Topic: Does the First Amendment protect advertisements? "Commercial speech," also known as advertising, is protected by the 1st Amendment of the U.S. Constitution. This type of speech enjoys somewhat less 1st Amendment protection from governmental encroac
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Chapter 8 Commercial Spee
e First Amendment and Advertising
Commercial Spee Doctrine
Advertising’s Lower Status
e Four-Part Test
Unfair and Deceptive Advertising
Unfairness
Deception
State Regulations
Federal Remedies
Prospective Remedies
Halting Advertisements
Required Statements
Competitor Remedies
Raeteering
Tobacco Advertising
Other Federal Regulations
Children’s Television
Broadcast Advertising
Personal Data
Other Consumer Protections
Loeries and Contests
Money
Media’s Right to Refuse Advertising
Self-Regulation
National Advertising Division
Media Regulation 393
Securities Transactions
Mandated Disclosure
Fraud
Until the late nineteenth century, advertisements were usually simple announcements mu like today’s
classifieds. In the 1700s and 1800s, artisans and merants used small notices to tell their patrons that
fabrics and other manufactured goods had arrived from abroad. e truth of advertisements was seldom
an issue because consumers could usually examine the products and shun merants who sold inferior
merandise.1
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With the growth of mass production, advertising became more sophisticated. By the beginning of the
twentieth century, manufacturers were using national advertising to convince consumers in distant
markets to buy mass-produced, undifferentiated products. As markets grew and became impersonal,
opportunities for profitable misrepresentations increased. Patent medicine manufacturers, in particular,
were notorious for their exaggerated advertising promises. Some patent medicine makers bragged that
with the right advertising, they could sell dishwater.
As mass marketing developed, truth in advertising took on new importance to reputable companies.
Procter & Gamble, Burpee Seeds, aker Oats, and other producers of brand-name products wanted
consumers to have faith in the truth of national advertisements. Believing the “roen apple theory,”
reputable national advertisers feared that false advertising by one company damaged the credibility of the
others.
Manufacturers’ concerns for truth in advertising led to the formation of regulatory organizations within
the business community. Truth in advertising was a major theme at the 1911 convention of the Associated
Advertising Clubs of America. In 1912, the National Vigilance Commiee—later the Beer Business
Bureau—was created. By the 1930s, a movement within the industry to clean up advertising had resulted
in several codes discouraging false and misleading advertising.2
New legal regulations were an important tool in the effort to keep advertising honest. Most states
adopted a law similar to one proposed in 1911 by the trade magazine Printers’ Ink. e Printers’ Ink
statutes, whi still form the basis for mu state regulation, made it a misdemeanor to disseminate
misleading advertising. On the national level, the Federal Trade Commission Act of 1914 established
federal authority to outlaw deceptive acts and practices, including false advertising. Later, the Food and
Drug Administration was established to oversee labeling of food, drugs, cosmetics, and medical devices
and to regulate the advertising of prescription drugs. e Bureau of Alcohol, Tobacco and Firearms (ATF),
a division of the Treasury Department, oversees advertising and promotion of alcoholic beverages.
For many years, state and federal regulation of advertising evolved without raising questions of freedom
of expression. Until the mid-1970s, commercial advertising was outside First Amendment consideration.
Today, however, the Supreme Court has established limited First Amendment protections for commercial
advertising, recognizing the important right of advertisers and publicists to communicate truthful
information about products and services to consumers, balanced with the people’s interests in being
protected from untruthful, misleading or incomplete information as they make purasing decisions.
e First Amendment and Advertising
e Supreme Court first ruled that “purely” commercial advertising enjoys constitutional protection in a
1976 case involving advertising for prescription drugs. In Virginia State Board of Pharmacy v. Virginia
Citizens Consumer Council,3 the Court stru down a state statute prohibiting pharmacists from
advertising the prices of prescription drugs. Since then, the Court has developed a complicated
“commercial spee” jurisprudence that has limited government regulation of billboards, “For Sale” signs,
lawyers’ advertisements, and other commercial messages, including advertisements for abortion referral
services. Several commentators expressed concern aer a Supreme Court ruling in 2015 that government
efforts to regulate commercial spee would become even more difficult, when the court stru down a
town ordinance restricting the size of political, religious and business signs on First Amendment grounds
(see Chapter 3).4 However, until shortly before the Virginia Pharmacy decision, commercial advertising
had always been outside constitutional consideration.
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Commercial Spee Doctrine
e Supreme Court placed advertising outside First Amendment protection in 1942, in a case called
Valentine v. Chrestensen.5 In that case, the Court ruled that F. J. Chrestensen had no First Amendment
right to distribute handbills advertising tours of a former Navy submarine. Chrestensen distributed
handbills to pedestrians in lower Manhaan, advertising 25-cent tours of his $2 million submarine moored
at a state-owned pier in the East River in New York City. e handbills promised visitors a glimpse of the
kiten, torpedo compartment, and crew’s sleeping quarters on the S-49 submarine, also known as the
“fighting monster.” Children could take the tour for 15 cents.
City officials, however, told Chrestensen to stop distributing his handbills because he was violating the
New York City Sanitary Code, whi prohibited the distribution of “commercial and business advertising.”
Chrestensen then added a message to the ba of his fliers protesting the restrictions imposed on him
under the sanitation code. With a “political” message on one side of his submarine handbills, Chrestensen
sought an injunction barring police from interfering with distribution of what he argued was
constitutionally protected expression.
e U.S. Supreme Court, in a four-page decision, ruled that New York officials could stop distribution of
Chrestensen’s fliers without violating the First Amendment. e Court said the fliers were “purely
commercial” advertising that fell outside constitutional protection. e Court dismissed the political
message appended to the fliers as a ruse not to be taken seriously. With its curt decision in Valentine v.
Chrestensen, the Court originated the “commercial spee doctrine,” whi was to deny constitutional
protection to commercial advertising until the mid-1970s.
In 1964, the Supreme Court took a small step toward constitutional protection for advertising when it
ruled in New York Times Co. v. Sullivan that political criticism of public officials is protected by the First
Amendment, even if it is paid for (see Chapter 4 for more detail about this case). e Supreme Court
rejected Police Commissioner Sullivan’s argument that the criticism of Alabama law enforcement officers
should have no constitutional status because the criticism was part of a paid advertisement. Another
commercial element of the advertisement, according to Sullivan, was its solicitation of funds to support the
civil rights movement. e Supreme Court, however, said that it was “immaterial” whether the editorial
advertisement was purased; the ad was protected political spee because it “communicated
information, expressed opinion, recited grievances, protested claimed abuses, and sought financial support
on behalf of a movement whose existence and objectives are maers of the highest public interest and
concern.”6
Although Times v. Sullivan established that paid political spee enjoys constitutional protection, the
case did not create constitutional protection for “purely commercial advertising” su as a dog food ad or
Chrestensen’s original handbills. e Supreme Court came a bit closer to protecting commercial spee in
1973 when it suggested in Pittsburgh Press Co. v. Pittsburgh Commission on Human Relations that it might
be willing to grant constitutional status to “an ordinary commercial proposal.”7 But the Court in Pittsburgh
Press upheld an advertising regulation that prohibited unnecessary discrimination by gender in newspaper
classified advertisements.
A short time later, in Bigelow v. Virginia,8 the Court stru down a state statute that prohibited
advertising of abortion referral services. But ads for abortion referral services too were not “purely
commercial” spee. Unlike product ads, the abortion referral ads contained factual material similar to the
political content of editorials and news columns. For example, the ad at issue in Bigelow declared,
“Abortions are now legal in New York.” e Bigelow ad was also different from purely commercial
advertisements because the service advertised was itself constitutionally protected aer the court’s Roe v.
Wade decision in 1973.9 It is more difficult to square advertising restrictions with the First Amendment if
the service advertised is itself constitutionally protected.
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e Supreme Court established First Amendment protection for “purely commercial” advertisements in
Virginia State Board of Pharmacy v. Virginia Citizens Consumer Council,10 a case in whi the Supreme
Court stru down a Virginia statute prohibiting licensed pharmacists from advertising the prices of
prescription drugs. e pharmacists’ ads were purely commercial because they did “no more than propose
a commercial transaction,” the Court said.
e Virginia State Board of Pharmacy argued that the prohibition on price advertisements for
prescription drugs did not violate the First Amendment because purely commercial spee had not been
protected by the First Amendment since Valentine v. Chrestensen. e board also argued that aggressive
price competition among pharmacists would harm consumers because pharmacists would have less time
to compound and dispense drugs. e pressures of advertising, the board said, would force conscientious
pharmacists either to diminish their painstaking professional services or to go out of business.
Furthermore, the Board of Pharmacy argued that competitive advertising would not necessarily result in
the lower drug prices anticipated by the Virginia Citizens Consumer Council.
e Consumer Council, representing a number of prescription drug users, particularly the elderly and
infirm, argued that the Virginia statute was a violation of consumers’ First Amendment right to receive
information necessary to their good health. e Consumer Council also argued that prohibitions on
advertising forced consumers to spend more time and money finding the best drugs at the eapest prices.
In Virginia Pharmacy, the Supreme Court recognized a constitutional protection for purely commercial
spee motivated by a desire for profit. Justice Blamun, writing for the Court, said that the price
advertising of prescription drugs is protected by the First Amendment even though a pharmacist does not
wish to editorialize on any subject, cultural, philosophical, or political. He does not wish to report any
particularly news-worthy fact, or to make generalized observations even about commercial maers. e
“idea” he wishes to communicate is simply this: “I will sell you the X prescription drug at the Y price.”
Although price advertising for drugs is “purely commercial,” the Court said commercial advertising, like
editorial comment, contributes to democratic decision making served by the First Amendment. In a
statement merging the commercial marketplace and the marketplace of ideas, the Court said,
Advertising, however tasteless and excessive it sometimes may seem, is nonetheless dissemination of information
as to who is producing and selling what product, for what reason, and at what price. So long as we preserve a
predominantly free enterprise economy, the allocation of our resources in large measure will be made through
numerous private economic decisions. It is a maer of public interest that those decisions in the aggregate be
intelligent and well informed. To this end, the free flow of commercial information is indispensable.
e Court’s First Amendment protection for commercial advertising depended very lile on the right of
pharmacists to speak or publish. Aer all, the professional association representing pharmacists opposed
liing the ban on advertising. Of more importance to the Court than a right to speak was the consumer’s
constitutional interest in receiving information about drug prices. e right to receive would be honored,
Justice Blamun said, because the individual consumer’s interest “in the free flow of commercial
information may be as keen, if not keener by far, than his interest in the day’s most urgent political
debate.” e Court rejected as “paternalistic” the State Board of Pharmacy’s claim that allowing
pharmacists to advertise prices of prescription drugs would undermine their professionalism and thereby
hurt consumers.
In a very sharp dissent, Justice Rehnquist feared that the “logical consequences” of the Virginia
Pharmacy decision would be to elevate “commercial intercourse between a seller hawking his wares and a
buyer seeking to strike a bargain to the same plane as has been previously reserved for the free
marketplace of ideas.” Rehnquist did not agree with the majority’s assertion that commercial advertising
should be protected by the First Amendment because purasing decisions based on advertising contribute
to public decision making in a democracy. To Justice Rehnquist, the First Amendment protects public
decision making on political, social, and other public issues. It does not protect “the decision of a particular
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individual as to whether to purase one or another kind of shampoo.” Justice Rehnquist thought the
Court’s decision in Virginia Pharmacy devalued the First Amendment.
Advertising’s Lower Status
According constitutional status to advertising has not necessarily devalued the First Amendment, but
advertising itself still does not enjoy the full First Amendment protection of political spee. Although the
majority of justices in Virginia Pharmacy appeared to equate commercial advertising with political spee,
in fact commercial spee came under the constitutional umbrella in Virginia Pharmacy as a second-class
form of expression. Starting in Virginia Pharmacy and continuing through other commercial spee
decisions, the Court has permied many regulations on commercial spee that would not be tolerated on
political spee. For example, although the government must demonstrate a compelling interest to justify
restraints on political spee, the government needs to demonstrate a lesser “substantial” or “important”
need to justify restraints on commercial advertising.
A major difference in the protection of political and commercial spee can be seen in the Court’s
tolerance for falsehood in ea. Although considerable falsehood is permied in the political arena because
government censorship is considered worse than false political spee, the Court said in Virginia
Pharmacy that the government may constitutionally ban commercial promotions that are “false or
misleading in any way” or that promote products or services that are illegal. e Court also said that prior
restraints, whi are presumed to be unconstitutional in the political arena, may be invoked to halt
misleading commercial spee. Furthermore, although political expression may not be compelled, the
Court said that commercial advertisers might be required to disseminate warnings, disclaimers, and other
messages to ensure that commercial spee is not misleading. Since Virginia Pharmacy was decided, the
Supreme Court has ruled that even truthful advertising may be prohibited to serve a substantial
government interest.11
e constitutional protections for commercial spee are weaker than those for political spee, the
Supreme Court said, because of “common sense” differences between commercial and political spee.
First, the Court said that commercial spee is hardier than other kinds of expression because of the need
of businesses to advertise in a market economy. Advertisers will not be as intimidated by government
regulations as political speakers might be, the Court said, because of the unrelenting economic pressure on
businesses to advertise. In other words, commercial advertising may be regulated more than political
spee because advertising can more easily withstand regulation.
e other “commonsense” difference between commercial and political spee is that commercial spee
is more easily verified. Advertisers, the Court said, know their products well and oen make factual
statements that can be proven objectively, perhaps by scientific test. Political statements, in contrast, are
oen assertions of fact or opinion that cannot be proved and should not have to be. But because
advertisers easily may verify their statements, the Court said there is less reason to tolerate false and
misleading statements in commercial ads than in political debate.
Although commercial spee has occupied a second-class status constitutionally since Virginia
Pharmacy was decided in 1976, the Supreme Court has issued a number of decisions broadening the range
of commercial content protected—at least partially—by the First Amendment. In 1977, the Court ruled that
aorneys have a constitutional right to advertise the prices of routine services, su as a simple will or
uncontested divorce.12 e Court has also extended constitutional protection to illustrations and pictures in
aorneys’ ads,13 “For Sale” and “Sold” signs on private houses,14 advertisements for contraceptives,15 and
promotions for electrical power by a utility.16 However, the Supreme Court has also ruled that the First
Amendment does not protect ads for casinos17 or sales promotions in college dormitories.18
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e Court’s commercial spee decisions have been criticized for being inconsistent and therefore
providing lile guidance for advertisers who want to know whether government restrictions are
constitutional. e Court employs a four-part analysis when determining the constitutionality of
advertising regulations.
e Four-Part Test
e four-part test for determining the constitutionality of regulations on commercial spee was set forth
by the Supreme Court in Central Hudson Gas & Electric Corp. v. Public Service Commission,19 a case in
whi the Court upheld a utility’s right to promote the use of electricity. In Central Hudson, the Court
stru down a state regulation that prohibited electric utilities from running all advertisements promoting
the use of electricity. e prohibition, whi was instituted to conserve energy, barred ads promoting
efficient uses of electricity as well as those advocating inefficient or wasteful uses. e Supreme Court
ruled that a blanket ban on all electricity ads violated the First Amendment.
Under the four-part test promulgated in Central Hudson and later cases, a court must determine first
whether spee is commercial expression eligible for First Amendment protection. Second, a court
examines whether the government asserts a substantial interest in regulating the expression. If the spee
is eligible and the government asserts a substantial interest, a court next considers whether the regulation
directly advances the governmental interest asserted. If so, the court in the fourth step decides whether the
regulation is sufficiently narrow.
COMMERCIAL SPEECH ELIGIBLE FOR CONSTITUTIONAL CONSIDERATION Spee passes the
first part of the Central Hudson test and is eligible for constitutional protection if it is accurate and
advertises a lawful product or service. False and misleading advertising and advertising for illegal products
and services are not eligible for constitutional consideration. e first task of a court, therefore, is to
determine whether the expression at issue is commercial spee for a lawful product or service.
Defining Commercial Spee An advertisement is commercial spee, the Court said in Virginia
Pharmacy, if it does “no more than propose a commercial transaction.”20 e Court also has said that
commercial spee is expression “related solely to the economic interests of the speaker and its audience.”
Similarly, Justice Brennan once referred to “pure advertising” as “an offer to buy or sell goods and services
or encouraging su buying and selling.”21 Although these definitions do not encompass all commercial
spee, they adequately describe ads that expressly offer a product or service for sale, particularly at a
specific price.
Price advertising for prescription drugs, the Supreme Court said in Virginia Pharmacy, was a purely
commercial proposal. Similarly, a lawyer’s offer to write a will at a predetermined price, a homeowner’s
offer to sell a house, and a salesperson’s aempt to sell Tupperware in a university dormitory are purely
commercial spee because they do no more than “propose a commercial transaction.”
Associating an advertisement with a political issue does not necessarily transform commercial spee
into political spee, the Supreme Court has said. F. J. Chrestensen’s commercial fliers for submarine tours
remained commercial advertisements, the Supreme Court said, even though he appended a political protest
to the ba. In Central Hudson, the Court said that an electric utility’s bill inserts promoting the efficient
use of electricity were commercial spee even though the inserts served a political plan, the state-
approved energy conservation program.
Likewise, in Bolger v. Youngs Drug Products Corp.,22 the Court ruled that leaflets distributed by a
condom manufacturer were commercial spee even though they contained political and social
information about preventing venereal disease. Leaflets distributed by a condom manufacturer were not
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transformed into fully protected political spee simply because they “link a product to a current public
debate,” the Court said. e Court said in Bolger that a condom manufacturer’s “direct comments” on
public issues su as venereal disease would merit full constitutional protection, but not statements “made
in the context of commercial transactions.” e Court said it feared advertisers would try to immunize
false or misleading product information from government regulation if commercial messages were
considered to be political when the two were blended.
e informational pamphlets at issue in Bolger did not propose that readers buy Youngs’ condoms. One
pamphlet discussed the use of condoms generally as a method of preventing the spread of venereal disease.
At the end, the pamphlet identified Youngs as the distributor of the flier. Another pamphlet about VD
described various Trojan-brand condoms manufactured by Youngs without offering them for sale.
Nevertheless, the Court ruled the pamphlets were commercial spee because they (1) were conceded to be
paid advertisements, (2) made reference to a specific product, and (3) were economically motivated. Not all
of these three criteria must be met for an advertisement proposing no commercial transaction to be
considered commercial spee. Corporate image ads, for example, might be considered commercial spee
even though they mention no products, the Court said.
e definition of commercial spee was clouded in 2004 when the Supreme Court let stand a California
ruling that corporate reports, press releases, and leers to the editor are less protected commercial spee—
subject to penalties if found to be false—rather than the more protected political spee.23 e California
Supreme Court had ruled that Marc Kasky, a consumer activist, should be allowed to prove in court that
Nike Inc. violated a state consumer protection law by issuing false statements about workers’ conditions in
the footwear company’s Southeast Asian manufacturing plants. When the U.S. Supreme Court dismissed
review, Nike seled with Kasky for $1.5 million to be used to educate workers, increase training, and
monitor manufacturing in Southeast Asia.24
Nike issued several press releases and comments in response to arges that its manufacturing
operations in Southeast Asia were “sweatshops” that paid low wages and exploited women and ildren.
e California court said Nike’s public comments were not fully protected political spee, but were
commercial spee—like product advertising—because they were directed “to an audience of persons who
may be influenced by that spee to engage in a commercial transaction with the speaker.” Nike claimed its
press releases and leers were political spee because they did not aempt to sell athletic footwear, but
responded to politically motivated criticism about its manufacturing processes. (See excerpts from a Nike
release in Figure 8.1.) More than 40 entities, including Microso, the New York Times, and public relations
organizations, supported Nike’s claim.
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Figure 8.1 Excerpts from a Nike press release responding to sweatshop allegations.
When the U.S. Supreme Court dismissed the Nike appeal, Justice Breyer dissented, arguing the high
court should rule Nike’s communications are protected spee about controversial public issues. Breyer,
joined by Justice O’Connor, noted that Nike’s leer to college presidents and athletic directors was not in
an advertising format, proposed no product purases and contained facts, and responded to criticism
about Nike’s labor practices. Breyer warned that fear of lawsuits would ill corporations’ willingness to
engage in public debate.25 Aerward, Nike said it would withhold a report on corporate responsibility.
Lawful Products and Services Once a court has determined that commercial spee is at issue, it asks
whether the expression promotes a lawful product or service. Under the first part of the Central Hudson
analysis, commercial expression entitled to constitutional protection must promote products and services
that are themselves legal. Ads for prescription drugs, houses, and lawyers’ services are eligible for
constitutional consideration because they promote lawful products and activities. Similarly, ads promoting
electricity and condoms also meet the first part of the test. However, ads for obscene materials, criminal
activities, and discriminatory job opportunities are outside constitutional consideration because they
promote illegal products or services.
Federal appellate courts have disagreed whether housing ads omiing pictures and references to
minorities discriminate in violation of federal law. e federal Fair Housing Act prohibits advertising
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“indicat[ing] any preference… based on race.” In one case, the U.S. Court of Appeals for the Second Circuit
refused to dismiss a discrimination suit against the New York Times by minorities who claimed housing
ads in the newspaper violated the federal law. Plaintiffs in the case, several African Americans joined by
the Open Housing Center of New York, arged that Times real estate ads published over a twenty-year
period violated the Fair Housing Act because they rarely depicted blas as potential home buyers or
renters. In refusing to dismiss the case, the Second Circuit said a jury “plausibly may conclude” that ads
with models of a particular race and not others violate the Fair Housing Act by indicating a racial
preference. Ads demonstrating a racial preference would not be protected by the First Amendment, the
court noted, because they would “further an illegal commercial activity.” e Supreme Court refused to
review the Second Circuit’s ruling to let the Times be sued.26
In contrast, the Sixth Circuit dismissed a similar discrimination suit against the Cincinnati Enquirer,
ruling that the Fair Housing Act is not violated merely because minority models are absent from housing
advertisements.27 Unlike the Second Circuit in the New York Times case, the Sixth Circuit ruled that
housing ads would violate the Fair Housing Act only if they constituted a discriminatory “campaign” by a
specific realtor or if the ads illegally promoted discrimination at specific housing projects. But ads that are
independent of a campaign are not discriminatory merely because they contain white models only, the
court said. Indeed, the Sixth Circuit concluded that independent housing ads depicting whites only are
lawful statements protected by the First Amendment.
In another twist to the question of what constitutes commercial spee for lawful products, the Supreme
Court has ruled that ads and logos promoting unlawful uses of lawful products may be unprotected by the
First Amendment. In Village of Hoffman Estates v. Flipside, Hoffman Estates, the Court ruled that logos
and slogans on cigaree papers, water pipes, “roa clips,” and other drug paraphernalia were outside First
Amendment protection because the paraphernalia were marketed for illegal purposes.28 In Hoffman
Estates, drug paraphernalia were displayed next to books and magazines entitled High Times, Marijuana
Grower’s Guide, A Child’s Garden of Grass, and The Pleasures of Cocaine. A sign in the store referred to
the “head” supplies used by frequent drug users. A design on cigaree papers showed a person smoking
drugs.
e Hoffman Estates decision did not say that commercial spee may be prohibited for all products
that might be used for an illegal purpose. Su reasoning could lead to prohibitions on almost all
commercial expression. “Peanut buer advertising cannot be banned,” a federal judge once observed, “just
because someone might throw a jar at the presidential motorcade.”29 However, the commercial expression
in Hoffman Estates was not protected commercial spee because it promoted the illegal use of drugs.
