover, on behalf of the state, a civil penalty of not more than $5,000 per violation (AS 45.50.551);

 3)         an injunction or restraining order under AS 45.50.501 can be imposed (violation of an injunction or restraining order can subject the violator to a civil penalty of up to $25,000 per violation) upon the request of the attorney general or a private individual or entity.

An action must be brought within two years of the time that the person discovers or reasonably should have discovered that loss resulted from an act or practice declared unlawful under AS 45.50.471. 

2.         Federal Law

Claims for false advertising can be brought by a competitor under the Federal Trademark Act, 15 USCA § 1125 (sometimes referenced as the Lanham Act), which provides in pertinent part that:

"Any person who, on or in connection with any goods or services ... uses in commerce any ... false or misleading description of fact, or false or misleading representation of fact, which ... in commercial advertising or promotion, misrepresents the nature, characteristics, qualities, or geographic origin of his or her or another person's goods, services, or commercial activities, shall be liable in a civil action by any person who believes that he or she is or is likely to be damaged by such act."

According to a number of courts, a company unhappy about a competitor's false advertising must prove five things to be successful in winning a suit under federal law:

1.      a false statement of fact by the defendant in a commercial advertisement about its own or another's product;

2.      the statement actually deceived or has the tendency to deceive a substantial segment of its audience;

3.      the deception is material, in that it is likely to influence the purchasing decision;

4.      the defendant caused its false statement to enter interstate commerce; and

5.      the plaintiff has been or is likely to be injured as a result of the false statement, either by direct diversion of sales from itself to defendant or by a lessening of the goodwill associated with its products.

See, e.g., Hewlett-Packard Co. v. NU-Kote Intern., Inc., No. 97-1552, 1998 WL 398818 (Fed. Cir. June 15, 1998) (affirming a preliminary injunction) (citations omitted).

Consumers cannot bring suit for false advertising under the federal Lanham Act, as the purpose of the Federal Trademark Act is to "protect persons engaged in ... commerce against unfair competition," as opposed to protecting consumers. 15 U.S.C. § 1127.  Further state law has traditionally provided consumers with remedies for losses incurred from misrepresentation.  See for e.g. AS 45.50.471.

Possible financial liability under the Federal Trademark Act can include the profits lost by the plaintiff, the profits made by the defendant as a result of the false advertisement, the cost of advertising by the plaintiff to correct the misleading impression left by the false advertisement, and/or the plaintiff's attorneys fees and expenses.  See, for e.g., U-Haul Intern, Inc. v. Jartran, Inc., 601 F.Supp. 1140, 1148-1149 (D. Ariz. 1984), aff'd, 793 F.2d 1034 (9th Cir. 1986).

III.   CONCLUSION

 This is merely a brief outline of the law regarding false advertising as an unfair trade practice.  If you have questions regarding false advertising, either from the standpoint of a business owner who does not want to run afoul of the law, or as a person or entity who believes you have incurred damages as a result of false advertising, we would be happy to meet with you to discuss your concerns.  

Disclaimer: This material does not constitute, nor is it a substitute for legal advice.  The materials here do not provide exhaustive coverage of the topic. The materials here are believed to be reasonably accurate and up-to-date, but are subject to change without notice.  This article is not to be interpreted as establishing an attorney-client relationship between the reader and the author or this firm