False, Misleading, and Deceptive Advertising To merit constitutional consideration, commercial
spee not only must promote a lawful product or service but also must be true and not misleading. e
state has a legitimate interest, the Court said in Virginia Pharmacy, in ensuring that the “stream of
commercial information flows cleanly as well as freely.” e Supreme Court ruled that ads offering
prescription drugs, simple legal services, and houses for sale were eligible for constitutional protection
because the ads were not false, misleading, or deceptive. e promotion of electricity by Central Hudson
Gas & Electric was also eligible for constitutional protection because it did not mislead consumers. A later
section will discuss deception in detail.
Generally, ads mislead if they make important false statements or leave the wrong impression. A federal
appeals court ruled that the term invoice in a car dealer’s advertisement is inherently misleading because
many customers mistakenly believe that a car dealer’s profit is the difference between the sale price to the
customer and the invoice price to the dealer. In fact, a dealer’s invoice may have lile relationship to the
cost of a car to a dealer.30
e Supreme Court has said advertising the price of a drug or simple legal procedure is not misleading
but that price advertising of complex services is. In Bates v. State,31 the Court said that price
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advertisements for complex legal services, su as complicated divorces and estate selements, could be
prohibited because they would be misleading. Ads for complex services are misleading, the Court said,
because aorneys cannot accurately fix a price before work begins on open-ended, time-consuming tasks.
Only routine legal services that take a fixed amount of time can be accurately priced in advertising that
does not mislead, the Court said. Routine services for whi the price might be advertised include
uncontested divorces and simple adoptions.
e Court also has ruled that aorneys’ use of in-person sales talks can be prohibited because of the
potential for deception. In-person solicitations can be prohibited because they, unlike lawyers’
advertisements in the media, present dangers of coercing, intimidating, misleading, and invading the
privacy of potential clients. e Court said an aorney’s in-person appeal for business—oen to a
vulnerable potential client who is distraught by a divorce, an accident, or a death—is deceptive because it
“may exert pressure and oen demands an immediate response, without providing an opportunity for
comparison or reflection.”32
In 2003, Congress enacted the CAN-SPAM Act to reduce unsolicited commercial email messages.33 e
law makes it illegal to send commercial email messages, known as spam, with intent to deceive recipients
about who is sending the message or the subject of the message. e CAN-SPAM Act also requires
commercial emailers to provide a functioning address and an opportunity for recipients to stop the
commercial messages. e law does permit companies to send warranty and safety information to
customers who have purased products.
LEGITIMATE GOVERNMENT REGULATORY INTEREST Once it has been determined that an
advertisement is eligible for constitutional consideration because it accurately promotes a legal product or
service, a court’s analysis focuses on the constitutionality of the proposed government regulation. e
second criterion of the Central Hudson test is whether a regulation serves a legitimate or substantial
government interest. If the spee in question were political rather than commercial, government
suppression would require proof of a compelling state interest under the standards of strict scrutiny. e
lesser value of commercial spee is reflected in the more relaxed standard that the government
demonstrate only a legitimate or substantial interest to justify regulation.
e government frequently has met the second part of the Central Hudson test quite easily by
demonstrating an interest in preserving the health, safety, morals, or aesthetic quality of the community.
In Central Hudson, the Supreme Court recognized the legitimacy of the New York Public Service
Commission’s desire to conserve energy. e Public Service Commission tried to curb Central Hudson’s
promotional advertising for electricity as part of a national policy of energy conservation. e Supreme
Court declared the commission’s complete ban on the utility’s electricity promotions to be
unconstitutionally broad but not before recognizing the legitimacy of the Public Service Commission’s
goal of saving energy. e Supreme Court also has said that traffic safety and the physical appearance of a
city are sufficient state interests to justify banning commercial billboards if the other criteria of the Central
Hudson test are met.34
In Posadas de Puerto Rico Associates v. Tourism Co., a case in whi the Supreme Court upheld a ban on
truthful casino advertising, the Court recognized as a legitimate state interest a desire by the government
of Puerto Rico to preserve the morality and welfare of the Puerto Rican people by discouraging gambling.35
e gambling promoted by the casino ads on the island, Justice Rehnquist said for the Court majority,
could result in “disruption of moral and cultural paerns, the increase in local crime, the fostering of
prostitution, the development of corruption, and the infiltration of organized crime.” Although the
Supreme Court has stru down laws prohibiting the advertising of alcoholic beverages, the Court has
recognized that governments have a legitimate interest in curbing the consumption of alcohol.36
DIRECT ADVANCEMENT OF THE GOVERNMENT’S REGULATORY INTEREST e third part of the
Central Hudson test is whether a regulation on commercial spee “directly and materially” advances the
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government’s legitimate interest. It is one thing to conclude that the government has a legitimate interest
in establishing a regulation; it is a more demanding requirement for the government to then establish that
the proposed advertising regulation would directly advance the state’s interest. In Central Hudson, the
Court said there is an “immediate connection between advertising and demand for electricity.” erefore, a
ban on the electricity promotions would advance the state’s interest in conserving electricity. us, when
the Supreme Court stru down the blanket prohibition on energy advertising in Central Hudson, it was
not because the Court was convinced the ban would ill serve the goal of conserving energy. e ban was
stru down because it was overbroad, barring all advertising for electricity, even ads that promoted
efficient uses of electricity.
Sometimes the Supreme Court has assumed, without hard evidence, that a regulation on advertising
would advance a governmental interest. In the Posadas case, the Court assumed, without concrete data or
anecdotes, that barring casino advertising in Puerto Rico would serve the government goal of keeping
Puerto Ricans out of the casinos. Writing for the majority, Justice Rehnquist said it was “reasonable” for
the Puerto Rican legislature to believe that advertising gambling on the island would increase the number
of gamblers. erefore, Rehnquist concluded that banning casino advertising would directly advance the
state interest in curbing prostitution, crime, and other demoralizing activities the legislature said gambling
spawned.
Since Posadas, the Supreme Court has been less willing to assume, without evidence, that a government
regulation will serve a government interest. Instead of deferring to state regulators, the Court now says
states must present evidence that a regulation will advance a legitimate interest. e government’s burden,
the Supreme Court has said, “is not satisfied by mere speculation and conjecture; rather, a governmental
body seeking to sustain a restriction on commercial spee must demonstrate that the harms it recites are
real and that its restriction will in fact alleviate them to a material degree.”37
Federal courts have grappled with the requirements of proof in several cases regarding compelled
disclosure requirements in marketing and labeling products. In 2015, for example, the U.S. Court of
Appeals for the District of Columbia Circuit reviewed a Securities and Exange Commission (SEC)
requirement that companies trading in gold, tungsten, tin, and tantalum from the Democratic Republic of
the Congo disclose that fact on their websites and reports. Advocacy groups have opposed allowing
imports of these materials from the Congo and other war-torn areas in a way that benefits militias that
commit genocide and other human rights atrocities. A trade group, the National Association of
Manufacturers, sued to strike down the requirement, arguing that the government had failed to prove any
benefits that the conflict minerals disclosure requirement would advance.38
e court of appeals considered this to be a commercial spee maer under Central Hudson rather
than merely being a maer avoiding deceptive advertising, as was the case when the court previously
upheld a U.S. Department of Agriculture regulation requiring meat producers to put country-of-origin
labels on meat products.39 While the court recognized that ameliorating the humanitarian crisis in the
Democratic Republic of the Congo was sufficient as a government interest, it also found a la of proof by
the government that the regulation would serve that interest. A potential effect of the regulation, the court
suggested, would likely be billions of dollars in compliance costs by companies and a boyco of companies
using minerals from those regions, perhaps preventing millions of dollars from flowing into the region.
However, the court said this outcome was “entirely unproven and rests on pure speculation.” Indeed, it was
unclear whether the rule either alleviated or aggravated the human rights problems in the region. Because
“the SEC was unable to quantify any benefits of the forced disclosure regime,” the court stru down the
requirement.40
e Supreme Court has not been convinced that prohibitions on alcohol advertising would further the
government’s legitimate interest in curbing drinking. In Rubin v. Coors Brewing Co., the Court stru
down a federal regulation prohibiting statements of alcohol content on beer labels because the ban would
not sufficiently advance a government interest in preventing “strength wars,”41 contests in whi brewers
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aempt to increase market share by advertising the high alcohol content of their beverages. In an opinion
wrien by Justice Clarence omas and joined by seven other justices, the Court said that the government
ban on labels containing the alcohol content of beer would not prevent strength wars because the
regulations were so contradictory as to be “irrational.”
e Court recognized that the labels were accurate and that the government had a substantial interest in
protecting the health, safety, and welfare of its citizens by preventing brewers from competing on the basis
of alcohol strength, a competition that might increase alcoholism. However, the Court said it could not
uphold the constitutionality of irrational regulations that prohibited statements of alcohol content on
beverage labels but permied them in beverage advertising. Justice omas also found it irrational that
federal law would prohibit alcohol statements in beer labels but permit them on labels of wines and spirits.
ere is lile ance, omas said, that a statute combating strength wars will advance its aim “while
other provisions of the same act directly undermine and counteract its effects.”
Similarly, the Court stru down a Rhode Island ban on advertising alcohol prices in part because the
government did not demonstrate that the ban would discourage drinking. In 44 Liquormart, Inc. v. Rhode
Island, the government of Rhode Island argued, but did not document, that competing advertisements
would lower the prices of alcohol, thus encouraging consumption.42 In the principal opinion for the Court,
joined by three other justices, Justice John Paul Stevens said that “without any findings of fact, or indeed
any evidentiary support whatsoever, we cannot agree with the assertion that the price advertising ban will
significantly advance the State’s interest in promoting temperance.” Furthermore, there was no evidence
that eliminating the ban on advertising would raise alcohol consumption. With no evidence that the ban
would curb alcohol consumption, the Court was unwilling to uphold what Stevens considered a
paternalistic ban on truthful spee about a lawful product.
In 2011, the Supreme Court ruled pharmaceutical companies have a First Amendment right to use data
identifying doctors’ drug prescriptions to market drugs to doctors. Ruling that the prescription data is
protected commercial spee, the Court stru down a Vermont statute prohibiting use of the data for
marketing. e court said the ban would not advance legitimate state interests in protecting public health
and reducing health costs.43
NARROWLY DRAWN BAN Besides directly advancing a legitimate state interest, a constitutional
regulation on truthful commercial spee for a lawful product must be narrowly drawn. Courts have
sometimes interpreted the fourth Central Hudson requirement to mean that a regulation on commercial
spee has to be the “least restrictive” possible. However, the Supreme Court ruled in Board of Trustees v.
Fox that restrictions on commercial spee may be constitutional even if they are not the least restrictive.44
e Fox Court said there should be a reasonable “fit” between legislative interests and the regulations
employed to aieve them.
e Court remanded the Fox case for a determination whether university regulations barring all private
commercial activities in dorm rooms represented the proper fit of legislative goal and regulatory means.
e regulations were allenged by companies prohibited from selling housewares in university dorms.
e State University of New York at Buffalo defended the regulations, designed to prevent commercial
exploitation of students and to create an educational atmosphere at the university. e Supreme Court
recognized the legitimacy of the state’s goals but returned the case to the lower courts for determination of
the reasonableness of the ban.
In Central Hudson, the Court found the ban on electricity promotions to be unconstitutionally broad
because it was more extensive than necessary to further the government interest in energy conservation.
e Court recognized that the New York Public Service Commission had a legitimate interest in regulating
advertising to conserve energy. But the ban was unconstitutional, the Court said, because it barred
promotional information about efficient as well as inefficient uses of electricity.
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e Court said the Public Service Commission had failed to demonstrate that its interest in energy
conservation could not be advanced adequately by more limited regulation. Rather than ban all
promotions, the Court said the Public Service Commission might further its conservation policy by
ensuring that the utility’s advertisements include information about the relative efficiency and expense of
different uses of electricity.
e city of Cincinnati also failed to constitutionally mat a regulation to a legitimate government goal.
In Cincinnati v. Discovery Network, Inc., the Supreme Court ruled unconstitutional a city ordinance that
prohibited 62 newsras distributing commercial handbills but allowed more than 1,500 other newsras
containing newspapers.45 e ordinance was allenged by companies that distribute real estate and adult
education booklets.
e Court agreed that the city had a legitimate goal of preserving the safety and aesthetics of the
community by limiting the number of newsras. However, the Court saw no relationship between the
total ban on 62 commercial newsras and the city’s interests in preserving safety and aesthetics. Removal
of the 62 ras would be a minuscule improvement, the Court said, if more than 1,500 equally ugly
newspaper ras were allowed to remain. Aer struggling unsuccessfully to find a clear distinction
between noncommercial newspapers and “commercial” real estate and education promotions, the Court
was “unwilling to recognize Cincinnati’s bare assertion that the ‘low value’ of commercial spee is a
sufficient justification for its selective and categorical ban on news-ras dispensing ‘commercial
handbills.’”
In a case of alcohol advertisements, eight justices of the Supreme Court agreed that Rhode Island’s total
ban on truthful price advertising for alcohol did not fit properly with the state’s goal of reducing drinking.
Rhode Island had several alternatives to a ban on price advertising, alternatives that would reduce
drinking without curbing spee, the Court said. e state could discourage drinking by raising prices of
alcoholic beverages, raising taxes on alcohol, puing limits on purases of alcohol as the government
limits the purase of prescription drugs, and conducting education campaigns to discourage drinking.
While striking down the Rhode Island law, the Supreme Court rejected a contention from the Posadas
case that the government’s power to regulate the sale of a product includes the right to ban commercial
expression about the product. “e First Amendment directs that government may not suppress spee as
easily as it may suppress conduct, and that spee restrictions cannot be treated as simply another means
that the government may use to aieve its ends,” Justice Stevens wrote in Liquormart. Under the Twenty-
First Amendment, states may regulate—even prohibit—the sale of alcohol. But the Twenty-First
Amendment does not permit states to restrict truthful spee about a lawful product, the Court said.
e Supreme Court also emphasized the importance of truthful spee about lawful products when it
stru down tobacco advertising regulations. In Lorillard Tobacco Company v. Reilly, the Court found that
Massauses had a compelling interest in protecting the health of ildren, but a prohibition of outdoor
advertising of cigars and smokeless tobacco products within 1,000 feet of sools or playgrounds failed the
fourth prong of the Central Hudson test.46
Writing for the Court, Justice O’Connor held that the breadth and scope of the outdoor restrictions did
not represent a “careful calculation” of the burden on spee. Massauses had not appropriately
considered the varying impact of the 1,000-foot boundary in rural, suburban, and urban locations. In a
large city su as Boston, tobacco manufacturers and retailers would be unable to advertise in 87 percent
to 91 percent of the city. To Justice O’Connor, the geographic rea of the restrictions would “constitute
nearly a complete ban on the communication of truthful information about smokeless tobacco and cigars
to adult consumers.”
e Court also stru down a Massauses prohibition on indoor smokeless tobacco and cigar
advertisements lower than five feet from the ground. is regulation failed both the third and fourth
prongs of the Central Hudson test. “Not all ildren are less than 5 feet tall, and those who are certainly
have the ability to look up and take in their surroundings,” O’Connor said.
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Although states have the authority to enact narrowly tailored advertising restrictions on smokeless
tobacco and cigars, a federal statute governing the advertising of cigarees preempts states from restricting
cigaree advertisements to promote health. e Federal Cigaree Labeling and Advertising Act, however,
does not preempt state power to control the sale of cigarees. us, a Massauses ban on self-service
displays of tobacco products was found to be constitutional.
A federal appeals court did find a “reasonable fit” between a ban on all “junk faxes” and a legislative
aempt to prevent advertisers from shiing the costs of advertising to consumers.47 Upholding a section of
the Telephone Consumer Protection Act of 1991, whi bans unsolicited faxed advertising, the Ninth
Circuit ruled the ban advances the government’s substantial interest in protecting consumers from having
to pay to receive unsolicited messages that tie up their fax maines. e law can constitutionally prohibit
companies from burdening consumers with paper costs and loss of time, the court said, even though
tenology may eventually allow all consumers to receive faxes instantaneously at no cost.
Furthermore, the court said the law is not too broad, even though it prohibits all unsolicited commercial
faxes even if the sender is not motivated by profit. “e ban is evenhanded,” the court said, “in that it
applies to commercial solicitation by any organization, be it a multinational corporation or the Girl
Scouts.”
■ Summary ■
e First Amendment protects commercial spee but to a lesser degree than it protects political
expression. e Supreme Court has said that the hardiness and verifiability of commercial spee justify
lesser constitutional protections on advertising than on political and social commentary. Commercial
spee has been defined as expression promoting a commercial transaction.
Under a four-part test developed by the Supreme Court, restrictions on commercial spee are permied
even if the expression is accurate and promotes a lawful product or service. Under the four-part test,
truthful commercial spee may be restricted if the government asserts a substantial interest that will be
advanced by a regulation. e regulation must also be narrowly tailored to serve government objectives.
Unfair and Deceptive Advertising
Because false and deceptive commercial advertisements are outside constitutional protection, they may be
banned. Advertisers also may be ordered to alter ads so that they cease to be deceptive. e required
alterations may include warnings, disclosures, and corrections of earlier deceptive ads. Advertisers are also
required to substantiate advertising claims.
Advertisements are regulated under a number of federal and state laws. e leading regulatory body is
the FTC, whi operates under the Federal Trade Commission Act of 1914 and is a five-person commission
whose members are appointed by the president to staggered seven-year terms. e commission has a large
staff of aorneys, economists, and accountants who originate inquiries, issue reports, and conduct
investigations.
e FTC’s rulings and reports not only define the scope of federal regulation but also determine
standards for state and industry regulatory bodies. In some states, an advertiser who complies with the
Federal Trade Commission Act may not be penalized under state antideception laws.
e FTC’s primary mission is to protect consumers from unfair or deceptive market practices and to
promote vigorous competition. e primary statutory authority for the FTC’s activities is the Federal Trade
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Commission Act, whi prohibits unfair methods of competition and unfair or deceptive acts or practices
in or affecting commerce. e Federal Trade Commission Act gives the FTC authority not only over
advertising but also over monopolistic and other anticompetitive activities. In recent years, the FTC has
been especially concerned with preventing deception in advertisements claiming environmental,
nutritional, and other health benefits.
e FTC shares jurisdiction or coordinates with the Department of Justice, the Food and Drug
Administration, the Environmental Protection Agency, the Consumer Product Safety Commission, and
numerous other federal agencies. e FTC also works with state agencies, notably the National
Association of Aorneys General.
e Federal Trade Commission originally had jurisdiction only over unfair and deceptive acts or
practices that hurt competing companies. In 1938, however, the scope of the Federal Trade Commission Act
was broadened to provide protection for consumers as well as competitors.48 At the heart of FTC
advertising regulation is its power to require that advertisers substantiate the accuracy of advertising
claims.49 Since the 1980s, the FTC has narrowed the definition of deception and demanded more empirical
evidence than before to establish that an advertisement is deceptive or misleading.
Unfairness
e FTC may stop both unfair and deceptive advertising. Section 5 of the Federal Trade Commission Act
declares unfair competition and unfair or deceptive acts or practices in commerce to be unlawful.50 e
Federal Trade Commission has referred to its authority to stop unfairness as its “general law of consumer
protection for whi deception is the one specific but particularly important application.”51
In the early 1970s, unfairness was described very broadly as whether a practice offended public policy,
was immoral or unethical, or caused substantial injury to consumers or businesses.52 In 1980, the FTC
narrowed the focus of its unfairness inquiries to whether an advertisement or commercial practice causes
substantial consumer injury.53 In 1994, Congress defined an unfair act or practice as one that “causes or is
likely to cause substantial injury to consumers whi is not reasonably avoidable by consumers themselves
and not outweighed by countervailing benefits to consumers or to competition.”54 e Federal Trade
Commission Act permits the FTC to issue broad rules curbing unfairness in a whole industry if the
harmful acts or practices are “prevalent.” ese “Trade Regulation Rules” and the advertising industry’s
resentment of them will be discussed in a later section.
Unfairness is more likely to arise in a company’s treatment of customers than in advertising. Because
the commission looks for substantial harm, the FTC is not concerned with trivial or merely speculative
harms. In most cases of unfairness, substantial injury involves monetary harm, as when sellers coerce
consumers into purasing unwanted goods or services. In one case, a company acted unfairly by
requiring consumers to buy expensive parts before company service personnel would reassemble furnaces
they had dismantled.55
Unwarranted health and safety risks also may support a finding of unfairness. A razor blade
manufacturer was found to have acted unfairly when it distributed free samples of blades in newspapers,
thus creating the possibility that small ildren might hurt themselves.56 A tractor manufacturer also was
found to have acted unfairly when it failed to tell customers that opening the gas cap aer the engine was
hot might result in dangerous “geysering” of gasoline.57
In 2012, Facebook seled FTC arges that the social network company was unfair and deceptive in its
online privacy practices. e FTC had arged Facebook with anging user information—su as users’
Friends lists—from private to public without warning or user approval; representing that apps would not
have access to most user information when they did; sharing “Friends Only” data more widely than
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Facebook policy stated; sharing information with advertisers aer promising not to; and making photos
and videos accessible aer an account had been deactivated.58
In the agreement, Facebook agreed to establish a comprehensive privacy program, to obtain consumer
consent before anging consumers’ privacy preferences, and to prohibit access to user information more
than 30 days aer the user deletes an account.59
Facebook is liable for penalties of $16,000 a day for ea count if it violates the terms of the selement.60
e selement also requires Facebook to obtain periodic assessments of its privacy practices by
independent auditors for 20 years.61
In 2014, Google agreed to refund at least $19 million the FTC said the company unfairly billed to
consumers for unauthorized arges by the consumers’ ildren. Google agreed to reimburse parents for
arges by ildren made through apps downloaded from the Google Play app store. It was unfair, the FTC
said, to bill consumers for unauthorized arges incurred by their ildren. Google also agreed to obtain
express, informed consent from account holders for all in-app arges. In a similar case, Apple agreed
earlier to pay at least $32.5 million for unauthorized in-app arges by ildren.62
Deception
e FTC is more concerned with deception than with unfairness. Although deception is not defined in the
Federal Trade Commission Act, the FTC has defined a deceptive ad as one that is likely to mislead a
reasonable consumer with a material statement or omission.63
LIKELY TO MISLEAD Deceptive advertisements are those that either contain express falsehoods or create
false impressions that tend to mislead. Courts and the FTC have long held that ads do not have to deceive
someone to be deceptive; rather, ads must possess a “tendency,” or “capacity,” or be “likely” to mislead a
reasonable consumer.64 It does not maer whether the advertiser intends to mislead; an advertisement may
have a tendency to deceive regardless of the advertiser’s intent. Deceptiveness is determined by the overall
impression of an advertisement, not by isolated statements within it. Statements that might be susceptible
to both a misleading and a nonmisleading interpretation will be considered deceptive.
REASONABLE CONSUMER Whether an advertisement is deceptive depends on the likelihood the ad will
deceive a consumer “acting reasonably in the circumstances.”65 An advertisement is not deceptive if it
would mislead only a few particularly gullible consumers. Aer all, the FTC has said, a company “cannot
be liable for every possible reading of its claims no maer how far-feted.”66 us, for example, the law
does not help the consumer who thinks Danish pastry is always made in Denmark.67
Sometimes the FTC determines an advertisement is deceptive simply by reading or viewing it. However,
oen the FTC relies on the testimony of experts and the results of consumer surveys to determine the
likelihood of deception. An ad is deceptive if it is likely to deceive a “substantial number” of consumers in
the group to whi it is directed.68 An ad that tends to deceive 20 percent to 25 percent of the consumers in
a survey is said to deceive a “substantial number.”
Although many ads are aimed at the reasonable consumer in the general public, others are targeted at
subgroups, su as ildren, the aged, or the ill. An ad that exaggerates the medicinal powers of a product
might not deceive average, healthy adults but could be deceptive if directed to terminally ill consumers
desperately seeking a cure.69 Misleading promises of easy weight loss might not deceive the consumer of
average weight but could deceive the obese consumer to whom it is directed.70
For many years, the FTC has been especially aentive to ads aimed at ildren, who are “unqualified by
age or experience to anticipate or appreciate the possibility that representations may be exaggerated or
untrue.”71 In an important ildren’s case, the FTC ruled that advertisements for Galoob Toys were
deceptive because they falsely represented the company’s Micro Maines as a set when, in fact, they were
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sold separately.72 e commission said the toy company and its advertising agency also deceived ildren
by misrepresenting the ability of a doll to twirl on one foot and of a missile to travel a long way.
e FTC also has taken action against alcohol and tobacco advertising that appears to threaten youth.73
In one case, the FTC halted the use of logos and messages for Redman smokeless tobacco in televised
tractor- and tru-pulling contests wated by young people. e commission said televising Redman
logos, flags, and other commercial symbols at the contests violated the federal law prohibiting televised
advertising of smokeless tobacco products.74 Similarly, the Philip Morris Company agreed to stop placing
signs behind scoring tables and other locations at baseball, basketball, hoey, and football games where
television cameras would fix on them.75
e FTC reaed an agreement with Audio Communications, Inc., to make it less likely that ildren
will run up large phone bills by calling 900 telephone numbers. Audio Communications and at least one
other company agreed to explain in television ads aimed at ildren that calls to 900 numbers cost money
and that the ildren should get permission from their parents before placing a call to hear a message, buy
a toy, or receive a gi.76
Advertisers are not liable if accurate ads aimed at doctors, lawyers, and other specialists are
misunderstood by the average consumer. Laypersons read at their own risk the tenical language in ads
directed to experts.77
MATERIALITY To be deceptive, advertising that has a tendency to deceive the average consumer must be
material. A material statement in advertising, like a material statement in corporate securities transactions,
is one that is likely to affect a purasing decision. A material advertising claim need not actually influence
a consumer’s decision to buy a product; nor must the consumer lose money for the ad to be considered
deceptive. An ad is deceptive if it is likely to, or has the capacity to, affect consumer oices.
Material statements include express claims and deliberately implied claims about a product or service.
An omission in an advertisement may also be material if the seller knows or should know that consumers
need the omied information to form an accurate impression. e FTC has found advertising claims or
omissions about health, safety, durability, performance, warranties, quality, and cost to be material.
Indeed, the FTC considers most factual advertising claims about a product to be material. Aer all, the
commission has observed, advertisers would not make factual claims if the advertisers did not intend to
influence consumers’ oices.78
Consumer decisions would be affected, for example, by a material claim that only one brand of air
conditioner ensures cooling on extra hot, humid days.79 Likewise, a claim that aspirin relieves pain beer
than other pain relievers is material,80 as is a claim that a skin cream contains aspirin. However, it would
not be material to say in a tire advertisement that the tire manufacturer’s main office is red when it is
white. e color of the building would not be germane to a consumer’s decision to buy tires.
Material statements that are likely to deceive may consist of express falsehoods. More oen, deceptive
ads contain statements that are literally true but create a false implication.
EXPRESS FALSEHOODS Expressly false statements about product aributes are almost always deceptive.
e FTC has defined express claims as ones that make a direct representation. e meaning of express
falsehoods, like the meaning of libel per se, can be determined from the plain meaning of the words.81 e
message is stated unequivocally. Express falsehoods include claims that merandise is “antique” when it
is not old enough to qualify as antique,82 that coffee is “caffeine free” when the brew contains caffeine, or
that goods are “fireproof” when they are only fire resistant.83 Explicit falsity has also been found when
merandise was called “genuine” when it was a simulation or imitation.84
An ad also is deceptive if it contains an expressly false demonstration of a product. In the famous
sandpaper shave case, Rapid Shave was made to appear in a television commercial to have the moistening
power to soak sandpaper for an effortless shave. e voice in the television commercial told viewers they
were seeing proof that Rapid Shave could shave “tough dry sandpaper.” However, viewers were not shown
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sandpaper being shaved. Instead, they saw a piece of Plexiglas on whi sand had been spread. Aer Rapid
Shave was applied, a razor whisked the sand away.85
e ability of Rapid Shave to soen sandpaper was not disputed, at least if considerable time was
allowed. But the viewer was not seeing sandpaper shaved. e FTC and the Supreme Court ruled the
Plexiglas mo-up was materially deceptive because it was used as “actual proof of an advertising claim.”
Even though Rapid Shave could shave sandpaper if enough soaking time were allowed, the Supreme Court
said the demonstration was deceptive because it falsely told viewers they were seeing objective proof of a
product’s performance. e Court said the false demonstration was similar to false testimony by a
celebrity or expert.
Colgate-Palmolive, the makers of Rapid Shave, said it substituted Plexiglas for sandpaper only to
compensate for the tenical distortions of television. Colgate-Palmolive said sandpaper on television
looked like unaractive, plain, brown paper. But the Court said simulations should not be employed if they
cannot represent a product truthfully. e Rapid Shave case indicates, the Court said, “that television is not
a medium that lends itself to this type of commercial, not that the commercial must survive at all costs.”
e Court’s ruling did not foreclose the use of mo-ups to overcome the tenical distortions of
television. Mo-ups may be used if they are not employed falsely to prove a product claim. For example,
an advertiser could use mashed potatoes to represent ice cream in an ad for table linen if ice cream would
melt too quily under hot television lights. However, mashed potatoes should not be used in an ice cream
advertisement to demonstrate the velvety texture and enticing colors of ice cream. Props are deceptive if
they are used falsely as proof of a product claim.
IMPLIED FALSEHOODS More common and more difficult to identify than express falsehoods are
statements or omissions in advertisements that create a false impression by implication. e FTC defines
implied claims circularly as claims that are not express.86 An implication can be thought of as a false
meaning added to a truthful advertisement by the reader or viewer because of an impression the
advertisement creates. For example, a consumer might infer that a tire manufacturer’s claims are baed
by scientific tests if “tenicians” in white jaets aest to the tires’ superior stopping power. If no
scientific tests support the tire manufacturer’s claims, the advertiser’s use of white-jaeted tenicians
creates a false implication of scientific validity. Advertising claims that are tenically true but deceptive
because they create a false implication can be divided into at least fieen categories.87 Several categories
are discussed in the following sections.
Reasonable Basis Implication e Federal Trade Commission requires that advertisers have a
reasonable basis for the objective claims in their advertisements. Advertisers should be able to support all
material claims with results from scientific tests or other appropriate evidence. us, an advertiser who
says its tires stop faster than others should have scientific evidence to substantiate the claim.
An advertiser’s ability to support substantive claims is a material element, the absence of whi is
deceptive. Consumers, the FTC says, are less likely to rely on claims for products and services if they know
that the advertisers have no reasonable basis for making them.88 us, the FTC may find an advertisement
deceptive, even if the claim is true, if the advertiser has no reasonable basis for making the claim.
e FTC originated the substantiation requirement in 1972 when it ruled that an advertising claim by
Pfizer Pharmaceutical laed a reasonable basis.89 Although Pfizer was tenically an unfairness case, the
FTC has frequently cited Pfizer for the proposition that advertising claims must be substantiated if an
advertiser is to avoid deception.90 In Pfizer, the FTC was not satisfied that the pharmaceutical company
had adequate substantiation for its claims that Unburn suntan lotion “actually anesthetizes nerves” to
relieve pain. In fact, the company could offer no scientific data to support the claim.
e FTC said that “failure to possess substantiation amounts to a la of reasonable basis, whi in turn
is an unfair act or practice under Section 5” of the Federal Trade Commission Act. e FTC said in Pfizer
that substantiation might be provided through scientific studies, existing medical literature, tests
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conducted by makers of similar competing products, or in some cases, the successful wide use of a product.
Pfizer, however, had virtually no evidence for its claims for Unburn tanning lotion.
Advertisers should possess substantiation before they make claims about safety, performance, efficiency,
quality, and price. If an advertisement asserts a certain level of scientific support by saying “tests prove” or
“studies show,” the advertiser must be able to provide supportive results for the claim from two
scientifically valid tests. If an ad does not claim a certain level of supporting data, the FTC determines a
reasonable basis for claims by considering the type of claim, the product, and the consequences for
consumers of a false claim. e FTC also considers the benefits to consumers of a truthful claim, the cost
to the company of developing substantiation and the amount of substantiation experts in the field believe
is reasonable.91
e Firestone Tire & Rubber Company was found to have issued deceptive and unfair advertisements by
failing to substantiate a claim that the company’s Super Sport Wide Oval tires “stop 25 percent quier.”
e tires did stop a car more quily than other tires on wet concrete, but the company laed “substantial
scientific test data” to prove that the tires performed significantly beer in the many different road
conditions American motorists encounter.92 Similarly, a company marketing Acne-Satin, a skin medication
promoted by singer Pat Boone, laed substantiation for its claims that the product “cures acne, eliminates
or reduces the bacteria and fay acids responsible for acne blemishes.”93
e FTC may reconsider a substantiation ruling if scientific opinion anges. In 1974, the commission
prohibited the Sterling Drug Company from claiming that Lysol Disinfectant Spray prevents colds. e
FTC’s ruling was based on the best scientific evidence of the time, whi concluded that colds were
transmied by airborne viruses that would not be affected by Lysol. Lysol was thought to have no effect
on airborne viruses because it was used to clean counters, tables and other surfaces. However, the
commission lied its ban when new scientific evidence indicated that colds may be transmied through
contact with surfaces that can be cleaned with Lysol. As new resear began to appear, the FTC said
Sterling could advertise that Lysol can prevent colds as long as successive claims were supported by
“competent and reliable scientific evidence.”94
Proof Implication Another deceptive advertisement is one that falsely creates the impression that
evidence presented proves a claim. A false implication of proof is created if an advertiser misrepresents the
evidence presented to substantiate an advertising claim. Ads are deceptive if they misuse test data, create a
phony aura of scientific support or otherwise imply proof that does not exist. In the Firestone
advertisement just mentioned, the company created a false implication of proof by saying that the
company’s “racing resear” established that Firestone tires “stop 25 percent quier.” e implication was
deceptive because, although the company had conducted tests, it had no tests comparing the ability of
Firestone and other tires to stop a car under normal driving conditions.95
Bayer Corporation agreed to undertake a $1 million campaign telling viewers the company had made
unsubstantiated claims for Bayer Aspirin. e Federal Trade Commission said Bayer had no substantiation
for its advertised claims that taking an aspirin daily can prevent heart aas and strokes. e FTC said a
regular aspirin regime will not benefit some adults and others will be adversely affected by taking an
aspirin ea day. Bayer’s aspirin-a-day advertisements ran for three years. Bayer consented to distributing
broures and running advertisements providing substantiated information about aspirin’s effectiveness in
preventing heart aas and strokes.96
Demonstration Implication Product demonstrations in advertisements may also create deceptive
implications. In the Rapid Shave case discussed earlier, a mo-up was misleading because it falsely
demonstrated the moistening power of a shaving cream. More oen, however, a demonstration is true but
nevertheless creates a false impression about how the product will perform in normal circumstances. e
FTC found misleading an advertisement in whi a sandwi was kept dry under water in a Baggies lun
bag while the sandwi in a competitor’s bag was soaked. e demonstration was accurate, but it falsely
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implied that Baggies were superior to other sandwi bags for keeping food fresh in a refrigerator or
lunbox. “Dunking the sealed bags in a sink of water and swishing them vigorously… is not proof of the
comparative abilities of the two bags to prevent food spoilage,” the FTC said.97
e Standard Oil Company of California falsely implied through a demonstration of clean air and a
pollution meter that Chevron gasoline with F-310 removed all or most pollutants from engine exhaust. In
one ad, a car burning Chevron with F-310 emied clear exhaust into a large see-through balloon tied to
the exhaust pipe of the car. In another ad, the exhaust was contained in a transparent bag encircling the
car. In a third, a meter dial labeled “exhaust emissions” pointed to “100” at the “dirty” end of the scale
before Chevron with F-310 was used. Aer “just six tankfuls,” the meter pointed to “20,” four-fihs of the
way toward “0” at the “clean” end of the scale. Meanwhile, another car in the ads, a car whose gasoline did
not contain F-310, continued to emit dirty exhaust that clouded the balloon and bag.
e balloon ads were deceptive, the FTC said, because the clear Chevron exhaust appeared to contain no
pollutants, when in fact it contained invisible but significant amounts of carbon monoxide and
hydrocarbons. Independent scientific tests revealed that the F-310 additive did reduce pollutants but not as
mu as the balloon and bag demonstrations indicated. e ads were deceptive, the FTC said, “because of
the substantial disparity between the visual impact of the demonstrations and the evidence whi showed
the actual average reductions.”98 e meter, too, was misleading because the drop of 80 units from the dirty
end to the clean end did not correspond to the mu smaller percentage reduction in pollutants a typical
motorist would experience from using Chevron with F-310.
e U.S. Court of Appeals for the Ninth Circuit ruled that BBD&O, the advertising agency in the
Chevron case, bore responsibility for the deceptive demonstrations. It is not enough that an advertising
agency know that products will perform as the manufacturer claims, the court said. e agency also has a
responsibility to represent that performance accurately. BBD&O argued that it should not be liable because
it based the ads on information that had been validated by independent tests and approved by several
departments at Chevron, including engineering, resear, and law.
However, the Ninth Circuit said it was not sufficient for BBD&O to satisfy itself only that F-310 did in
fact reduce pollution. e agency also had a responsibility to ensure the accuracy of the implicit
representations the ads conveyed. Said the court:
No specialized engineer was needed to put BBD&O on notice that a gauge whi drops from a reading of 100
(“dirty”) to 20 (“clean”) implies a sweeping representation with reference to the ange in level of pollution
disarge. In light of the advertising agency’s active participation in developing this advertising, it was BBD&O’s
responsibility to assure itself not only that the gauge was not rigged, but also that use of the gauge did not convey
a distorted impression.99
No alification Implication Advertisements are also misleading if they omit a necessary
qualification. e FTC ruled, for instance, that a Firestone tire advertisement was misleading because it
claimed without qualification that Firestone was “e Safe Tire.” e company’s claim was supported by
the statement that Firestone tires pass all of the company’s inspections.100
However, although it was true that Firestone marketed no tires that failed company inspections, the FTC
ruled that the unqualified claim that Firestone tires were “safe” was deceptive because it falsely implied
that the tires were free of all defects. Indeed, 15 percent of the respondents in a consumer survey thought
the company was claiming that its tires were free of defects. But tests available at the time of the
advertisement were insufficiently accurate to detect all defects in a tire.
Effective alification Implication Consumers are always warned to read the small type in an
advertisement for qualifications, but the FTC says ads may be deceptive even if they contain accurate but
ineffective qualifications. “A qualification presented weakly has the same impact as a qualification
completely absent,” Professor Ivan Preston observes.101
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e FTC ruled that the advertisements for Chevron gasoline with F-310 were deceptive not only because
the clear bags belied scientific tests for pollution, but also because the visual impact of the clear bags
overwhelmed the verbal and wrien qualifications in the broadcast and print versions of the ads. e
verbal and wrien parts of both balloon ads did not claim that the Chevron exhaust was completely
“clean,” only that it was “cleaner” than the other exhaust. Nor did the ads claim that Chevron eliminated
pollution, only that it reduced it. Despite this qualifying language, the Federal Trade Commission ruled
that the ads were misleading because the “strong, predominant visual message” of the clear balloons and
bags implied a complete reduction in pollutants. “e net impression,” the FTC said, “is overwhelmingly
influenced by the striking visual portions of the advertisements.”102
Significance Implication Insignificant facts stated so that they appear to be significant also create a
false implication in advertising. In one case, advertisements for Old Gold cigarees were deceptive even
though they truthfully claimed that Old Golds were found “lowest in throat-irritating tars and resins.”
ough true, the ads created the false implication that smokers would benefit from oosing Old Golds
over other brands.103
e study on whi the cigaree ad claims were based was reported in Reader’s Digest. In its report of
the study, Reader’s Digest concluded that the difference in tar and nicotine among cigaree brands was too
insignificant to be important to smokers. One cigaree is “just about as good as another” to “nail down” a
smoker’s coffin, the Digest said.
e FTC ruled, in a decision upheld by a federal appeals court, that the Old Gold ads were deceptive
because they falsely implied a significant difference among cigarees. e advertisements, the court said,
used the truth in a perverted way “to cause the reader to believe the exact opposite of what was intended”
in the Reader’s Digest article.
Similarly, advertisements for Carnation Instant Breakfast were ruled to be misleading when they
claimed the product provided “as mu mineral nourishment as two strips of bacon.” Bacon, it turns out, is
not a good source of the most commonly recommended minerals.104 Likewise, claims that Gainesburgers
dog food provides all the milk protein a dog needs were of misleading significance because dogs do not
need milk protein.105
Puffery Implication Although advertising claims are supposed to be factual and represent the
experience of the people making them, the law of advertising, like the law of libel, leaves room for
subjective statements of opinion. Advertisers may exaggerate or “puff” their products on su subjective
maers as taste, feel, appearance and smell. e commission assumes that ordinary consumers do not take
puffery seriously.
It is acceptable puffery for an advertiser to say that a foreign sports car is “the sexiest European,”106 that
“Bayer works wonders,”107 or that a motor oil is the “perfect” lubrication, allowing a car to travel an
“amazing distance” without an oil ange.108 “So far as we know,” a federal appeals court said, “there is
nothing ‘perfect’ in this world, whi undoubtedly means nothing more than that the product is good or of
high quality.” Su exaggeration is recognized as puffery and creates no false implication.
Puffery becomes deception when exaggerated claims falsely imply material assertions of superiority.
However, determining when puffery becomes a materially misleading statement is very difficult. e FTC
ruled that Jay Norris Company went beyond acceptable puffery when it advertised that a television
antenna was an “electronic miracle.” e FTC said the statement was one of several exaggerated claims
that could lead consumers to believe falsely that the antenna was generally superior.109
Endorsements e FTC regulates product endorsements by consumers, experts, organizations and
celebrities, requiring disclosure of “material connections” between advertisers and endorsers. e FTC
requires advertisers to inform consumers if product endorsements are paid for with money or products. An
endorsement is misleading if consumers would think the product evaluation is independent when in fact
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statements are sponsored advertising messages. FTC endorsement guidelines revised in 2015110 extend
disclosure requirements to bloggers and others in social media who endorse products. It may be
particularly difficult for consumers to distinguish independent product evaluations from paid
endorsement-advertisements in informal, interactive social media. Companies increasingly send products
to bloggers to generate buzz about new commercial offerings.
Bloggers must disclose payments they receive in exange for reviewing a product. “e post of a
blogger who receives cash or in-kind payment to review a product is considered an endorsement,” the FTC
says. “us, bloggers who make an endorsement must disclose the material connections they share with
the seller of the product or service.”111 A member of Elevenmoms.com, a bloggers group organized by Wal-
Mart, must disclose the merandise they receive from Wal-Mart retailers and suppliers if they review
Wal-Mart merandise. A blogger who receives a car for a favorable review must disclose the material
connection to the sponsor. A blogger who receives a free book probably does not.
Celebrities do not have to disclose their relationship to an advertiser if the relationship would be
obvious to a consumer, as when a celebrity endorses a product in a prime-time television commercial. But
the celebrity must disclose his or her material relationship to an advertiser if the celebrity is paid to
endorse a product during a talk-show conversation or other venue in whi a consumer might not expect a
favorable comment about a product was paid for. Under the new guidelines, celebrity endorsers as well as
advertisers may be liable for false or unsubstantiated claims in an endorsement.
An expert is someone who has acquired superior knowledge of a subject as a result of experience, study
or training. If experts claim in an advertisement that a product is superior, FTC guidelines require that the
experts have expertise relevant to their product endorsements. Experts are also supposed to have compared
a product they endorse with others. Astronaut Gordon Cooper’s endorsement of a fuel-saving automobile
engine aament was ruled to be deceptive because the astronaut’s expertise was not in the field of
automobile engines.112
If an organization endorses a product, the product should meet professional standards set by the
organization.113 us, maresses endorsed by a iropractic association should perform to standards set by
the profession. Neither celebrities nor ordinary citizens need to possess special expertise to endorse a
product.
Twin Star Productions, Inc., agreed to pay $1.5 million to consumers deceived by program-length
“infomercials” in whi seemingly independent consumers made false and unsubstantiated endorsements
for the EuroTrym Diet Pat, Foliplexx hair-loss product and Y-Bron impotence treatment.114 At the
conclusion of an FTC proceeding, Twin Star agreed to stop airing infomercials as independent consumer
programs when, in fact, they were paid advertisements.
Besides halting false statements about the ability of the products to reduce weight, restore hair and
revive potency, Twin Star agreed to discontinue the deceptive format in whi actors are paid to appear as
ordinary, independent consumers expressing honest opinions about the products. All future Twin Star
infomercials are required to begin with this disclosure: “e program you are wating is a paid
advertisement for [the product or service].” e company and its officers also were ordered to pay the FTC
$1.5 million for distribution to purasers of EuroTrym, Foliplexx, and Y-Bron.
e FTC has also craed down on video game companies that pay influencers to promote their
products on YouTube. In 2016, Warner Bros. seled with the FTC aer it was revealed that the company
had paid individual YouTubers hundreds to thousands of dollars to promote its Middle Earth: Shadow of
Mordor video game. e sponsored videos, whi were viewed an estimated 5.5 million times, did not
include any clear disclosure that they were sponsored. A text box that revealed the video was sponsored
only if a viewer clied on a “show more” buon was inadequate, the FTC said. e selement mandated
clearer endorsement disclosures by Warner Bros. in future videos.115
Native Advertising Web platforms su as Facebook, Buzzfeed, and Vice, as well as traditional news
operations su as The New York Times and The Atlantic, have offered companies the ance to pay tens
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of thousands of dollars for content to be published that has the appearance of being an independent
journalism effort.116 However, studies have shown that, regardless of efforts by publishers to make
sponsorship of content transparent, readers and viewers are oen still confused about whether content is
an advertisement.117 In 2015, the FTC released guidelines regarding native advertising—oen also known
as “sponsored content” or “brand publishing”—to ensure that the relationship between sponsor and
publisher is made clear to the audience. In the policy statement, the FTC noted that native advertisements
“are deceptive if they mislead consumers into believing they are independent, impartial, or not from the
sponsoring advertiser itself.” ese include, for example, publishing advertisements that are in the same
format as news content, su as content with a byline and in the same font and column width as a news
story or a video that resembles other video content usually produced by journalists on a news site. To
avoid confusion, the FTC recommends native advertisements make the sponsorship relationship clear, with
the word “advertisement” featured prominently.118
e FTC brought an enforcement action in 2016 against the retailer Lord & Taylor, whi paid the
online magazine Nylon to publish an article and to post photos of its fashion collections on Instagram
without requiring Nylon to disclose the connections. In addition, Lord & Taylor paid 50 “influencers”
between $1,000 and $4,000 to wear dresses from the collection and post photos of themselves on Instagram,
also without requiring disclosure of the payments. As part of a selement, Lord & Taylor was required to
make future endorsement relationships on su platforms clear and conspicuous.119
State Regulations
All 50 states have enacted legislation that, like the Federal Trade Commission Act, prohibits unfair
competition and unfair acts and practices or otherwise allows citizens and companies to sue over deceptive
advertising.120 Under many state laws, consumers as well as competitors can sue not only to stop deceptive
advertising but also to recover damages and aorneys’ fees.
Although states can regulate advertising only within their borders, regulations in important commercial
states, su as Texas or Florida, have a national impact. During the many years of deregulation by the
federal government, state aorneys general became more aggressive, suing airlines, car rental companies
and other corporations over advertising that violated state laws, laws that sometimes reflected guidelines
issued by the National Association of Aorneys General. National advertisers objected that they could not
meet 50 different state standards for deception. State aorneys general also enforce regulations on tobacco
marketing.
In a blow to state efforts to regulate national advertising, the Supreme Court ruled that states could not
regulate airline advertising because federal airline rules preempt state law.121 Because Congress claimed
federal jurisdiction for regulation of airline advertising, the Court said that states could not sue airlines for
failing to disclose tiet restrictions and arges in their advertisements. Congress has not claimed
exclusive federal jurisdiction over all national advertisements. Plaintiffs have been allowed to sue under
state law for a variety of claims, including one that national ads falsely claimed a diet plan was safe when,
in fact, it caused gallbladder disease.122
ONLINE CHALLENGES Enforcing state and federal commercial spee laws online can be a allenge
because of the safe harbor provisions for providers and users of interactive computer services under
Section 230 of the Communications Decency Act (see Chapter 4), by not treating them as a “publisher or
speaker” of information provided by others. While this immunity from liability has been broadly applied
in the context of libel claims, some courts have found ways around the shield to allow civil and criminal
investigations of web hosts to proceed.
A website may lose its immunity under Section 230 if it creates or helps third parties to develop
defamatory or other illegal content. A federal appeals court ruled that Roommate.com was not immune
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from liability under Section 230 because it required subscribers to state possibly discriminatory preferences
before they could sear listings or post housing opportunities on the site that mated people seeking a
roommate to those offering a room for rent.123
Roommate.com required subscribers to answer a questionnaire disclosing their sex, sexual orientation
and whether they would bring ildren to a household, as well as their preferences on those three maers
and others. ese were in drop-down menus built into the website. e court said Roommate.com lost its
immunity under Section 230 by becoming a content provider, helping to create content that was possibly
discriminatory in violation of federal and California fair housing laws.
Writing for the majority, Judge Alex Kozinski said Section 230 does not grant immunity for “inducing”
third parties to express illegal preferences. “By requiring subscribers to provide the information as a
condition of accessing its service… Roommate becomes mu more than a passive transmier of
information provided by others,” Kozinski wrote. “It becomes the developer, at least in part, of that
information.” e message to website operators is clear, Kozinski said: “If you don’t encourage illegal
content, or design your website to require users to input illegal content, you will be immune.”
While Roommate.com lost its immunity under Section 230 for inducing possibly discriminatory
preferences, it did not lose its immunity for encouraging subscribers to provide “Additional Comments”
that were sometimes provocative. Roommate.com was not responsible when subscribers wrote that they
preferred white male roommates, only “BLACK, GAY, MALE” roommates, no “drugs, kids or animals,” or,
in one posting, a woman who “hopefully wont mind having a lile sexual incounter [sic] with my
boyfriend and I.”
e Roommate.com ruling, however, has been widely criticized and largely seems to be limited to its
unusual facts, whi involved active participation by the web host in forcing consumers to reveal
discriminatory information that violated fair housing laws. Ultimately, aer years of litigation and appeal,
Roommate.com was found not to have violated housing discrimination laws, rendering the Section 230
question of potential liability for illegality moot.124
Typically, under Section 230, web hosts will not be held liable for the acts of their users, even if it allows
distasteful content on the web to go unpunished. Sex traffiing victims and advocates have long tried to
deter sex traffiing under federal and state laws, targeting websites that run advertisements enabling
connections between sex dealers and buyers. Craigslist shut down its adult services advertising section in
2010, but Bapage.com continued to run advertisements for “adult entertainment” and “escorts,” using
Section 230 as a shield from civil liability. In 2016, a federal court of appeals bolstered Section 230
immunity for Bapage.com, in a lawsuit brought by sex traffiing victims who said they were minors at
the time they were being featured in the “escorts” section and that Bapage facilitated these
advertisements to maximize profits. For example, Bapage arged a fee for posting the advertisements
and collected additional fees for “sponsored advertisements” elsewhere on its site. Despite the court’s
obvious sympathy for the victims, it said the law was clear in this maer—Section 230 does not allow
Bapage to be held liable for the posting of third-party content on its website. While the court agreed that
the plaintiffs had made a persuasive case that Bapage “tailored its website to make sex traffiing easier,”
it noted
Congress did not sound an uncertain trumpet when it enacted the CDA, and it ose to grant broad protections to
internet publishers. Showing that a website operates through a meretricious business model is not enough to strip
away those protections.125
■ Summary ■
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A number of federal and state agencies prohibit harmful trade practices. However, the Federal Trade
Commission is the main enforcer of truth in advertising. Deceptive advertisements contain material
statements or omissions that are likely to mislead reasonable consumers. Ads are deceptive if they contain
expressly false statements or demonstrations. Ads are also deceptive if they contain true statements that
convey a misleading implication. Deceptive implications may be found in advertisements that la
substantiation, la sufficient qualification, contain misleading proofs or demonstrations, imply false
significance, puff excessively, and rely misleadingly on expertise and endorsements. Plaintiffs may also
bring suits for deceptive advertising under state law. Web hosts of advertising, however, are largely
shielded from su lawsuits by Section 230 of the Communications Decency Act.
Federal Remedies
e FTC has a number of powers to prevent or remedy deceptive advertising. Some are future-looking,
providing guidance to advertisers so that they can avoid deceptive advertising. ese powers include staff
opinion leers, industry guidelines, and rules. Some FTC powers focus on the present, permiing the
agency to halt or correct a misleading or deceptive ad. ese include consent decrees, cease-and-desist
orders, affirmative disclosure, and corrective advertising. In addition, the FTC, advertisers, and consumers
can seek court injunctions to halt deceptive ads. One of the FTC’s most important powers is the authority
to require advertisers to substantiate advertising claims before they are disseminated.
e FTC has issued no special regulations to prevent fraud and deception on the rapidly expanding
Internet. However, the FTC has sued several Internet advertisers for violating current law on deceptive or
fraudulent advertising. Most large national and international corporations, as well as smaller businesses,
have established sites on the web. Companies find ri marketing opportunities on the Internet, including
posting advertisements, emailing customers and contacting them through wireless media. Online
marketers also collect extensive digital data on consumer shopping paerns and establish interactive
relationships with customers through social media.
Prospective Remedies
e FTC’s opinion leers, advisory opinions, industry guides, and trade regulation rules are broad
statements that tell advertisers before they disseminate advertisements the kinds of statements and
practices that may be deceptive. ese are prospective, or future-looking, guidelines that help advertisers to
avoid deceptive practices.
STAFF OPINION LETTERS Staff opinion leers are not specifically mentioned in the FTC’s rules. ey
are a form of qui, free advice that does not bind the commission. If an advertiser wants an informal
opinion on whether an ad might violate the law, the advertiser can ask for an opinion leer from the
commission.
ADVISORY OPINIONS If advertisers want to know more than they can learn in a staff opinion leer
about whether a contemplated activity would be legal, they can write to the FTC for an advisory opinion.
An advisory opinion, whi is more formal than a staff opinion leer, is placed in the public record and
protects the requesting party who follows the advice from litigation until su time as the commission
might shi its position.126 However, although the advertiser who follows an advisory opinion is protected
from a suit, an advertiser might find the commission’s advice burdensome because the commission tends
to be stricter in its advisory opinions than in its litigation.
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INDUSTRY GUIDES Under Section 18 of the Federal Trade Commission Act, the FTC may prescribe
“interpretive rules and general statements of policy with respect to unfair or deceptive acts or practices.”
One form of general statement is an industry guide. Unlike an advisory opinion, an industry guide is
wrien for a whole industry. An industry guide is the FTC’s interpretation of federal law but does not
itself have the force of law. An advertiser who violates an industry guide may or may not be arged with
deception or some other violation of federal law.127
FTC industry guides prescribe, oen in minute detail, acceptable advertising and labeling of products as
diverse as adhesives,128 dog food,129 and toupees.130 FTC regulations on product endorsements and
testimonials are issued in the form of industry guidelines, as are regulations on deceptive pricing, fuel
economy advertising for new automobiles, the women’s handbag industry, and cigaree labeling.131
Sometimes industry guides are required by Congress. For example, a section of the Fur Products Labeling
Act required the FTC to establish a fur products name guide so that animals used for furs would be
uniformly identified. One FTC industry guide specifies that the word free may be used in an advertisement
even if a consumer is arged a small fee for postage and handling.132
e FTC has issued guidelines to limit deception when advertisers claim environmental benefits from
their products.133 e guidelines prohibit general environmental claims su as “Eco-Safe” if the
environmental benefits are not specifically listed. Use of the term biodegradable, the FTC said, should be
reserved for advertising claims that can be substantiated with competent scientific evidence that the
product will decompose in nature within a reasonably short period.
e FTC also has issued guidelines explaining when the agency will consider health and nutrition
claims su as “low fat” or “high fiber” to be deceptive or misleading.134 e FTC’s policy derives from
regulations issued by the Food and Drug Administration (FDA) for the labeling of foods.135 Under FDA
regulations, food labels must tell consumers what nutrients, fat, calories, olesterol, salt, and fiber are
contained in labeled food, and the FDA sets criteria allowing food manufacturers to describe a food as
“low fat” or “high fiber.” e FTC looks to the FDA for guidance when determining whether health and
nutrition claims in food advertising are deceptive.
In 2013 the FTC updated its “Dot Com Disclosures,” guides telling advertisers how to avoid deceptive
advertising on smart phones and social media. Disclosures necessary to avoid deception must be “clear and
conspicuous” on any device, large or small, the FTC said. If a disclosure cannot be made clearly on a small
screen, then that platform should not be used. It would be deceptive, the FTC said, if smart phone users
had to zoom and scroll to read small type disclosing the monthly fee for a house-monitoring camera, or
had to cli a hyperlink to learn that a portable cooler would not keep food safe in a hot car.
Further, the Dot Com Disclosures guide gave examples for advertisements on social networking sites
su as Twier. It can be allenging for marketers to make full disclosures in the 140-aracter limit on
Twier, though FTC guidelines do not make exceptions for su platforms. It is inadequate to merely link
to the advertiser’s website for full disclosures because readers may not be expected to cli through.
Additionally, making the ad pit in one tweet and the disclosure in the next may not be adequate because
the delay could make the two disconnected on the reader’s timeline or stream. Instead, the FTC
recommends beginning the tweet with “Ad:” or using #ad or #sponsored in the tweet.136
RULES A more sweeping and legally potent FTC power is the agency’s rule-making authority. Rules may
be required by statute or may be issued under the FTC’s broad authority to prevent unfair and deceptive
practices. e commission favors rules, like industry guides, because they allow for a more uniform and
efficient policy than individual commission decisions. Rules, like industry guides, affect whole industries,
not just an individual company or advertiser.
Rules are more potent than industry guides because they have the force of law. Advertisers who violate
a rule may be sued for engaging in deceptive acts or practices in violation of Section 5 of the Federal Trade
Commission Act. Violators may be required to refund money, return property, pay damages, and pay civil
penalties of up to $10,000 a day.137
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When the FTC wishes to issue a rule, it must publish the text of the rule and reasons for proposing the
rule. Advertisers, manufacturers, and the public can then present wrien comments and testify at
hearings. A final rule can be allenged in a federal appeals court within 60 days of its promulgation.
Several rules are mandated by statute. For example, the Comprehensive Smokeless Tobacco Health
Education Act of 1986 requires health warnings on smokeless tobacco products and advertising.138 e
Hobby Protection Act of 1973 requires that imitation political posters, literature, and buons be marked
with the year of publication.139
e FTC has issued a rule required by statute to curb misleading telemarketing. Under the
Telemarketing Sales Rule, telemarketers must disclose “promptly and clearly” in their telephone calls their
identities and that they are aempting to make a sale.140 e caller must also disclose the nature of the
goods or services offered. Costs of purasing, receiving, or using any good or service must also be
conspicuously disclosed. e rule also prohibits calls before 8 A.M. and aer 9 P.M. and prohibits threats
and intimidation, profane or obscene language, and repeated calling that abuses or harasses. However, the
rule does permit telemarketers, including publishers and cable operators, to call more than once within
any three-month period.
In 2008, the FTC amended its Telemarketing Sales Rule to allow consumers to easily opt out of receiving
automated, recorded voice messages from commercial and aritable organizations. e amendment to the
National Do-Not-Call Registry allows consumers to refuse future recorded messages by pressing a key or
saying a particular word as the message is delivered. Consumers who find recorded solicitations on their
answering maines can call a toll-free number to blo future messages. Telemarketers must acquire
wrien consent to send recorded telephone solicitations. e rules do not allow consumers to opt out of
recorded political calls and market surveys because those calls are beyond the FTC’s jurisdiction.141 e
law forbids automated calls or text messages to cell phones.
Besides issuing rules mandated by statute, the FTC also issues trade regulation rules, oen called TRRs,
under its own authority. e commission first asserted the power to issue trade rules in the early 1960s,
when it issued the rule requiring a health warning on cigaree paages.142 In the years following, the
commission issued a number of rules, oen specifying detailed requirements su as what information
must be included in advertising about the power output of home amplifier143 and how the size of television
screens is to be measured (diagonally).144
Baed by a Supreme Court decision145 and legislation,146 the FTC in the 1970s issued several broad rules
to prevent unfairness in advertising for eyeglasses, vocational sools, funeral homes, used cars, and other
products and services. Businesses objected, arguing that rules based on “unfairness” were too vague to
follow without undue uncertainty and expense. Opposition to the FTC prevailed when the agency
proposed to ban all televised ildren’s advertising as unfair. e ban was justified, the FTC argued,
because the relationship between powerful, sophisticated corporate advertisers and susceptible ildren
was inherently unfair. e networks, advertisers, and toy manufacturers, with $661 million in advertising
revenues at stake, disagreed. If corporate advertising to ildren is inherently unfair, they asked, why isn’t
all advertising unfair? Is even the average adult a mat for the refined marketing and psyological skills
of Madison Avenue professionals with millions to spend on an ad campaign?
Responding to the criticism of the FTC’s aggressive campaign against unfairness, Congress passed
legislation requiring the FTC to halt issuing broad unfairness rules, including its proposed ban on televised
ildren’s advertising.147 By 1994, aer years of acrimony, Congress again authorized the FTC to issue
trade regulation rules but not vague rules aempting to prohibit a generalized “unfairness.” e FTC is
now authorized to issue trade regulation rules to halt unfair acts and practices that cause or are likely to
cause “substantial injury” to consumers, when consumers cannot reasonably avoid the injury, and when
the injury is not outweighed by countervailing benefits to consumers or to competition.148
To reduce the likelihood of vague rules, Congress limited FTC discretion in two ways. First, the Federal
Trade Commission Act bars the FTC from relying on “policy” considerations alone in determining what is
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unfair. e FTC must base a trade regulation rule on a likelihood of substantial injury that the consumer
cannot avoid.
Second, the Federal Trade Commission Act permits the FTC to issue a trade regulation rule only to halt
harmful acts and practices that are “prevalent,” su as those that present a “widespread paern of unfair
or deceptive acts or practices.”149
Halting Advertisements
If the FTC’s warnings in advisory opinions, industry guides, and rules fail to prevent deceptive advertising,
the FTC can halt illegal ads through the use of consent decrees and cease-and-desist orders. In addition,
competing advertisers who might be hurt by a deceptive advertisement can seek a court injunction.
CONSENT DECREES More than 90 percent of FTC cases are seled by consent decrees in whi a party
agrees to discontinue an advertising practice.150 Advertisers have a strong incentive to sign consent
decrees. If they do not, the FTC may file a formal complaint against them. e formal complaint is oen
accompanied by considerable bad publicity, mu more than accompanies a consent decree. In addition, an
advertiser who signs a consent decree is not required to admit to false or deceptive advertising.
Furthermore, a consent decree saves the costs and time of litigation. A signed consent order is published
for public comment and becomes final aer sixty days. Failure to abide by a consent order subjects a
company to fines of up to $10,000 a day for as long as the advertising campaign continues.
e FTC has been actively seeking consent agreements to halt misleading infomercials and require
advertisers to reimburse consumers who are misled. In a consent agreement with the Synronal
Corporation, the FTC ordered the New York company not to broadcast infomercials containing
unsubstantiated claims for a baldness cure and ordered the company to pay $3.5 million into a consumer
reimbursement fund.151 In another consent order, the National Media Corporation agreed not to advertise
Cosmetique Francais in infomercials making false claims about the efficacy or safety of skin treatments.152
e company agreed to place $275,000 into a fund to be paid to consumers.
In response to the first complaint filed by the FTC against an Internet advertiser, Brian Corzine, who
operated as Chase Consulting on America Online, agreed to refund the $99 customers paid him for advice
to repair bad credit ratings. Corzine allegedly advised customers to use new federal taxpayer identification
numbers on credit applications in place of their social security numbers.153 e FTC said customers who
followed Corzine’s advice would be providing false information.
Most consent decrees originate when a citizen or—more frequently—a competitor sends a leer to the
FTC complaining about an advertising practice. Commission staff members, either in Washington, D.C., or
at one of the several regional FTC bureaus, may also originate an inquiry. If it appears that ads are
deceptive, the staff conducts an investigation. If the investigation reveals that corrective action may be
necessary, a proposed complaint may be submied to the commission. e commission notifies the party
of the proposed complaint and asks whether the party would sign a consent order agreeing to discontinue
the deceptive practice.154 If so, the complaint can be abandoned.
CEASE-AND-DESIST ORDERS If consent cannot be reaed, the FTC may issue a formal complaint
leading to a cease-and-desist order. Once the formal complaint is issued, the advertiser loses the
opportunity to sign a consent order. e commission begins the cease-and-desist proceedings if it
determines that the action would be “to the interest of the public” as required by Section 5 of the Federal
Trade Commission Act. As Justice Brandeis said, that interest must be “specific and substantial.”155 If
deception is trivial, the commission may decide that seeking a cease-and-desist order is not in the public
interest.
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e FTC has wide discretion to decide whether the public interest would be served by legal action
against an advertisement. In deciding whether to take action, the FTC will answer su questions as how
many consumers were deceived, how mu money they lost, whether market forces would fix the problem
without government intervention, and whether government intervention would be an effective
deterrent.156
When the FTC issues a complaint against an advertiser, an investigation proceeds to adjudication. e
FTC announces the complaint in a widely distributed press release sometimes accompanied by a press
conference, either of whi may damage a company’s sales.157 When the complaint is issued, the case is
assigned to an FTC administrative law judge, who conducts a hearing mu like a trial. e agency has the
burden to establish substantial evidence that an advertiser has violated the law. e administrative law
judge either dismisses the case or issues a cease-and-desist order that can be appealed to the full
commission and then to a federal appeals court.
A cease-and-desist order becomes final aer all appeals or aer time runs out to make an appeal. Failure
to abide by a cease-and-desist order, as with failure to abide by a consent decree, can lead to fines of up to
$10,000 a day, but the fines are usually mu less. In fact, a company might decide it makes beer business
sense to continue the ads and sustain the fines than to stop a successful ad campaign.
In one of the most famous and long-running cases, the FTC won a judgment against the makers of
Geritol 14 years aer a complaint was filed to halt misleading advertisements. e FTC filed a complaint in
1962 arging that the J. B. Williams Company’s television advertisements for Geritol were misleading.
e FTC said the ads for the vitamin-and-iron tonic misleadingly said the product was an effective remedy
for tiredness, loss of strength, and that “run-down” feeling. e FTC found the ad deceptive because
Geritol is effective only in a minority of cases, in whi tiredness is caused by a la of the iron and
vitamins in Geritol. In most cases, fatigue is caused by factors not affected by Geritol.
In 1964, the FTC issued a cease-and-desist order telling J. B. Williams to include statements in its ads
that the vast majority of people who are run down do not suffer from iron or vitamin deficiencies that
Geritol might correct. Two years later, the case was given to the Justice Department when J. B. Williams
did not comply with the cease-and-desist order. e company was fined $800,000 in 1973 for violating the
FTC’s order, but a court of appeals ordered a new trial.158 In 1976, 14 years aer the complaint was filed,
the FTC won a $280,000 judgment against the makers of Geritol.
INJUNCTIONS In some cases of deceptive advertising, particularly when public health might be at risk,
the most important FTC goal is to stop the offending advertisement quily. is can be accomplished with
an injunction. Under Section 13 of the Federal Trade Commission Act, the commission can ask a federal
district judge for an injunction to stop deceptive advertising for food, drugs, or cosmetics.159 For example,
in FTC v. National Commission on Egg Nutrition, the FTC obtained a temporary injunction stopping
statements asserting there is no scientific evidence linking egg consumption and heart disease.160
Although the commission obtained a temporary injunction in the Egg Nutrition case, the agency usually
does not seek a permanent injunction, preferring to act through the slower and more thorough
administrative process of seeking consent decrees or cease-and-desist orders. However, these processes are
mu too slow for consumers whose health is being harmed by a product or for companies being hurt
commercially by a competitor’s deceptive advertisements. Advertisers damaged by competitors’ ads oen
seek injunctions in federal court under the Lanham Act, a subject addressed shortly.
Required Statements
Not only can the FTC halt deceptive advertising and punish the advertiser, but the agency can also order
alterations in advertisements to make them accurate. Besides requiring substantiation, the FTC can tell
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advertisers that they must include certain words or phrases in their ads and correct false impressions
created by deceptive ad campaigns.
e FTC’s power to alter the content of advertisements is a power not usually enjoyed by the
government. Critics arge that su a power violates the First Amendment as well as the purpose of the
Federal Trade Commission Act. e FTC, critics say, is supposed to prevent deception, not require the
dissemination of information. But defenders of affirmative disclosure requirements say that the FTC
cannot meaningfully prohibit deception unless it can sometimes require that statements be added to
advertisements.
AFFIRMATIVE DISCLOSURE e Federal Trade Commission Act does not explicitly grant the FTC
power to order disclosure. But Congress did recognize that advertisers must reveal facts necessary to keep
ads from being deceptive.161 Silence by an advertiser is not always deceptive, but silence is deceptive if it
means a consumer might be hurt.162
Oen a consent decree contains an affirmative disclosure requirement. In one case, the Morton Salt
Company agreed to stop advertising Lite Salt in su a way that consumers would think it was more
healthful than ordinary salt. In signing the consent order, the company agreed that future advertising of
Lite Salt would contain the statement: “Not to be used by persons on sodium- or potassium-restricted diets
unless approved by a physician.”163 In another case of affirmative disclosure, the FTC ordered the J. B.
Williams Company to tell customers in Geritol ads that a vitamin-and-iron supplement will probably not
correct a run-down feeling. Health warnings on cigaree paages are also a form of affirmative
disclosure.
CORRECTIVE ADVERTISING In rare cases, the FTC requires that advertisements contain statements to
correct misrepresentations created by a long-term, misleading advertising campaign. In a case involving
Doan’s pills, the FTC may impose corrective advertising if consumers develop false beliefs due to an
advertising campaign and if consumers are likely to hold those false beliefs into the future.164 To determine
whether corrective ads are necessary, the FTC considers consumer surveys, the duration of the ads, the
persuasiveness of the ad claims, and how sophisticated the audience for the ads is.
In the Doan’s case the FTC imposed a corrective advertising requirement on the maker for eight years of
advertisements that said that Doan’s was an effective remedy for ba pain and that the pills contained
special ingredients not found in other nonprescription pain relievers. e FTC said that the ads made an
unsubstantiated claim that Doan’s pills were beer for relieving ba pain because of special ingredients.
e FTC said the pills do contain ingredients not found in other nonprescription pain relievers, but there
was no evidence Doan’s pills were more effective because of the ingredients. e FTC told Novartis
Corporation, Doan’s pills’ manufacturer, to stop making the “special ingredients” claims. e FTC also
ordered Novartis to include a disclaimer in their ads: “Although Doan’s is an effective pain reliever, there
is no evidence that Doan’s is more effective than other pain relievers for ba pain.”
In the Doan’s decision, the FTC said that it did not consider corrective advertising to be a “drastic
remedy.” It said that requiring a truthful message to counteract beliefs created by deceptive advertising is
an “appropriate method” to tell the public the original ad was incorrect and to stop a company profiting
from its deception. e FTC said corrective advertising may be required when “a preponderance of the
evidence” shows a false belief will remain aer the advertising campaign. e agency said it did not have
to show with “certainty” that misbeliefs will linger. e FTC also said it could require corrective
advertising even if the deceptive advertising campaign was not effective in boosting sales.
e U.S. Court of Appeals for the District of Columbia Circuit upheld the FTC’s Novartis decision.165
e court said the FTC may impose a corrective advertising requirement if (1) deceptive advertising
substantially has helped to create false beliefs in the public’s mind, (2) the false beliefs likely will remain
aer the advertising campaign stops, and (3) consumers continue making purase decisions based on the
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false beliefs. e court said the FTC supported its finding that the Doan’s pills advertisements met this test.
e court said the FTC’s use of survey resear results and expert testimony was sufficient.
In the well-known Listerine case, the FTC required the Warner-Lambert Company to make statements
in its advertising to correct a long-running campaign claiming that use of Listerine mouthwash would help
to prevent colds.166 e FTC ordered Warner-Lambert to include in $10 million of its advertising the
statement that Listerine “will not help prevent colds or sore throats.” e FTC also ordered the company to
use the phrase, “Contrary to prior advertising.” However, the U.S. Court of Appeals for the District of
Columbia Circuit said requiring that phrase violated Warner-Lambert’s First Amendment rights. e court
said the FTC had required more spee than needed to correct the false impression. e court did uphold
the FTC’s requirement that Warner-Lambert say Listerine would “not help prevent colds or sore throats.”
In a long-running fraud and raeteering case, federal District Judge Gladys Kessler in 2012 issued the
final text of corrective messages to be published by major tobacco companies that had been found to have
communicated for decades false and deceptive statements amounting to fraud under the raeteering laws.
(See “Raeteering” and “Tobacco Advertising,” p. 376.) Judge Kessler ordered Philip Morris, R.J. Reynolds
and other cigaree manufacturers to publish corrective statements about the adverse health effects of
smoking, the addictiveness of smoking and nicotine, and the la of any significant health benefit from
smoking “low tar,” “light,” “ultra light,” “mild,” and “natural,” cigarees. e companies were also ordered
to disclose their manipulation of cigaree design and composition to ensure optimum nicotine delivery
and the adverse effects of exposure to secondhand smoke. A federal appeals court upheld most of Judge
Kessler’s order in 2015.167
On appeal, the District of Columbia Circuit Court ruled most of Judge Kessler’s corrective disclosures
could be required of the cigaree companies under the raeteering law because they are forward looking
disclosures that prevent future violations of the statute. us the appeals court approved Judge Kessler’s
requirement that cigaree companies publish statements proclaiming that
Smoking kills, on average, 1200 Americans every day.
Smoking causes heart disease, emphysema, and many cancers.
Cigaree companies intentionally designed cigarees with enough nicotine to create and sustain
addiction.
Smokers of “low tar” and filtered cigarees inhale essentially the same amount of tar and nicotine
as they would from regular cigarees.
Cigaree companies design filters and select cigaree paper to maximize the ingestion of nicotine.
Secondhand smoke kills over 38,000 Americans ea year.
While upholding many of Judge Kessler’s required disclosures, the appeals court did overturn the
requirement that cigaree companies announce they “deliberately deceived the American public” about
the dangers of cigarees. Requiring a disclosure of past misconduct might have been permissible in a
Federal Trade Commission proceeding, the court said, but the court ruled the raeteering statute only
allows corrective statements that will prevent future violations.
Competitor Remedies
Consumers, of course, are not the only people hurt by deceptive advertisements. Advertisers, too, may be
hurt by the false and deceptive claims of competing companies. However, the FTC offers lile immediate
relief for a competitor whose major concern is to quily stop a deceptive ad that may hurt business. Even
if the FTC agrees to seek an injunction, the process may be too slow to be of mu help to the damaged
competitor. erefore, companies oen seek court injunctions themselves to stop the deceptive ads of
competing companies.
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Companies seek injunctions under Section 43(a) of the Lanham Trademark Act of 1946, the same act
discussed earlier in the intellectual property apter. Besides protecting trademarks, the Lanham Act, as
amended in 1988, prohibits any person’s “false or misleading representation of fact” in “commercial
advertising or promotion” that “misrep-resents the nature, aracteristics, qualities, or geographic origin of
his or her or another person’s goods, services, or commercial activities.”168 Anyone, whether a competitor
or not, who believes that he or she “is or is likely to be damaged” by deceptive advertising may seek an
injunction. Courts, however, have oen restricted recovery under the Lanham Act to those who have
suffered “competitive injury.” e U.S. Court of Appeals for the ird Circuit has ruled that consumers
may not sue sellers for false advertising under the Lanham Act.169 Plaintiffs usually seek to halt an
offending ad, but they may also be entitled to significant monetary damages.
Before the 1988 amendments to the Lanham Act, competitors could sue under Section 43(a) only if the
defendant’s advertisement contained false statements about his or her own products. Aer the 1988
amendments, anyone may sue to stop advertisements in whi defendants make false claims either about
their own products or about the plaintiff’s.
Employing the law before 1988, the makers of Minute Maid orange juice halted Tropicana orange juice
ads that contained falsehoods about Tropicana. In the ads, Olympic ampion Bruce Jenner squeezed fresh
oranges and poured the juice into a Tropicana carton as a voice proclaimed, “It’s pure, pasteurized juice as
it comes from the orange.”170
e Coca-Cola Company, whi sells Minute Maid, claimed the Tropicana ads were misleading because
Tropicana orange juice, like most ready-to-serve orange juices, is not paaged as it “comes from the
orange.” It is pasteurized and sometimes frozen before paaging. Even though the Tropicana ad said the
juice was pasteurized, the U.S. Court of Appeals for the Second Circuit granted a preliminary injunction to
stop the ads because they were likely to harm Minute Maid. A “not insubstantial” number of consumers
surveyed mistakenly believed Tropicana juice came unprocessed from the orange.
Oen competitors aempt to stop deceptive comparative advertisements under Section 43(a). All ads
invite comparison, but so-called comparative ads point out the similarities and differences between an
advertiser’s product and its competitors’. e FTC has defined comparative advertising as ads that
compare named or identified competing brands for objectively measurable aributes or price.171 Although
advertisers, the networks, and the FTC once frowned on comparative advertisements, the FTC now
encourages companies to name and compare competitors’ products in advertisements.172 Comparative ads,
whi are popular today, are thought to help consumers make beer oices.
In a well-known comparative ad case, Johnson & Johnson, the manufacturer of Tylenol, obtained an
injunction against Anacin ads that falsely claimed Anacin was a superior pain reliever.173 e televised ads
claimed Anacin could reduce inflammation from muscle strain, baae, and tendonitis faster than other
pain relievers. “Your body knows the difference between these pain relievers… and Adult Strength Anacin,”
the ad said. Unlike the Tropicana ad, whi did not mention Minute Maid by name, the Anacin ad showed
the competing products—Datril, Tylenol, and Extra Strength Tylenol—on the screen. A federal court
enjoined the Anacin ads because they le the impression with consumers surveyed that Anacin was a
beer pain reliever overall. e real superiority of Anacin, if any, was its ability to reduce inflammation.
Although companies usually seek an injunction under Section 43(a) to stop a competitor’s deceptive
advertisement, plaintiffs may also seek monetary damages—large monetary damages. In 1986, the U.S.
Court of Appeals for the Ninth Circuit upheld a $40 million damage award against Jartran rental tru
company for its deceptive ads during a marketing bale with U-Haul.174 Jartran’s ads deceptively
portrayed the company’s rates as lower and its trus as newer than U-Haul’s. e court awarded U-Haul
$6 million in benefits that Jartran received from its deceptive advertising campaign and $13.6 million that
U-Haul had to spend to counter Jartran’s deceptive ads. en the court doubled the award to U-Haul as the
Lanham Act allows when ads hurt a competitor.
e authors of a treatise on advertising have offered several suggestions for avoiding litigation over
comparative advertisements, including the following:175
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Make comparative ads truthful.
Avoid subjective claims. Use objective claims that can be substantiated.
Use reliable independent testing services or public surveying firms to substantiate claims.
Keep the results of the substantiation.
Present the comparison fairly.
Avoid knoing the competitor’s business practices.
Raeteering
Because individual consumers cannot sue over deceptive advertising under the Federal Trade Commission
Act and oen cannot sue under the Lanham Act, consumers sometimes can sue under raeteering
statutes. Consumers have joined class action suits under state or federal raeteering laws against
advertisers whose deceptive advertising caused them harm. e federal law is the Raeteer Influenced
and Corrupt Organizations Act, or RICO.176 e RICO law was enacted in 1970 to curb organized crime’s
infiltration of legitimate businesses. e law prohibits a “paern of raeteering” involving an interstate
enterprise, usually fraudulent use of telephones or the mail.
In a 2006 fraud and raeteering ruling, a federal court ordered the major cigaree companies to stop
the lies, misrepresentations, and deceit to the American public “about the devastating health effects of
smoking and environmental tobacco smoke.”177 Federal district judge Gladys Kessler enjoined the
companies from future acts of fraud and ordered them to issue a series of corrective statements—discussed
earlier—in newspapers, on television, on company websites, and on cigaree displays and paages.
Tobacco Advertising
In 2009, Congress passed major legislation to reduce the health hazards of smoking, especially to youth.
Many of the provisions of the Family Smoking Prevention and Tobacco Control Act regulate the
advertising and promotion of cigarees and other tobacco products whi, as Judge Kessler said, have
oen been aimed at young people. Most new smokers, Congress noted in the statute, are under 18.178
Congress in its “findings” concluded that tobacco use is “the foremost preventable cause of premature
death in America,” causing more than 400,000 deaths in the United States ea year. Congress said
reducing the use of tobacco by minors by 50 percent would prevent “well over 10,000,000 of today’s
ildren from becoming regular, daily smokers, saving over 3,000,000 of them from premature death due to
tobacco-induced disease,” and saving $75 billion in health care costs. “In 2005, cigaree manufacturers
spent more than $13 billion to aract new users, retain current users, increase current consumption, and
generate favorable long-term aitudes toward smoking and tobacco use,” Congress found.179
e Family Smoking Prevention and Tobacco Control Act authorizes the Food and Drug Administration
to control the manufacturing, marketing, advertising, and labeling of tobacco products. Congress
concluded the FDA is the only agency with the scientific expertise to regulate lawful products known to
contain an addictive drug—nicotine—and other ingredients known to cause cancer. Advertisements that
violate the Smoking Prevention Act are also deceptive or unfair in violation of the Federal Trade
Commission Act, the law that regulates most advertising. e new law requires the Federal Trade
Commission to coordinate with the Food and Drug Administration on enforcement of FTC regulations on
advertising of cigarees and smokeless tobacco. e FDA consults with the FTC to revise labeling
requirements, normally under FDA jurisdiction. e FDA was also to reissue 1996 regulations on the sale,
distribution, and use of cigarees and smokeless tobacco, rules the agency was not able to enforce when
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first issued because the Supreme Court ruled Congress had not then authorized the agency to regulate
tobacco marketing.180
e Smoking Prevention Act gives the FDA power to restrict tobacco advertising and promotions,
collect user fees from tobacco companies to support tobacco control, and to stop illegal sales of cigarees
and other products to ildren. Under the law, the FDA can reduce—but not eliminate—nicotine in tobacco
products and require elimination of harmful additives and prohibit the use of most flavorings.
e law prohibits outdoor advertising within 1,000 feet of a sool or playground, bans brand
sponsorships of sports and entertainment events, and bans free samples. e law also requires that outdoor
cigaree advertising be bla text on a white baground. Tobacco ads in print publications must also be
bla and white unless the adult reader-ship is high—above 85 percent—or readership under age 18 is low—
fewer than 2 million for a national publication.
e Smoking Prevention Act requires the FDA’s prior approval before a tobacco company can sell or
advertise new products, including products that claim to offer less risk of disease or to be less harmful than
other products. e FDA will demand scientific proof to verify su claims. No advertising or labels will be
allowed that suggest the FDA approves a tobacco product. Health warnings now must cover half of a
cigaree paage and include graphic images of the harm caused by smoking. Advertisements and labels
are supposed to identify a tobacco product as a “nicotine delivery device.”
Shortly aer the Smoking Prevention Act was adopted, the National Association of Aorneys General
promised to collaborate with the Food and Drug Administration enforcing regulations on the tobacco
industry.181 e state aorneys general had 11 years of experience enforcing the Master Selement
Agreement of 1998 in whi the tobacco industry gained some protections from lawsuits, agreed to stop
marketing tobacco to youth, and agreed to pay states $206 billion compensation for medical costs of
smoking. Under the master selement, the tobacco companies also agreed to finance a $1.5 billion
antismoking campaign and to open previously secret industry documents. e master agreement contains
many marketing and advertising provisions that are similar to, or identical to, those the Food and Drug
Administration is expected to enforce.
In the Smoking Prevention Act, Congress declared that advertising and labeling regulations must be
consistent with First Amendment spee protections. But six tobacco companies quily filed suit
allenging the constitutionality of the statute.182 See editorial advertisement, “Protecting Our Spee,”
published by the Lorillard Tobacco Company, Figure 8.2. Philip Morris was the lone cigaree company to
ba passage of the law, perhaps hoping FDA controls on advertising and limits on new tobacco products
will solidify the market dominance of Philip Morris’s Marlboro cigaree.183
e U.S. Court of Appeals for the District of Columbia Circuit ruled in 2012 that color graphics required
by the government to illustrate the dangers of smoking were not constitutional. e D.C. Circuit said the
graphic pictures, whi were to be emblazoned on cigaree paages, contained emotional appeals to
discourage smoking rather than
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Figure 8.2 Editorial advertisement published by the Lorillard Tobacco Company allenging the constitutionality of
tobacco advertising restrictions in the Family Smoking Prevention and Tobacco Control Act. (Reprinted with
permission.)
uncontested factual statements required to counter the misleading and deceptive advertising disseminated
by the tobacco companies.184 Furthermore, the court said the FDA provided not a “shred” of evidence the
graphic images would advance the government’s interest in reducing smoking.
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e graphic images showed people dying from smoking-related disease and mouth and gum damage
linked to smoking. One image of a mother holding a baby encircled in smoke warned: “Tobacco smoke can
harm your ildren.” Another image showed smoke escaping from a hole in the ne of a man holding a
cigaree. “Cigarees are addictive,” the caption said.
In early 2013, the government determined not to appeal the D.C. Circuit opinion, but, rather, to abandon
the graphic images and reconsider the government’s efforts to warn citizens of the dangers of smoking.185
Meanwhile, the Centers for Disease Control and Prevention renewed a series of television ads in whi ex-
smokers harmed by smoking warn smokers to quit.186
In 2015, major tobacco companies sued the FDA, claiming the agency violated the First Amendment by
requiring companies to get prior approval for nearly all anges in cigaree labels. e FDA guidance
issued in Mar required pre-approval if the labels would make a product already on the market “distinct,”
including anging the baground color of an existing product from green to red, anging its logo or
adding words su as “premium tobacco.”187
■ Summary ■
e Federal Trade Commission has several powers and remedies to keep the flow of commercial
information clean. e forward-looking powers include staff opinion leers, advisory opinions, industry
guides, and trade regulation rules. In addition, the FTC can halt deceptive advertising through consent
decrees, cease-and-desist orders, and injunctions. e FTC can also require that advertisements contain
statements necessary to leave an accurate impression or to correct misrepresentation. In addition,
companies may seek injunctions under the Lanham Act to halt false or misleading advertisements and
promotions by competitors. Consumers may not sue advertisers under the Federal Trade Commission Act
or the Lanham Act, but they may sue under state law and may eventually prevail in a RICO suit. e
Family Smoking Prevention and Tobacco Control Act puts regulation of tobacco advertising and marketing
under control of the Food and Drug Administration and adds significant new restrictions on advertising of
tobacco products.
Other Federal Regulations
While deception and unfairness are major concerns in the regulation of advertising, consumers claim
protection from fraud and misuse of electronic data in the modern media. is section examines
regulations on the amount and content of broadcast advertising, the control and security of personal data,
and the regulation of contests and the depiction of money in advertising.
Children’s Television
Parents and citizen groups oen contend that ildren’s television programs contain too mu advertising.
In response, the 1990 Children’s Television Act limits the quantity of advertising aired during ildren’s
programs. e 1990 legislation limits commercial time during ildren’s programming to ten and a half
minutes an hour on weekends and 12 minutes on weekdays. e FCC said half as mu advertising would
be allowed during half-hour programs. e commission said the commercial limits pertain only to
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programming for ildren ages 12 and younger, “ildren who can neither distinguish commercial from
program material nor understand the persuasive intent of commercials.”
Television broadcast stations and cable operators must abide by the commercial limits, and they must
keep records to verify compliance with the statute. Cable operators are responsible for limiting ildren’s
advertising in locally originated programming and cable network programming, but they are prohibited by
other laws from editing programming, including advertising, transmied by over-the-air broadcast
licensees. e commercial limits apply to advertising just before and aer programming but not to public
service announcements and noncommercial miniprograms fewer than five minutes in length.188
In 2006 the FCC adopted rules prohibiting the display of website addresses during ildren’s
programming if the website is selling a product. A website address may be displayed during programs
directed to ildren ages 12 and under only if it meets four criteria establishing that the site supplements
the program and is not a sales promotion:
1. e website offers a substantial amount of program-related content or other noncommercial
material;
2. e website is not primarily intended for commercial purposes, including either e-commerce or
advertising;
3. e website’s home page and other menu pages are clearly labeled to distinguish noncommercial
from commercial sections; and
4. e website page to whi viewers are directed by the website address is not used for e-
commerce, advertising, or other commercial purposes.189
e FCC regards the display of the address of a website that sells a product as the “equivalent of a
commercial encouraging ildren to go to the store and buy the product.” us, including the web address
during a program converts the program into a commercial “just as a host telling ildren to race to their
local toy store would,” the agency wrote.190
Broadcasters are allowed to display the addresses of commercial websites during allowable commercial
time. However, during both programs and commercials, broadcasters are not allowed to display the
address of a website that uses aracters from the program to sell products or services.
e FCC imposes serious fines on broadcasters for violating the commercial time limitations. e FCC
fined KTTU (TV) of Tucson $125,000 because the commission found KTTU exceeded commercial limits 581
times in a 16-month period.191 e commission also granted the station only a short-term license renewal
of two years. In 1998, the FCC reported that 26 percent of stations seeking license renewal did not comply
with the ildren’s television ad limits.192 As a remedy, the FCC said it would begin unannounced audits of
television stations to discover violations of the commercial time limits. Stations found violating the rule
can be reprimanded, fined, or have their license renewal endangered.
PRODUCT-BASED PROGRAMMING AND PROGRAM-LENGTH COMMERCIALS Parents not only
protest the quantity of advertising in ildren’s programming but also complain about what they call
“program-length commercials,” programs based on toys and other commercial products during whi ads
for the same products are broadcast. Citizen groups complain that ildren’s shows featuring commercial
products, including The Adventures of the Gummi Bears and Captain N: The Game Master, are nothing
more than program-length commercials for candy, video games, and other products. e groups want the
FCC to require that the shows be labeled as commercials, whi would mean that the half-hour shows
would violate the limits of 10½ or 12 commercial minutes an hour for ildren’s programming.
e FCC has ruled, however, that a program based on a commercial product is not, by definition, a
“program-length commercial.” e FCC said that a product-based program is a program-length
commercial only if both the show and the ads feature the same product. In 1993, the commission fined
WFTS-TV of Tampa $10,000 for running a program-length commercial. e station ran two advertisements
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for G.I. Joe toys during a 30-minute G.I. Joe program featuring cartoons based on the toy. e commission
said the entire program counted as commercial time because both the program and the ads in the program
featured the same product line.193
e FCC also prohibits “host-selling” in whi a aracter in a program promotes a product or service
that is financially connected to the program. A program aracter would engage in host-selling if he
promoted the virtues of saving at First Bank when First Bank has a relationship to the show or the
aracter. Host-selling is thought to take unfair advantage of the trust ildren place in program
aracters. To further prevent confusion in young minds, the FCC requires that commercials be separated
from ildren’s program content with a buffer, su as “It’s now time for a commercial break.”194
SPONSOR IDENTIFICATION e FCC also has said companies that give programs to broadcast stations
in return for advertising time do not have to be identified as sponsors of the programs under Section 317 of
the Communications Act. Section 317, the sponsorship identification requirement, mandates that
broadcasters identify anyone who pays to have a commercial or a program broadcast. A station must
identify on the air anyone who pays for a program to air or provides a program free if the program
promotes a product, service, or trademark. Sponsorship identification is intended to prevent deception by
telling viewers who is paying for a program or commercial.
In a case involving one of the most popular ildren’s programs of the late 1980s, the FCC held that
broadcast stations did not have to identify the companies providing He-Man and the Masters of the
Universe to stations if the companies received advertising time in return. e commission rejected the
contention of a citizen group, the National Association for Beer Broadcasting (NABB), that KCOP-TV of
Los Angeles should have told viewers the program He-Man had been given to the station by makers of the
toy of the same name. He-Man, based on an invincible animated hero, had been given to the station by
Mael and Group W in exange for two minutes of advertising time during ildren’s programming. e
NABB said the He-Man cartoon amounted to a gi to the station because the advertising time provided by
KCOP-TV was worth only a small proportion of the program’s value. Mael and Group W spent $14
million on the first 65 episodes of He-Man and received commercials from KCOP-TV worth about
$300,000.
In 1989, the FCC said that stations need not identify the source of a program as long as the stations gave
something of value, including advertising time, in return. In a decision upheld by a federal appeals court,
the commission said a station would have to identify the source of a toy-based program only if it had been
given to a station free or for only “trifling” consideration.195 e more than $300,000 worth of advertising
exanged by KCOP-TV for He-Man, the commission said, was of substantial value and not an
insignificant, or “trifling,” amount. e commission said no single station would be expected to pay the
entire cost of a nationally ranked ildren’s program.
Broadcast Advertising
Although advertising can be limited during ildren’s programs, the amount of commercial time in other
programming is not restricted. e FCC has said that marketplace forces can beer determine the number
and length of commercials than FCC rules can. e commission said that if stations air more commercials
than the public will tolerate, “the market will regulate itself”—viewers will not wat and advertisers will
not buy time.196
However, a few federal statutes still regulate commercials. Section 317 of the 1934 Communications Act,
for example, requires that broadcasters identify anyone who has purased broadcast time, a provision
that was just mentioned in this apter.197 In commercials, use of an advertiser’s name or product
constitutes sufficient identification of the sponsor.198 In 2008, the FTC sought comments on whether the
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agency should require more disclosure of payments when companies place their products in television
programs or embed their products in program plot lines. Companies increasingly embed their products in
television programs as viewers increasingly employ tenology to avoid commercials.
Two federal statutes ban broadcast advertising of cigarees, lile cigars, and ewing tobacco.199 Wine
and beer have been advertised on broadcast stations for years, but liquor usually has not been. Liquor
advertisements are not prohibited by statute or the FCC; liquor ads have been kept off the air voluntarily
by trade associations representing broadcasters and the alcoholic beverage industry. States oen place
limits on advertising in all media for happy hours, two-for-one specials, and other ad content that might
encourage irresponsible drinking.
Broadcast beer advertisements are generally aimed at audiences where at least 70 percent of the
listeners or viewers are above the legal drinking age. e FTC has ruled that advertisements may be unfair
or deceptive if aimed at audiences too young to use the products lawfully. Ads show safe, moderate
drinking, in compliance with FTC decisions and trade association rules.200
e FDA oversees advertising for prescription drugs, including the pharmaceutical companies’ $3 billion
yearly advertising campaigns aimed directly to consumers (DTC). Some televised ads raise serious health
concerns. Mer and Company’s heavily advertised Vioxx enjoyed annual sales of $2.5 billion despite
evidence that it caused heart problems.
In 2007, there were 12,600 drug ads for the FDA to review but only 13 FDA employees to examine DTC
drug ads. In 2008, the FDA received $6.1 million to review the mushrooming DTC ads—up from $2.2
million in 2007—but Congress refused to grant the FDA authority to ban DTC drug advertisements that
raise serious safety concerns. e FDA can fine pharmaceutical companies for false or misleading
advertisements.
Under FDA regulations, direct-to-consumer ads
1. cannot be false or misleading;
2. must present a fair balance between the risks and benefits of the drug;
3. must reveal facts that are material to the representations made in the ad or the consequences of
using the product; and
4. must—if printed—disclose the risks listed in the product’s labeling or—if broadcast—make
“adequate provision” through toll-free telephone numbers, websites, broures, and other means
to disclose risks.201
e FDA is also draing guidance to the medical industry about making statements on social media. For
example, because platforms su as Twier have a limited aracter count, the FDA suggests balance in
communicating benefit and risk information both within the same tweet while also including a link to
more complete information about the drug or product.202
Personal Data
With the growth of computerization and the Internet, control of personal data is an increasingly
nelesome issue. In one of the most publicized cases of stolen personal data, it was revealed that sham
businesses purased the personal records—names, addresses, social security numbers—of 150,000
consumers from ChoicePoint, an information services company that sold personal data to credit card
companies, mortgage companies, and banks that offer loans and mortgages to consumers.203 By one
estimate, data companies, media companies, universities, and other data handlers collectively fumbled
nearly 94 million private records in one two-year period.204 In addition, major sear engines like Google
and Yahoo! collect and store billions of bits of information recording the terms surfers sear, what sites
they query, and what computer and browser they use.205 In 2012, a German student studying law and
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computer science at Stanford University discovered that Google was secretly planting traing cookies on
a vast number of iPhone browsers—perhaps millions—so that advertisers could follow users’ movements
from website to website even though the users’ browsers were set to prohibit behavioral traing.206 With
su vast information, advertisers can profile the preferences of consumers and target ads instantaneously
as consumers cli on related websites.
In a 1998 report to Congress, the FTC set out Principles of Fair Information Practices intended to
increase individuals’ control over personal information, limit data collection, and curb abuses of data
collectors. e Principles of Fair Information Practices provide:207
1. Notice Data collectors must disclose their information practices before collecting personal
information. Failure to have a policy or to abide by its terms may bring action from the FTC for
unfair or misleading practices.
2. Choice Consumers must be given options on whether and how personal information will be used.
3. Access Consumers can view and contest the accuracy and completeness of data collected about
them.
4. Security Data collectors must take reasonable steps to assure that information collected is
accurate and secure.
In 2008, the FTC issued revised principles for advertisers’ self-regulation of online behavioral
advertising,208 principles that are continuously revised in a dynamic advertising environment.209 Of most
concern to the agency is behavioral advertising itself, whi the agency defines as “the traing of a
consumer’s online activities over time—including the seares the consumer has conducted, the web pages
visited, and the content viewed—in order to deliver advertising targeted to the individual consumer’s
interests.” Behavioral ads account for about $1 billion of the $23 billion online ad revenue.210 Of lesser
concern to the FTC are “first party” advertising, where no data are shared with third parties, and
contextual advertising, where delivery of an advertisement is based on a single visit to a web page or a
single sear query.
One of the principles for behavioral advertisers seeks “transparency and consumer control,” requiring
websites to provide a clear, concise statement about data being collected and allowing consumers to opt
out of providing data. A second principle provides for “reasonable security” and limited retention of
consumer data. e third requires consent from consumers if a company plans to make material anges to
existing privacy agreements. e fourth principle allows consumers to refuse to allow traing of health,
financial, family, and other sensitive information. e FTC has also asked the FCC to consider online
privacy issues when formulating national broadband policy.
In 2010, the FTC proposed a do-not-tra option whereby consumers could “opt in” if they wanted
advertisers to follow and record their online activities. In 2011, federal regulators and advertising trade
groups announced a do-not-tra initiative that would allow users to “opt out” of behavioral traing by
oosing an option built into their browsers. Under the plan, “first party sites” su as Google, Amazon,
and the New York Times would still be allowed to serve ads based on collected data.211
In 2012, Facebook seled with the Federal Trade Commission over arges the social media company
engaged in unfair and deceptive privacy practices.212 In a case discussed on page 352, Facebook agreed to
be more protective of the private information of Facebook’s 845 million users worldwide.213 In 2012,
Facebook also expanded its arive feature to provide users with previous user names, friend requests and
the Internet protocol address of the computers users have logged in from. Facebook had earlier given users
a copy of their photos, posts, messages and lists of friends and at conversations.214 e anges in
Facebook policy were a response to a complaint filed by ten privacy organizations with the Federal Trade
Commission arguing Facebook violated federal law by anging policy without notice and declaring a
user’s name, profile photo, friends list, gender, and other data to be “publicly available information.”
Facebook planned to share some of the private information with soware developers. Preceding the
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selement, Facebook founder and ief executive Mark Zuerberg announced privacy policy anges to
give subscribers more and simpler control over information.
In an illustrative case, the FTC seled a complaint with Sears Holdings Management Corporation—
owned by Sears, Roebu and Company and Kmart Management Corporation—in whi Sears agreed to
make fuller disclosure of its behavioral traing program and to destroy resear data collected through a
company soware program.215 e FTC had arged that Sears soware monitored consumers’ online
secure sessions even though consumers thought the soware was only monitoring their “online browsing.”
In fact, the soware collected data on the contents of a consumer’s online shopping carts, online bank
statements, drug prescription records, video rental records, library borrowing histories, and the sender,
recipient, and subject of web-based emails.
According to the FTC’s complaint, Sears invited consumers to “participate in exciting, engaging, and on-
going interactions—always on your terms and always by your oice.” Sears paid consumers $10 to
participate. Sears then asked consumers to download “resear” soware that the company said would
confidentially tra their “online browsing.” But consumers would not know, unless they read deep into a
lengthy license agreement near the end of the registration process, that Sears was traing mu more
than their browsing. e complaint arged that Sears’ failure to adequately disclose the scope of the
traing soware’s data collection was deceptive and violated the FTC Act.
Under the selement, Sears admied no wrongdoing but agreed to destroy information collected and to
clearly disclose the types of data the company will collect in the future. e disclosure must be made
separately from any user license agreement; no burying disclosures in the fine print. Sears must also
disclose whether any of the data will be used by a third party.
Other Consumer Protections
American and European governments have adopted data privacy statutes serving the Principles of Fair
Information Practices.216 e federal government has not adopted comprehensive data privacy legislation,
but the government has passed a patwork of legislation that provides consumers some measure of
control over how personal data is collected and disseminated.
e Fair Credit Reporting Act (1970)217 protects consumers from the disclosure of inaccurate personal
information held by consumer reporting agencies but does not restrict the amount and type of information
collected. Amending the act in 2003, Congress made it easier for consumers to correct credit information
and to blo fraud. But, one must first be a victim to blo fraud. Under the act, victims of fraud can
prevent new lines of credit from being established for seven years by placing a fraud alert on their files
held by credit reporting agencies, su as Equifax and TransUnion. Fraud victims whose identity has not
been stolen can place a fraud alert for 90 days.218
e Right to Financial Privacy Act (1978)219 creates a statutory financial protection for bank records. e
act requires that the customers authorize access to their bank records or that the government has a proper
subpoena or sear warrant.
e Children’s Online Privacy Protection Act (COPPA) of 1998 prohibits commercial websites from
misusing information acquired from ildren.220 e law requires parents’ permission before the websites
collect personal information su as names, addresses, and phone numbers from ildren under the age of
13. FTC rules taking effect July 1, 2013, make it more difficult for website operators to collect personal
information from ildren who, increasingly, use social media, smart phones and mobile media that
transmit information valuable to advertisers and Internet companies. Under the new rules, service
providers need parental consent to collect photographs, video, audio files and geo-locations that identify a
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ild under thirteen. Operators of websites or online services still need parental consent to acquire screen
names and email addresses, but also to collect online contact information su as identifiers for instant
messaging, Voice Over Internet Protocol and video-at platforms. Under the rules, Apple and Google app
stores are not responsible if the soware the companies sell for others violates the rules.221
e Gramm-Lea-Bliley Act (1999) regulates the disclosure of personal data by financial institutions.222
e act requires financial institutions to provide wrien or electronic notice of the categories of personal
information collected, categories of people the information will be disclosed to, and the company’s
confidentiality policy. e act also codifies protections against pretexting, the practice of obtaining
personal financial information through false pretenses. As noted earlier, employees and subcontractors of
Hewle Paard (HP) employed pretexting to gain the phone records of dissident HP board members and
journalists covering boardroom fights.
Gramm-Lea-Bliley also requires that consumers be told of their rights to opt-out of data distribution
programs and requires that safeguards on consumer data be secure.
Lotteries and Contests
For many years, Americans feared that laws prohibiting gambling were needed to “protect the citizen from
the demoralizing or corrupting influence” of solicitations to gamble.223 erefore, federal law long
prohibited all advertising of loeries.224 However, as more states conduct loeries to raise revenue, the
federal law has been modified to permit the media to advertise loeries in states that conduct them.
Congress also has adopted other exemptions to the loery advertising ban.
LOTTERIES A lottery has three elements: (1) prize, (2) ance, and (3) consideration. e prize is the
reward, money, trip, merandise, or other remuneration given to the winner. Chance means that lu, not
skill, will determine the winner. Consideration, whi is oen more difficult to recognize than ance or
prize, is the effort or expense required of the participant. Consideration is the time one spends to play a
game or the money paid to enter a contest. All three elements must be present for a promotion to be
considered a loery.
e ban on loery advertising was relaxed by two 1988 laws. First, Congress permied broadcasters to
carry ads for legal gambling, including casino gambling, conducted by Native American tribes.225 Second,
Congress permied publishers and broadcasters operating in states where loeries are legal to advertise
and disseminate information about loeries in those states and in adjoining states if loeries are also
lawful there.226
e media may also print or broadcast advertising and prize lists of loeries conducted by nonprofit
organizations and by commercial companies, if these loeries are legal under state law. e commercial
loeries, however, must be conducted only occasionally and not be related to the company’s usual
business.
In 1993, the Supreme Court upheld the constitutionality of the federal prohibition against advertising of
loeries by broadcast stations licensed in states where loeries are illegal. In United States v. Edge
Broadcasting Co., the Court ruled 7–2 that the federal prohibition was constitutional in a case involving
WMYK-FM, a station licensed in Moyo, North Carolina, where loeries are illegal.227 e station was
located only three miles from the state of Virginia, where loeries are legal. Edge Broadcasting argued that
the federal prohibition on loery advertisements in North Carolina unconstitutionally barred WMYK from
broadcasting lawful commercial information, particularly to Virginians, who constitute 98 percent of the
North Carolina station’s audience.
Applying the Central Hudson test for commercial spee, the Supreme Court concluded that the federal
prohibition on loery broadcasts advances the significant state interest of discouraging gambling in North
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Carolina. In dissent, Justice Stevens argued that the government las a substantial interest in discouraging
gambling in a nation in whi more than 35 states have legalized loeries. Whatever the state interest,
Stevens said, it does not justify a ban on constitutionally protected commercial spee.
e Supreme Court in 1999 said a ban on radio and television stations carrying ads for legal casino
gambling violated broadcasters’ First Amendment rights.228 Louisiana broadcasters argued they should be
permied to carry ads for Louisiana and Mississippi casinos. Writing for the Court, Justice Stevens agreed,
saying the ban could not pass the third and fourth parts of the Central Hudson test.
e Court said the government’s interests were substantial, thus passing the second part of the Central
Hudson test. e government said its interests were to reduce social costs associated with gambling and
protect states in whi gambling is illegal. However, the Court said the exemptions Congress adopted—
permiing advertising for state-conducted loeries, casinos operated by Native American tribes, and
certain occasional casino gambling—meant the law could not directly advance the government’s interests.
e Court said it is not clear that permiing advertising for some casino gambling but not others would
reduce the number of people who gamble or the amount of gambling. Rather, the Court said, the
congressional exemptions only would persuade gamblers to go to one casino rather than another. e law,
then, failed to satisfy the third part of the Central Hudson test.
e Court also said the law was broader than necessary to serve the government’s interest, failing
Central Hudson’s fourth part. Gambling’s social ills will not be reduced by forbidding ads for some casinos
while permiing ads for others, the Court said. us, banning broadcast casino gambling ads restricted
more truthful spee about lawful activities than the law’s results could justify, the Court said.
CONTESTS Although publishers and broadcasters may conduct only occasional loeries unrelated to
their businesses, they can conduct promotional contests and advertise the contests of others as long as the
promotions are not false or deceptive. To be legal, contests may not consist of all three elements of a
loery: prize, ance, and consideration. Contests may include two elements of a loery, su as a prize
and ance, as long as they do not require the third element, consideration. Many contests avoid the
prohibitions on loeries by basing winning on knowledge or skill rather than ance. Common contests
conducted by publishers, broadcasters, and retailers include treasure hunts, drawings, word games, picture
coloring, name-that-tune competitions, and cash call-in japots.
e FTC generally does not regulate loeries, but it does issue rules regulating contests, particularly in
food retailing and the gasoline industry. e Federal Communications Act of 1934 also regulates contests.
e communications act prohibits broadcasters from deceiving the public by providing any “special and
secret assistance” to a contestant in a contest or from fixing or rigging a contest through “any artifice or
seme.”229 In addition, FCC rules require broadcasters who conduct or advertise contests to
fully and accurately disclose the material terms of the contest, and… conduct the contest substantially as
announced or advertised. No contest description shall be false, misleading or deceptive with respect to any
material term.230
FCC rules require that stations reveal who is eligible to win, the nature and value of prizes, how to enter,
how winners will be determined, and dates of the contest. A disc joey, television host, or broadcast
promotion director could be subject to a fine of $10,000 and a year in jail for participating in a false or
misleading contest. Furthermore, a station could lose its license for willful or repeated violation. Contests
may also be prohibited under state law.
e FCC revoked the license of WMJX-FM in Miami, Florida, because of deception in two contests. In
one, the station announced that contestants could win a $1,000 prize in an Easter egg hunt. e station’s
program director allowed the promotional announcements to be broadcast even though the station had no
prize money to award. In the other contest, the station announced a $500 reward for the listener who
found disc joey Greg Austin, reported to be wandering around the Miami area in a daze, “his mind
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boggled,” aer a trip to the Bermuda Triangle. However, station announcers knew that Austin was in the
studio, safely returned from a brief arter boat excursion.231
Money
e U.S. Supreme Court has ruled that the government can constitutionally regulate the manner in whi
money is pictured in advertisements and news stories. In Regan v. Time, Inc., the Court upheld a federal
statute requiring that money be pictured only in bla and white and only either larger or smaller than
actual size.232 Color images are now permied, but the Treasury Department fears that color photos of
money in actual size would aid counterfeiters. erefore, the law prohibits picturing money unless the
reproduction is one sided and either less than three-fourths or more than one-and-a-half times the actual
size of money.233
■ Summary ■
e Children’s Television Act of 1990 limits the amount of time devoted to commercials during ildren’s
programming. e FCC also regulates program-length commercials and requires sponsor identification.
e collection, control and dissemination of personal data is regulated by a number of laws that aempt
to prohibit fraud and misuse of data.
e media may advertise all official state loeries in any state that operates one. e media may also
print or broadcast advertising and prize lists of loeries conducted by nonprofit organizations and
occasionally by commercial companies if the loeries are legal under state law and if the commercial
loeries are not related to the company’s usual business. A loery has three elements: ance, prize, and
consideration. A contest usually requires the participant to demonstrate a measure of skill or effort. e
media may reproduce U.S. money in an advertisement or illustration if the money is pictured either larger
or smaller than real money.
Media’s Right to Refuse Advertising
It is well established that the media oose what to broadcast or publish. As Chief Justice Burger said in
CBS, Inc. v. Democratic National Committee, “For beer or worse, editing is what editors are for; and
editing is selection and oice of material.”234 In Democratic National Committee, the Court ruled that a
Washington, D.C., television station had a First Amendment right to refuse to sell airtime for a business
group’s editorial advertisements.
Earlier, the Court had ruled unconstitutional a Florida law requiring newspapers to print replies from
political candidates aaed editorially. In Miami Herald Publishing Co. v. Tornillo,235 a political candidate
argued that newspapers, whi are oen monopolies in their cities, should be required to publish responses
from candidates the papers criticize. But Chief Justice Burger, writing for the Court, said, “A newspaper is
more than a passive receptacle or conduit for news, comment, and advertising.” What a newspaper
publishes is a maer of editorial judgment that the First Amendment places beyond government control,
Burger said.
Before the Supreme Court established the media’s First Amendment right to refuse advertising, lower
courts had ruled in common law that the media are private businesses free to accept or reject advertising,
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provided publishers do not violate contracts with their advertisers, monopolize or restrain trade in
violation of the antitrust statutes, or discriminate on the basis of race or sex. In Chicago Joint Board,
Amalgamated Clothing Workers of America, AFL-CIO v. Chicago Tribune Co., the U.S. Court of Appeals
for the Seventh Circuit ruled that newspapers are private enterprises that can refuse even editorial
advertisements.236
e First Amendment and the common law do not free the media entirely from required publishing and
broadcasting. e Federal Communications Act imposes obligations on broadcasters to provide airtime for
candidates during elections. e media are also required to provide access to advertisers with whom
contracts have been signed. In addition, media that collude to refuse advertisements may violate the
antitrust laws.
■ Summary ■
e media may refuse to publish or broadcast advertisements because of First Amendment and common-
law precedents. e media’s refusal to disseminate an advertisement is not deemed a government refusal
in violation of the First Amendment just because the media receive government benefits. However, the
media, like other businesses, must honor their advertising contracts, the antitrust laws, and other legal
obligations.
Self-Regulation
Despite the elaborate legal apparatus for regulating advertising, self-regulation by the advertising industry
has been called the most efficient tool for curbing excesses and illegalities.237 In the recent era of
government deregulation, the FTC also emphasized the importance of regulation from within the
advertising industry. With FTC budget cuts and the closure of a number of regional FTC offices, consumers
depend on advertisers themselves, more than before, to ensure that advertising is fair and accurate.
Although the zeal for deregulation has abated, regulation of advertising by a number of bureaus and
agencies outside of government is still important. ese regulatory bodies include associations, su as the
American Association of Advertising Agencies; the broadcast networks, all of whi have advertising
acceptance guidelines; and individual radio and TV stations, newspapers, and magazines.
Some advertisers promote self-regulation to stave off government regulation. e Direct Mail Board of
Review, Inc., a trade association formed to help regulate direct mail advertising, has issued a Code of
Business Ethics. Similarly, the American Telemarketing Association has adopted Telemarketing Standards
and Ethics Guidelines. e National Infomercial Marketing Association asks members to air only truthful
advertisements as required by the association’s Marketing Guidelines. A leading regulator of the
advertising industry is the National Advertising Division of the National Advertising Review Board
(NARB). e NARB was set up by a number of trade associations during the most vigorous period of the
consumer movement in the early 1970s.
National Advertising Division
e National Advertising Division and the National Advertising Review Board were established in 1971 to
promote truth and accuracy in national advertising. ese regulatory bodies were created through the
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cooperation of the American Advertising Federation, the American Association of Advertising Agencies,
the Association of National Advertisers, and the Council of Beer Business Bureaus. e National
Advertising Division, or the NAD as it is called, is “responsible for receiving or initiating, evaluating,
investigating, analyzing, and holding initial negotiations with an advertiser on complaints or questions
from any source involving the truth or accuracy of national advertising.”238
Like the FTC, the NAD investigates advertising claims to determine whether they are substantiated. e
NAD says that it “maintains the principle unreservedly” that prior substantiation “is essential for truthful
and accurate advertising.”239 Most of the cases NAD reviews involve substantiation of advertising claims.
e NAD deals only with misleading or deceptive national advertisements. It does not get involved in
private disputes between competitors and does not take complaints dealing with local advertising or
business practices. Furthermore, the NAD does not entertain questions about the basic performance of
products, questions of taste, political and issue advertising, or advertising addressed to lawyers, engineers,
or other audiences with special expertise. A related organization, the Children’s Advertising Review Unit,
tries to prevent exploitation of ildren through misleading ads, messages that ildren cannot understand,
and ads that disregard the risk that ildren may imitate dangerous product demonstrations.
e NAD’s cases come from the organization’s own systematic monitoring of national television, radio,
and print advertising; complaints from competing advertisers; and complaints from consumer groups,
individuals, and the independent Beer Business Bureaus. e NAD also reviews claims of deceptive
advertising on the Internet, where, an advertising official says, the advertising business can regulate itself
more quily and eaply than the government can.240 Consumers and advertisers may report fraud on the
Internet via regular mail, email, or the Beer Business Bureau’s website, www.cbbb.org/cbbb. If the NAD
is not satisfied that an advertising claim is substantiated, it will negotiate with the advertiser to modify or
discontinue the ad. If an agreement cannot be reaed, an advertiser can appeal the NAD decision that an
ad is deceptive to an impartial five-member panel appointed by the air of the NARB. e review board
has 50 members representing national advertisers, advertising agencies, and the public. Members of the
board serve a two-year term.
e NAD has no definitive standards defining untrue or inaccurate ads. It decides ea case
individually. But the NAD brings into the regulatory process the standards of many other agencies and
associations, including FTC rules and consent orders, postal regulations, state consumer protection
programs, and court decisions, particularly the increasing number of comparative advertising cases. e
NAD also relies on the guidelines of the Advertising Resear Foundation, network broadcast guides, and
professional and trade association guides.
In a typical case, the NAD found there was inadequate substantiation for newspaper ads proclaiming
the superiority of Bama Peanut Buer over three other brands that had been compared in taste tests with
ildren in the South. e ad said:
Peanut Buer lovers say “You Can’t Beat Bama!” Jif Can’t! Peter Pan Can’t! Skippy Can’t! In recent taste tests in
the South, boys and girls who love peanut buer found Bama Peanut Buer unbeatable! None of the leading
brands beat the delicious taste of Bama.
e company’s taste tests did show ildren thought Bama was as good as or beer than the other three
brands overall, but the kids liked the consistency and the strength of the peanut buer flavor beer in one
of the competing brands. Because Bama’s taste was not preferred in all respects, the NAD found
insufficient substantiation for Bama’s claim to be preferred by ildren. e company agreed that claims of
Bama’s superiority to all three other brands would not be used in future campaigns without more test data
to support the claims, but as typically happens, the advertising had already been discontinued.241
e NAD has no coercive powers or punitive role, but advertisers nevertheless cooperate with the NAD.
Not until 1993 did an advertiser—Eggland’s Best, Inc.—refuse to halt an advertisement aer participating in
the complete process of an NAD investigation, decision, and appeal to the NARB.242 In those rare cases in
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whi an advertiser refuses to participate in an NAD review or an advertiser refuses to halt a misleading
advertisement, the case may be referred to the FTC or another government agency. In 1995, Eggland’s Best
agreed with the FTC not to disseminate egg advertisements containing misleading and unsubstantiated
health claims.243 Publicity about NAD cases is circulated to the media, businesses, colleges, and
government agencies in monthly Case Reports.
Media Regulation
In addition to the NARB, advertising is regulated by the networks, newspapers, and other media that sell
advertising time and space. e media, like the FTC and the NAD, screen advertisements submied to
them for accuracy and fairness and demand that objective claims be substantiated. So valued are network
guidelines that advertising associations regreed network cutbas in their advertising acceptance
departments. ere is always a concern that failure of the advertising industry to regulate itself will
encourage more government regulation.244
For many years, the National Association of Broadcasters’ Television Code imposed several limits on
members’ advertising. ese guidelines were more sensitive to the taste and morals of the audience than
the law was. To meet the standards of the Television Code, ads not only had to be accurate but also had to
be presented “with courtesy and good taste.” According to the broadcast code, ads were not supposed to be
objectionable “to a substantial and responsible segment of the community.”245 e guides were especially
sensitive to the sensibilities of ildren. e code prohibited advertising hard liquor, firearms except for
sport, and fortune-telling. Personal hygiene products were to be advertised “in a restrained and obviously
inoffensive manner.”
e NAB Code was abandoned aer the Justice Department won an antitrust suit allenging the code’s
provisions barring advertising “cluer.” e cluer provisions prohibited the advertising on member
stations of two or more products in a single advertisement lasting less than sixty seconds. In other words,
thirty-second spots could contain ads for only a single product or two closely related products, su as
different models of the same vacuum cleaner. e NAB claimed the cluer provisions saved viewers from
the confusion of having to wat several short advertisements at one time. e NAB also contended that
the cluer provisions did not violate the antitrust law because the NAB code in whi the provisions were
contained was a voluntary code adhered to only by members of the National Association of Broadcasters.
e federal District Court for the District of Columbia agreed with the Justice Department that the NAB
cluer provisions violated the Sherman Antitrust Act.246 Although the code was not legally binding on its
members, the court said the NAB, in effect, had a monopoly on the industry because the most important
broadcasting outlets in the country belonged. e court said adherence to the code was not really
voluntary because stations that did not abide by the code could be dropped from membership in the
association. e court also said that prohibiting an advertiser from advertising more than one product in a
30-second spot was a restraint of trade that particularly hurt smaller companies that could not afford
longer television ads.
Aer the Justice Department won an antitrust suit against some of the NAB code provisions, the NAB
abandoned the broadcast code. However, networks adopted advertising standards that essentially
conformed to the abandoned NAB code. All networks have advertising acceptance guidelines requiring
truth, good taste, and substantiation of broadcast claims.247
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Government regulation is not the only e on the accuracy of advertising. Advertisers themselves and
the media monitor advertisements to ensure that the government and public will not find them deceptive.
e leading self-regulatory body is the National Advertising Division of the National Advertising Review
Board. Many other agencies, as well as the networks and newspapers, monitor advertising. Like the FTC,
the National Advertising Division and the media expect advertising claims to be substantiated.
Securities Transactions
Corporations not only have a right to speak but may also be required to speak or publish. A number of
laws require banks, insurance companies, and other businesses to disclose to the public the details of their
financial offerings and the financial strength of their institutions.
Probably the most far-reaing corporate disclosure laws are the securities acts passed during the
Roosevelt administration to eliminate abuses that contributed to the sto market crash of 1929. Under the
laws, corporations whose sto is publicly traded must disclose financial information to the government,
shareholders, and the public when the corporations register and trade securities.
For public relations practitioners, federal and state disclosure requirements mean jobs writing periodic
reports and press releases, preparing for annual stoholders’ meetings, and advising corporate executives
about their disclosure responsibilities. For business journalists, corporate filings with the Securities and
Exange Commission have been said to compose “the single most intensive resear tool” for learning
about the operations of American companies.248
e fundamental purpose of the federal statutes, the Supreme Court said, “was to substitute a
philosophy of full disclosure for the philosophy of caveat emptor and thus to aieve a high standard of
business ethics in the securities industry.”249 One of the most important securities reforms passed during
the New Deal was the Securities Act of 1933, whi regulates the initial offering and sale of securities.250 A
year later Congress enacted the Securities Exange Act of 1934, whi regulates the trading of securities
on sto exanges aer they have been offered.251 Another relevant measure that was enacted during the
Roosevelt administration is the Investment Advisers Act of 1940, whi regulates some financial
publications.252
e securities acts are administered by the SEC, created in 1934. e SEC is an independent, bipartisan,
quasi-judicial agency. e SEC has five members, not more than three of whom can belong to the same
political party. ey are appointed by the president for five-year staggered terms. e SEC oversees the
financial disclosure that is required of companies traded on the sto exanges, cities and public agencies
that issue municipal bonds,253 and investment advisors.254
Mandated Disclosure
e securities statutes mandate disclosure of financial information about securities that are bought and
sold on the sto exanges. e Securities Act of 1933 requires disclosure in connection with registering
securities for sale. e Securities Exange Act of 1934 mandates corporate disclosure in connection with
the trading of those securities. Security has been defined broadly under federal law to include stos,
bonds, and a variety of other investment vehicles where the puraser does not take an active role in
managing the investment.255
REGISTERING SECURITIES e 1933 Securities Act was passed to provide investors with the
information they need to make intelligent decisions when purasing new sto offerings. To aieve this
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goal, Section 5(c) of the Securities Act prohibits a company from “going public” by offering its sto for
sale before it has filed a registration statement with the SEC containing extensive financial information
about the company.256 A company whose shares are already traded on an exange must file registration
statements if a new sto offering is made. Aer a company files a registration statement with the SEC,
there is a brief waiting period during whi a company cannot advertise or offer to sell the securities the
company hopes investors eventually will buy. e waiting period allows investors “to become acquainted
with the information contained in the registration statement and to arrive at an unhurried decision
concerning the merits of the securities.” Aer the waiting period, a company may advertise the shares for
sale.
While a company is waiting to offer shares of sto to the public, it may issue press releases, advertise
its products, and continue its other usual communications. However, the company may not seek
purasers of its new shares of sto until the SEC declares its registration “effective.”
In a famous case, the Arvida Corporation violated Section 5(c) of the Securities Act by inviting investors
to purase Arvida sto before a registration statement had been completed.257 Arvida was formed by the
industrialist Arthur Vining Davis when he transferred mu of his extensive Florida real estate holdings to
the corporation. Davis planned to raise additional capital through an offering of sto to the public. When
the financing proposal reaed final form but before registration was filed with the SEC, a press release
was issued on the leerhead of Loeb, Rhoades & Co., a New York brokerage.
e Loeb, Rhoades press release said Arvida would have assets of more than $100 million. e release
also said that Davis would transfer to Arvida more than 100,000 acres near the Florida “Gold Coast” for
development. To help ensure wide dissemination of the press release in the most prestigious papers, the
public relations counsel for Loeb, Rhoades invited reporters from the New York Times, the New York
Herald-Tribune, and the Wall Street Journal to its offices in time to meet the papers’ deadlines. A company
official told the reporters that the sto would sell for about $10 a share but declined to answer questions
about debt on the property, capitalization of Arvida, the company’s balance sheet, or control of the
corporation. e substance of the press release appeared in the three New York newspapers and numerous
other news media throughout the country.
e SEC arged that the release violated Section 5 because it, along with earlier publicity, was
calculated “to set in motion the processes of distribution” of sto before registration “by arousing and
stimulating investor and dealer interest in Arvida securities.”258 To the SEC, the “arresting references” in
the press release to assets in excess of $100 million and to over 100,000 acres on the Florida Gold Coast
were part of an illegal selling effort. Indeed, an SEC survey found that within two business days, the
publicity had resulted in investor interest worth at least $500,000.
e SEC rejected Loeb, Rhoades’s contention that the release and publicity about Arvida were legal
because they were legitimate news. Section 5(c), the SEC said, “is equally applicable” whether or not
“astute public relations activities” make an illegal sto offering appear to have news value. Indeed, the
SEC reasoned, “the danger to investors from publicity amounting to a selling effort may be greater in cases
where an issue has ‘news value’ since it may be easier to whip up a ‘speculative frenzy’… by incomplete or
misleading publicity” and thus aid distribution of an unsound security at inflated prices. is, the SEC
concluded, “is precisely the evil whi the Securities Act seeks to prevent.” e SEC did not want to dam
up the normal flow of information, but, the SEC said, the company and its underwriters cannot be part of
a publicity campaign that constitutes an offer to sell or solicitation of an offer to buy before registration of
a security.
When Arvida’s final prospectus was made public, the SEC found support for its decision to enforce
Section 5(c). Whereas the press release had stressed the great acreage owned by Arvida, the final
prospectus describing the sto revealed that the bulk of the land was not usable in its present condition
and was located in areas remote from existing development. e final prospectus also revealed significant
debt, indicating that the bulk of the money raised through the sto offering might be used to retire the
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debt rather than to develop the land. e fuller truth disclosed in the final prospectus proved to the SEC’s
satisfaction the superiority of the mandated disclosure system over investment decisions “brought about
by press releases.”
e Arvida case raised no First Amendment issues, but the SEC noted that Section 5(c) of the 1933 act
“in no way restricts the freedom of news media to seek out and publish financial news.” e Section 5(c)
prohibition does not violate the First Amendment rights of underwriters because they are in the business
of distributing securities, not news, the SEC said. e restrictions of Section 5(c) do not apply to reporters,
who presumably “have no securities to sell.”
TRADING SECURITIES Whereas the Securities Act of 1933 is concerned primarily with financial
disclosure before a security is traded on an exange, the Securities Exange Act of 1934 is principally
concerned with the trading of securities from one puraser to another aer distribution on the nation’s
sto exanges. Under the 1934 act, large publicly traded corporations are required to file annual,
quarterly, and other reports with the SEC about the company’s operations.259 Other sections of the act
regulate the solicitation of proxies and tender offers.260 Proxy statements announce annual and special
shareholder meetings. Tender offers are offers by one company to buy controlling shares of another
company.
Annual and arterly Reports Annual reports, whi must be sent to shareholders and filed for public
inspection with the SEC, are one of the most effective media through whi information is disseminated to
the investment community. Corporate reports contain information about management, net sales, earnings,
dividends, and other information about the financial condition of the company. e annual report also
contains the “management discussion and analysis” that describes in detail the capital resources, results of
company operations, and projected performance. If a projection turns out to be wrong, a businessperson
may be protected from a fraud suit if the projection (1) was prepared with a reasonable basis and (2) was
disclosed in good faith.261
Mu of the information in an annual report is updated in required quarterly reports. Between quarterly
reports, publicly traded corporations are also mandated to report a few significant developments within
fieen days of their occurrence. Between quarterly reports, companies are required to report to the SEC on
form 8-K anges in control of the company, the buying or selling of significant assets, filing for
bankruptcy or receivership, anges in the company’s certified public accountants, and the resignation of
directors.262 e SEC says that a corporation may, “at its option,” report other important occurrences, but
the law does not require the company to do so unless disclosure is necessary to avoid fraud.
e SEC also allows disclosures to be made online on their websites or, as of 2013, on social media
platforms su as Facebook and Twier, as long as investors have been made aware of the platforms the
company uses to make su announcements. e SEC, for example, opened an investigation against the
streaming movie service Netflix aer the company’s CEO revealed on his Facebook page that Netflix had
surpassed one billion hours of streaming content in a month for the first time in the company’s history.
e same disclosure was not announced through traditional annels su as a press release or an 8-K
form, leading to concern that only certain investors knew this positive information while the company’s
sto price increased about $10 per share in a day. Investors should have been made aware, the SEC said,
that company information of this kind was going to be shared on Facebook.263
e sto exanges require mu faster disclosure of a mu broader range of information than must
be disclosed under securities law. e New York Sto Exange and the American Sto Exange have
adopted rules that generally require rapid disclosure of all material corporate developments. Although
listed companies oen follow the exange rules, violations of exange requirements, like failure to
follow SEC regulations, oen go unpunished. e enforcement powers of the exanges are too drastic to
be employed frequently or effectively. e New York and American exanges may halt trading or “delist”
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companies that disclose too lile information. But exanges competing for corporate listings are reluctant
to employ su severe penalties.
Proxies and Annual Meetings Besides reporting regularly in quarterly and annual reports, publicly
traded companies must tell shareholders in proxy statements when and where the shareholder meetings
will be held and what business will be conducted.264
Proxy statements must also include extensive information about the compensation of ief executive
officers and other highly paid executives. Shareholders who will not aend the annual meeting can vote by
proxy on various proposals, including management anges and proposals submied by shareholders.
When shareholders vote by proxy, they give their proxy holder, oen a commiee designated by
management, the authority to vote their shares as they instruct on their proxy statement. rough “proxy
fights,” dissident directors or minority stoholders may “solicit” shareholders to vote their proxies against
management. rough proxy fights, dissident shareholders can sometimes vote management out of office,
thus gaining control of a company without buying a majority of shares. Under securities law, neither
corporations nor dissident stoholders may issue false or misleading statements to shareholders in an
effort to sway their votes.
False or misleading proxy solicitations may be halted whether they are targeted directly at shareholders
or are communicated more indirectly through speees, press releases, and television scripts for the public.
e U.S. Court of Appeals for the Second Circuit ruled that even a newspaper advertisement placed by a
citizens group might be halted if it contained false statements published in an aempt to influence
shareholders in a proxy fight.265 e case involved a newspaper advertisement purased by a citizens
group opposed to the Long Island Lighting Company, known as LILCO. e citizens group was associated
with dissident stoholders who hoped to oust LILCO management in a proxy fight. e ad accused
LILCO of mismanagement and of aempting to saddle ratepayers with the needless costs of constructing
the controversial Shoreham Nuclear Power Plant. e ad urged that LILCO, a company owned by
shareholders, be managed by a public authority.
LILCO tried to halt the advertisement, claiming that it contained false statements aempting to sway
LILCO shareholders to vote against management. But a federal district court ruled that the newspaper ad
purased by a citizens group was constitutionally protected political expression.266 However, the U.S.
Court of Appeals for the Second Circuit reversed the lower court. Avoiding the First Amendment issue, the
appellate court treated the case as a narrow issue of securities regulation, noting, “e SEC’s authority to
regulate proxy solicitations has traditionally extended into maers of public interest.” e appeals court
remanded the case, asking the lower court to determine whether the ad in a general-circulation newspaper
actually solicited shareholders’ votes.
Tender Offers Corporate takeovers may be aempted through proxy fights at a company’s annual
meeting. More oen, however, one company buys another by making an offer to stoholders of the other
company to tender—or surrender—their shares for a certain price, usually well above the current market
price of a sto. Securities law requires that takeover bidders disclose information about themselves to
shareholders of the target company. e securities law requires that anyone who rapidly acquires more
than 5 percent of another company—and who may be anticipating buying mu more—file with the SEC,
the target company, and the exange where the target’s sto is traded a statement describing the buyer’s
“baground and identity.” Any company that buys a large position in another company must also disclose
the source and amount of funds to be used in buying shares, the extent of the buyer’s holdings in the
target corporation, and the buyer’s plans for the target corporation’s business or corporate structure.267
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e securities laws require sto companies to disclose financial information before shares are offered and
while they are being traded. Mandated disclosure includes prospectuses before a sto is offered for sale
and periodic reports aer trading begins. Although companies must disclose a few significant events if
they occur between annual reports, corporations may withhold mu information if there is no intent to
conceal fraud. Rules regulating communications to shareholders have been held to extend to political
advertisements that might affect shareholders’ votes.
Fraud
Corporations that knowingly make false or misleading statements in their annual reports, proxy
statements, and other communications mandated by the securities acts commit fraud. It is also fraudulent
for corporate executives to knowingly make false statements in speees and press releases if the
statements would affect the price of the company’s sto. Both federal law and individual states’ laws—so-
called blue-sky laws—outlaw fraud in connection with securities transactions.
Most fraud litigation is brought under Section 10(b) of the 1934 Securities Exange Act and Rule 10b-5
of the Code of Federal Regulations. Section 10(b) makes it unlawful for a corporation or its agent to be
manipulative or deceptive in connection with the purase or sale of securities. Under Rule 10b-5, it is
manipulative or deceptive for a company to make a deliberately misleading material statement. It is also
fraudulent for a company to fail to clarify a statement to avoid misleading investors. Investors may sue to
enjoin deception and to recover money lost because of reliance on deceptive statements.
MATERIALLY DECEPTIVE FACTS For a statement to be fraudulent, it must involve a material fact.
Material facts are facts important to the decision of a reasonable investor to buy, sell, or hold a security. A
fact is material in a proxy statement, the Supreme Court said, “if there is a substantial likelihood that a
reasonable shareholder would consider it important in deciding how to vote.” To be material, a fact must
not necessarily ange an investor’s decision to buy or sell. A fact is material if it would be significant to
reasonable shareholders in the “total mix” of their information.268
Material facts include a sharp ange in company earnings, the imminence of a very profitable
transaction, and information about a possible merger or bankruptcy.269
Material facts also may include the illness or disability of a key executive.270 A non-material fact would
be the color of the ief executive’s office. us, a company might falsely state the color of the boss’s office
without commiing fraud because the color is not important to investors’ decisions to buy or sell.
e merger of two companies is usually important to investors, thus raising the question at what point
merger negotiations become material and therefore can no longer be lawfully denied. Are casual lunes at
whi executives gently probe the possibility of a merger material? Or does a merger become material
only when the documents joining two companies are signed?
e Supreme Court has ruled that merger negotiations become material either when they are so
advanced as to make a merger very probable or at an earlier point in the discussions if the magnitude of
the merger would dramatically alter the company.271 us, discussions of big mergers become material
before discussions of insignificant mergers, and discussions that seem likely to result in mergers are
material before discussions in whi mergers seem improbable. Until mergers and other developments
become material, companies can lawfully deny them.
Following major corporate financial scandals, Congress in 2002 passed important legislation to increase
corporate accountability and restore confidence in the markets.272 Just before the fall elections, Congress
passed the Sarbanes-Oxley Act to increase trust in corporate accounting, whi was undermined
repeatedly by unreported sweetheart loans, off-the-books entities, and insider dealing at infamous
companies called Enron, Arthur Andersen, ImClone, Global Crossing, WorldCom, and Adelphia.
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e major focus of Sarbanes-Oxley is to strengthen independent accounting at publicly traded
companies. Sarbanes-Oxley also requires faster and more complete disclosure of important anges at
publicly traded companies. From now on, companies must disclose in their annual reports material
transactions and special-purpose entities that are not reported on the corporate balance sheet.273 Other
material anges to a company’s financial condition must be reported on a “rapid and current basis.”
Sarbanes-Oxley also increased criminal penalties greatly. Penalties for corporate mail and wire fraud
were quadrupled from five years in prison to twenty years.
Misstatements Materially deceptive facts can be positive misstatements or omissions. It was a material
misstatement for the director of the Livingston Oil Company to overstate the corporation’s income during
a spee to securities analysts. e spee was later distributed to shareholders to encourage more sales of
sto.274
e Supreme Court has ruled it is materially misleading for management to give advice to shareholders
that is not based on generally accepted fact. In Virginia Bankshares, Inc. v. Sandberg,275 the Court agreed,
8–1, that a Virginia bank misled minority shareholders when it urged them to approve a buyout of their
sto at $42 per share as part of a merger. Management told the shareholders in proxy statements that $42
per share was a “high” value and that terms of the merger were “fair.”
Management’s “conclusory terms in a commercial context” were misleading, the Court said, because
they were not based in fact. e Court agreed with lower-court conclusions that management’s statements
were misleading because the $42 share price was neither high nor fair “when assessed in accordance with
recognized methods of valuation.” Management’s evaluation, the Court said, “was open to aa by
garden-variety evidence.”
However, the Court ruled against the shareholders seeking payment above $42 per share from the bank.
A five-member majority of the Court ruled that the minority shareholders were not entitled to additional
compensation because they could not prove that they lost money as a result of the misleading statements
soliciting their proxies. e Court said that the misleading proxy statements did not cost the shareholders
money because the shareholders’ proxies were not legally necessary for the bank merger to occur.
Public relations firms cannot avoid liability for fraud if they blindly pass along misleading investment
information for their corporate clients. A federal judge in Illinois told a corporate financial relations firm it
could rely on corporate clients’ representations only if the PR firm also made a “reasonable investigation”
to satisfy itself that the statements were true.276 e SEC has reiterated the financial public relations firm’s
responsibility to withhold corporate information it knows or has reason to know is false.277
A 1995 amendment to the federal securities laws provides a “safe harbor” for predictions by
corporations as long as they are accompanied by adequate cautionary statements.278 e safe harbor
provision—called a “pirate’s cove” by detractors—allows companies to make predictions about earnings or
new products without liability for fraud if the predictions are subsequently proven wrong. However, to
benefit from the safe harbor, the prediction must caution investors about important factors that could
create results different from those envisioned by management.
Omissions More common than misstatements of material facts are deceptive half-truths or omissions.
e Electric Autolite Company misled shareholders when it disclosed a proposed merger but failed to tell
them in proxy statements that the Autolite board of directors, whi recommended a merger with the
Mergenthaler Linotype Company, was already under the control of Mergenthaler.279
In one of the most famous public relations fraud cases, the Texas Gulf Sulphur Company (TGS) issued a
materially deceptive press release to dampen rumors of a major copper discovery. In its press release, TGS
said that press reports of the company’s substantial copper discovery in Timmins, Ontario, were
exaggerated. e release said public estimates about the size and grade of ore were “without factual basis
and have evidently originated by speculation of people not connected with TGS.”280 Relying on this
negative release, several investors sold shares in the company, only to learn from a Texas Gulf Sulphur
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press release twelve days later that the company had made a 10-million-ton ore strike, one of the largest in
history.
In court, Texas Gulf Sulphur said it would have been premature and possibly misleading for the
company in its first release to speculate on the size and grade of ore at the mining site. e company had
not yet had the ore samples analyzed emically. But a federal appeals court ruled that the known riness
of the ore samples even before emical analysis was material and did not justify a press release as
negative as the company first issued. As evidence that the ore samples were material to investors’
decisions even before the samples were emically analyzed, the court noted that several Texas Gulf
Sulphur executives bought additional shares of the company before the ore strike was announced.
e U.S. Court of Appeals for the Second Circuit said the TGS press release misleadingly suggested
there was no basis for investor optimism. e court did not require a company to issue a press release to
quell rumors but said that material facts should be complete and accurate once a company issues a public
statement. Instead of saying speculation about a major ore find was without factual basis, Texas Gulf
Sulphur should have said nothing, told how promising the ore samples were by visual inspection, or said
the situation was in flux.
How mu to reveal, if anything, during seares for raw materials, merger negotiations, land
acquisitions, and other delicate periods may be a difficult corporate decision. Nevertheless, silence may
sometimes be the best policy to keep negotiations on tra and to avoid arges of fraud for partial
revelations. Silence may be difficult to maintain when a company would like to be forthcoming and when
securities analysts and the media are clamoring for information.
Even when a company communicates material facts, statements may be misleading because of the
format of presentation. e American-Hawaiian Steamship Company was held to have issued a deceptive
proxy statement because the company obscured the truth by scaering material facts through a lengthy
document.281 Use of unnecessarily tenical terminology can also be misleading. However, the SEC
encourages some businesses, including oil companies, to use tenical terms familiar to experienced
investors when precision is necessary to avoid deception.
A company’s use of a tenical term is not deceptive simply because investors might not be familiar
with it. e Sable Company was ruled not to be deceptive when it issued a press release announcing the
company was filing a new “investigational” application with the FDA to develop so contact lenses.
Investigational applications are filed when significant product development is necessary before marketing.
e company did not say in its release that it usually takes several years before the government approves
an investigational product for the market.
Investors unfamiliar with the lengthy approval process for investigational applications were
disappointed that the company’s tenology would not lead to higher earnings and sto prices for several
years. One investor sued Sable for issuing misleading information. However, a federal district court said
that a claim that Sable misled investors could not be based on the plaintiff’s ignorance. “Where the public
can make the evaluation as to how beneficial a certain corporate action will be to the earning picture of
that corporation, the omission of information about the decision-making process of a government agency
is not a violation of Rule 10b-5,” the court said. Indeed, the court said the company probably would have
misled investors if it had tried to announce a time at whi the FDA would approve the lenses for
marketing.282
Failure to Disclose Payment for Publicity Another fraud securities law prohibits is failure of
publishers and public relations practitioners to disclose payments they receive for corporate publicity
affecting a security. Su failure can violate Rule 10b-5 or Section 17(b) of the Securities Act. Section 17(b)
makes it illegal to “publish, give publicity to, or circulate any notice, circular, advertisement, newspaper,
article, leer, investment service, or communication about a security without revealing payments
received.”283 e purpose of the section is to halt articles in newspapers or periodicals that appear to be
unbiased opinion about a company but that in fact are purased.284
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Stock Market Magazine was arged with fraud for failing to reveal that it published corporate features
for companies that bought advertising and story reprints.285 e U.S. Court of Appeals for the District of
Columbia sent the case to a federal district court for a determination as to whether the magazine, whi
offered financial news to some 12,000 subscribers, was publishing the articles in exange for corporate
purases of advertising and reprints. If so, the magazine could be required to disclose these payments. e
magazine contended there was no quid pro quo that needed to be revealed under the securities laws.
e Court of Appeals told the district court that although the lower court was investigating whether
articles were published in return for advertising and reprint sales, the court could not demand to know
who wrote the articles in question. e SEC had argued that the magazine should be required to reveal not
only that it sold advertising and reprints but also that featured companies sometimes wrote the articles,
paid public relations firms to write them, or paid editors of Stock Market Magazine to write them. e
appeals court said the First Amendment prohibits inquiry into who pays a writer or how mu of a
published article is wrien by someone outside a magazine. Su inquiry, the court said, would
impermissibly interfere with editorial judgments about constitutionally protected content.
e First Amendment protects the publisher’s right to determine who writes and edits published
material, the court said. Content is protected whether the writer is paid by a publisher, a public relations
firm, or a featured company. A magazine might be required to disclose that it received payments or sold
advertising and reprints as a condition for publishing an article, the court said, but the First Amendment
bars requiring a magazine to disclose who wrote whi parts of a business article.
Public relations practitioners are also supposed to disclose payment from companies they promote. e
SEC has warned public relations firms that they violate the Securities Act if they do not reveal payment
for preparation and dissemination of material designed to make a new sto offering look like an aractive
investment.286
IN CONNECTION WITH A PURCHASE OR SALE Under Rule 10b-5, not only must fraudulent
statements be material, they must also be “in connection with the purase or sale of any security.” e in-
connection-with test is met if a corporation issues a materially false or misleading statement on whi
other investors rely for their purases or sales. But reliance by investors may be presumed when a
company makes materially false or misleading statements. In the Texas Gulf Sulphur case, the Second
Circuit Court of Appeals said the in-connection-with test was met when Texas Gulf Sulphur issued a
misleading statement “reasonably calculated to influence the investing public.”287
Courts have ruled the in-connection-with requirement is also met when materially false statements are
made in corporate annual reports,288 product promotions,289 speees by corporate directors to securities
analysts,290 and advertisements.291 In ea case, investors might rely on the statements when buying or
selling securities. e SEC has also warned companies that statements made during rate-filing hearings,
during labor negotiations, and in other public circumstances must be factual because they too can be heard
and relied on by investors.292
DUTY TO CORRECT STATEMENTS ATTRIBUTED TO THE COMPANY A publicly traded corporation
has an affirmative duty to correct a published material misstatement if the error originates with the
corporation or its agent. In Green v. Jonhop,293 a federal court said that a corporation had an obligation to
correct falsely optimistic earnings projections made by an underwriter who marketed the company’s
securities. Corporate silence in the face of falsely optimistic earnings projections, the court said, could
fraudulently encourage investors to rely on the underwriter’s statements.
A corporation also has a responsibility to correct misstatements if the company approves or helps to
dra reports by sto analysts or public relations firms containing material misinformation. e U.S. Court
of Appeals for the Second Circuit noted that corporate officials who review outside analysts’ reports
engage in “a risky activity, fraught with danger” because officials, by their participation, make “an implied
representation that the information they have reviewed is true or at least in accordance with the
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company’s views.”294 In addition, corporate officials must treat with caution any activity that suggests that
the company has “ratified” a particular analysts’ projections. One corporate communication manual
suggests that “the company should avoid disseminating analysts’ reports.”295
A corporation may also have a duty to correct its own statements if anging conditions transform
accurate statements into misleading statements. A U.S. district court said the A. H. Robins Company had a
duty to update statements in its stoholder annual reports indicating that the company’s Dalkon Shield
contraceptive was safer and more effective than other similar devices on the market. A study that was
published aer Robins’s first reports indicated that the contraceptive was not as safe or effective as Robins
first indicated.296 Another court ruled that the Shau Denn Mining Corporation had an obligation to tell
investors that a previously announced merger deal had fallen through. Without the update, investors could
buy Shau’s sto with the mistaken belief that the merger would increase profits.297 Courts have
generally been vague about how long an initial corporate communication remains “alive” and thus subject
to correction, although it is clear that eventually a statement will become stale and thus not require
correcting.298 One way to limit the “life” of a press release might be to use phrases su as “at present” or
“right now.”299
A corporation generally has no duty to respond to market gossip and rumors not aributable to the
company.300 In the Texas Gulf Sulphur case, the court said that the company did not have to respond to
speculation about the company’s ore discovery because the speculation did not originate with the
company. Texas Gulf Sulphur statements were fraudulent because the company responded on its own
initiative to rumors in a less than complete statement.
Similarly, a corporation has no duty to respond to an inaccurate interpretive article that is not
aributable to the company. e U.S. Court of Appeals for the Second Circuit ruled that the International
Controls Corporation (ICC) had no duty to respond to Dan Dorfman’s report in the Wall Street Journal
about ICC’s plan to buy the Electronic Specialty Company. e speculation about the plan turned out to be
true, but the price per share that Dorfman quoted was considerably higher than ICC was offering. ICC had
no duty to respond because the company was not the source of the speculation.301
Even if an inaccurate news article is aributed to a company, a corporation probably has no duty to
correct the article if information the company provided was accurate. In Zucker v. Sable, a federal district
court said it would be unreasonable to require a company “to examine every financial publication to
ascertain whether the reports of its admiedly accurate press release have been misinterpreted so as to
mislead members of the public.”302 In Zucker, the newspapers had published misleading stories about the
Sable company by omiing the word investigational, whi had been included in Sable’s press release.
Sable had filed an investigational application with the Food and Drug Administration for development of
plastic lenses. e word investigational was a critical omission in the news reports because investigational
applications, whi indicate time-consuming product resear is not complete, can take many years for
FDA approval.
DUTY TO DISCLOSE INSIDER TRADING Besides a duty to correct its own false or misleading
statements, a corporation and its “insiders” also have a duty to disclose material information when they
plan to base purases or sales of company sto on nonpublic information. is duty to disclose to avoid
fraud arises from executives’ financial responsibility to shareholders and the markets. Publishers of
personal investment advisories and some financial journalists may also have a duty to disclose nonpublic
information they intend to profit from.
Insiders An assumption underlying the securities laws—although not all legal solars agree—is that it
is unfair for insiders to buy and sell a company’s sto for their own benefit if they base their decision on
nonpublic material facts. e theory is that every investor should have equal access to material
information about a sto. Insiders have a duty to disclose material information before trading because of
the fiduciary nature of their positions. Fiduciaries are people who have a position of trust that prohibits
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them from acting only in their own self-interest. In the corporate context, an executive is entrusted by
shareholders with responsibility to manage the shareholders’ assets and is therefore supposed to act in the
shareholders’ interest. To avoid a conflict of interest, Rule 10b-5 imposes a duty on insiders who possess
valuable nonpublic information either to disclose the information or to refrain from trading.303
Securities statutes do not define insider, and congressional aempts to define it have failed. But the
Supreme Court, agreeing with the SEC, has defined an insider as one who, by virtue of his or her position
with the issuer of sto, has access to nonpublic corporate information that is supposed to be used only for
corporate purposes, not for personal benefit.304 is definition covers corporate officers, directors,
controlling stoholders, and corporate public relations executives.
Certain outsiders may acquire the duties of insiders if they “have entered into a special confidential
relationship in the conduct of the business of the enterprise and are given access to information solely for
corporate purposes.”305 ese temporary insiders or quasi-insiders include accountants, lawyers, and public
relations counsel who have access to nonpublic material information that is intended only for corporate
use. ese quasi-insiders, like permanent insiders, are supposed to make true and accurate statements
about material aspects of a company and are supposed to abstain from trading if they have not disclosed
the material information on whi trades might be based.
Anthony M. Franco, head of Miigan’s largest public relations firm, resigned the presidency of the
Public Relations Society of America aer the SEC accused him of insider trading. Without admiing guilt,
Franco agreed not to trade on inside information. e SEC accused Franco of buying sto in Crowley,
Milner and Company just before Franco, as public relations adviser to the company, announced that
another company would purase Crowley.306
A variation of illegal insider trading is tipping. Tipping is the practice of passing nonpublic material
information to friends or brokers so that they can trade. e “tipper” may be liable for fraud along with
the “tippee.” e Texas Gulf Sulphur case is a well-known example of both insider trading and tipping. In
Texas Gulf Sulphur, the federal appeals court found that executives of the mining company violated
insider trading prohibitions by buying sto in the company and also by tipping friends when the insiders
learned ahead of the public of the very promising copper ore samples taken at a site in Timmins, Ontario.
In ruling that the insiders’ sto purases were illegal, the court said the investing public should have the
same access to material corporate information as a corporate insider. Under legislation passed since Texas
Gulf Sulphur was decided, inside traders may have to repay three times their illegal profits.
In an effort to curb insider trading, Congress passed legislation that increased penalties, extended
liability, and encouraged revelation of insider trading. Under the Insider Trading and Securities Fraud
Enforcement Act of 1988, not only are illegal traders and tippers liable, but so also are those brokers,
investment advisers, and other supervisors who fail to take appropriate steps to prevent illegal trading.307
e act also increases criminal penalties and allows the Securities and Exange Commission to pay
persons who provide information about insider trading.
One example of insider trading that has drawn SEC scrutiny is the “pump-and-dump” seme, in whi
a company promotes the sto publicly, sometimes using misleading information, to increase share values,
with a plan of selling the sto when it has sufficiently increased its value. Pump-and-dump semes oen
use the Internet, including social networks, to rea a broad audience rapidly. In 2011, the rapper 50 Cent
promoted a penny sto on Twier in whi he had a large ownership interest, saying, for example,
“HNH1 is the sto symbol for TVG there launing 15 different products. they are no joke get in now” to
his nearly 4 million Twier followers. e sto price soared, increasing 290 percent in value, and earning
50 Cent more than $5 million in increased sto value. Because he did not immediately sell the sto, and
because it was not based on clearly inaccurate information, this was not an illegal pump-and-dump
seme.308 Additionally, he followed his tweets with several disclaimers that may have helped him avoid
an SEC investigation, including one saying, “I own HNH1 sto thoughts on it are my opinion. Talk to
financial advisor about it.”309
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asi-Insiders People using confidential information to buy or sell securities violate the insider trading
laws, even if the traders have no direct association with the company whose shares they trade. e U.S.
Supreme Court said that a company owns its non-public information just as it does the rest of its property,
and the information is for the company’s exclusive use.310 A person violates the securities laws by
misappropriating insider information, su as the unpublished fact that a company is targeted for a take-
over. e Court’s decision came in a case that arose when James O’Hagan bought shares of the Pillsbury
Company before the flour miller was purased by a British company. e Court ruled O’Hagan had
misappropriated information belonging to his Minneapolis law firm when he bought the shares. O’Hagan’s
firm represented Grand Metropolitan PLC (Grand Met), a British company, whi hired a Minneapolis law
firm to represent it while it was considering its takeover bid for Pillsbury. Pillsbury’s share value increased
dramatically when Grand Met announced that it would bid for the company. O’Hagan sold his shares for a
profit of more than $4.3 million.
Although O’Hagan was not involved directly in representing Grand Met, he was convicted of violating
securities, federal mail fraud, and money-laundering laws. e Supreme Court upheld the convictions. e
Court said that in addition to the “traditional” theory of insider trading, whi is applicable when, for
example, a company director or officer uses nonpublic information to trade in the company’s sto, there
is a second approa—the “misappropriation” theory. As in the Winans case, a person violates securities
laws when she or he “misappropriates confidential information for securities trading purposes in brea of
a duty owed to the source of the information.”
In the Grand Met case, O’Hagan did not represent Grand Met, but his law firm did. e firm’s
connection allowed O’Hagan to learn nonpublic information: that Grand Met intended to make a bid for
Pillsbury. It also created a fiduciary responsibility for him to let Grand Met know he would use that
information to purase Pillsbury sto or to refrain from buying the sto. Because he did neither, he
misappropriated Grand Met’s information to trade in Pillsbury’s sto, and in doing so, he violated insider
trading laws. e Court noted, however, if O’Hagan had found in a park trash can information about
Grand Met’s takeover plans, he would have no fiduciary duty. He could trade freely in Pillsbury sto.
Investment Advisers Stobrokers and financial advisers have a fiduciary relationship with their
clients mu like that of a corporate insider with shareholders. Stobrokers and financial advisers have a
personal responsibility to their clients, imposing on the advisers a duty to register with the Securities and
Exange Commission and to avoid misleading customers for personal gain.
Although many publications offer advice about stos and finances, most financial publications la the
personal relationship to investors and the direct involvement in investors’ portfolios that create fiduciary
responsibilities. In Lowe v. SEC,311 the Supreme Court ruled that Christopher L. Lowe’s Lowe Stock
Advisory was not an investment advisory that must be registered with the Securities and Exange
Commission. Lowe’s newsleer contained general commentary about the securities markets, reviews of
investment strategies, and specific recommendations for buying, selling, or holding stos. Lowe, however,
did not manage individual investment portfolios through the newsleer.
A financial publication must register with the SEC as a personal investment advisory, the Court said,
only if it offers “individualized advice auned to any specific portfolio or any client’s particular needs.”
Lowe’s newsleer was not a personal investment advisory, the Court said, because it offered completely
disinterested advice to the general public on a regular publication sedule. A financial newsleer, the
Court said, is not so mu like an investment adviser as it is like a newspaper; newspapers,
newsmagazines, and general-circulation business publications are exempt from registration requirements
of the SEC. e Court in Lowe suggested, but did not hold, that a telephone hotline Lowe offered to readers
might be subject to the Investment Advisers Act even though his newsleer was not, because the hotline
might be considered “personalized advice” about buying and selling securities.
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Financial Journalists and Market Insiders ere is another level of information processors who have
access to corporate information but who do not have the fiduciary duties of a corporate insider, a quasi-
insider, or an investment adviser. People in this group include financial journalists, publishers of
impersonal financial newsleers, printers, bank employees, public relations practitioners, and employees of
financial brokerage houses. ese information handlers are sometimes called market insiders because they
have access to information about mergers, tender offers, and other sensitive financial intelligence, but they
do not have the fiduciary relationship of insiders and quasi-insiders to companies issuing sto or of
investment advisers to their clients.312
Although market insiders have no fiduciary duty to market traders, courts have ruled that employees of
investment banking firms, financial printers, newspaper publishers, and other processors of market
information violate Section 10(b) and Rule 10b-5 if they mis-appropriate information about mergers,
acquisitions, and other confidential information for their own gain. Under a theory of misappropriation,
market insiders have been ruled to engage in fraud in violation of Section 10(b) by taking market
information belonging to their employers and using it to tip and trade for their own enriment.313
By a 4–4 vote, the Supreme Court upheld the securities fraud conviction of R. Foster Winans, a Wall
Street Journal reporter, who engaged in a form of “scalping.”314 (e 4–4 split means that the appeals court
decision is precedent only in the Second Circuit.) A scalper manipulates the market, usually by buying
sto, touting it in a publication, and then selling it when the price of the sto rises.315 Winans passed
financial information to a stobroker, Peter Brant, who acted on the information before it appeared in the
Journal’s “Heard on the Street” column, a column containing public information about companies’
financial prospects. e influence of the Wall Street Journal is su that the price of a company’s sto
might fluctuate because of a favorable or unfavorable mention in the “Heard on the Street” column.
Winans’s tips resulted in a net profit of $690,000 for Brant and his clients. Winans and his roommate, who
was also involved in the seme, made about $31,000.
e Supreme Court upheld a ruling by the Second Circuit Court of Appeals that Winans violated
Section 10(b) by misappropriating information belonging to his employer in violation of the Journal’s
conflict-of-interest policy. e conflict-of-interest policy forbade staff members to trade on information
before it is published. Like most newspapers, the Wall Street Journal claims ownership in all information
gathered by its staff.316
Although Winans was not a corporate insider and was not trading on insider information, he was not
exempt from the fraud provisions of the securities law. e Second Circuit said the securities laws are not
aimed “solely at the eradication of fraudulent trading by corporate insiders.” e fraud provisions also
rea trading activity, su as trading on the basis of improperly obtained information, a practice that the
court said is “fundamentally unfair.”
e court said Winans’s duty to abide by the Journal’s conflict-of-interest policy created another duty
under Section 10(b) to avoid trading or tipping on the basis of misappropriated information. Winans’s
misuse of the Journal’s information before publication defrauded the newspaper, the court said, by
sullying its reputation for ethical journalism.
e Second Circuit said that holding a journalist liable under a securities fraud statute did not violate
the First Amendment because no government restrictions were placed on publication of the “Heard on the
Street” column. e securities law required only that journalists, like other citizens, not engage in
fraudulent transactions.
Winans was also convicted of violating federal statutes prohibiting use of interstate mail or wire
communication for fraud, a conviction that the Supreme Court unanimously affirmed. e wire and mail
fraud statutes prohibit use of either form of interstate communication to obtain money or property by false
pretenses. e Court said Winans defrauded the Wall Street Journal by taking the publisher’s confidential
information in violation of an employee pledge and using the mails and telephones to profit from the
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information. e Court said the Journal had an exclusive right to use its property, including confidential
business information.
■ Summary ■
Publicly traded corporations are subject to fraud suits under Section 10(b) of the Securities Exange Act
of 1934 if they deliberately make a misleading statement of a material fact or fail to disclose material
information when they have a duty to do so. Materially deceptive statements include misstatements and
omissions that would affect an investor’s decision to buy, sell, or hold a security. In addition, a corporation
may have a duty to disclose material information if misleading information circulating in the media
originated with the corporation. Corporate insiders and publishers of personal investment advisories also
have a duty to disclose material information before using it as a basis for buying or selling securities.
Financial journalists and market insiders have also been ruled to have a duty not to trade on market
information acquired from their employers.
ADEQUATE DISCLOSURE e duty to disclose corporate information includes a requirement that
disclosure be timely and broad. When a corporation makes a disclosure, whether it is mandated by statute
or is made to avoid fraud, the disclosure must be prompt and adequately distributed so that shareholders
and other investors will have time to digest the information before insiders buy and sell.
Breadth of Disclosure Information must be disseminated, the SEC has said, “in a manner calculated to
rea the securities marketplace in general through recognized annels of distribution, and public
investors must be afforded a reasonable waiting period to react to the information.”317 e procedures to be
followed for sufficient dissemination of material information will depend on the market for the
corporation’s securities. If the corporation has a national market, information should be directed to the
national financial press, the major financial communities, and to other areas where the corporation knows
there will be interest in its securities. Many documents must be filed electronically with the Securities and
Exange Commission and can be posted on corporate websites.318 In addition, publicly traded companies
can make “fair disclosure” to the public through widely circulated press releases, announcements made
through press conferences or conference calls, and by electronic transmission, including the Internet319
e New York Sto Exange requires a listed company to disclose material information to the public
quily. Ordinarily the fastest means will include a release to the public press by telephone, facsimile, or
hand delivery, including dissemination through Dow Jones & Company, Inc., Reuters Economic Services,
and Bloomberg Business News.320 In addition, the NYSE suggests dissemination to newspapers in New
York City and in cities where the corporation has headquarters or plants.
e SEC has said that release of material information over a private wire service to a limited number of
institutional subscribers is not adequate dissemination.321 In SEC v. Texas Gulf Sulphur Co., the U.S. Court
of Appeals for the Second Circuit said it was not sufficient for a New York Sto Exange corporation to
publish news of a large mineral discovery only in a Canadian newspaper of limited circulation.322 In the
same case, the Second Circuit said that issuing a news release “is merely the first step in the process of
dissemination required for compliance with the regulatory objective of providing all investors with an
equal opportunity to make informed investment judgments.”
Timeliness While disclosure is supposed to be broad, it is also supposed to be prompt. But the SEC, the
courts, and the exanges permit a company to withhold material information temporarily if the decision
to withhold is a good-faith business judgment. Disclosure may be delayed where it would prejudice the
ability of a company to pursue corporate objectives or where facts are in a state of flux. e objectives of a
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corporation might be jeopardized, for example, if negotiations for land were disclosed before acquisition
was complete. In the Texas Gulf Sulphur case, officers of the company fraudulently misled investors while
insiders bought sto, but the appeals court said it was not wrong for the company to withhold disclosure
of the promising drilling results until adjoining land could be acquired.323 Disclosure of information might
also be delayed to allow acquisition of another company324 or liquidation of a portion of a company’s
business.325
When circumstances are in a state of flux, corporations may exercise their business judgment to
withhold information until the situation has stabilized. In a rapidly anging situation, a series of press
releases could cause undesirable fluctuations in the price of a corporation’s sto. In su circumstances, it
is beer to wait until the situation has calmed.
e U.S. Court of Appeals for the Tenth Circuit ruled that a corporation can wait to release information
until it is “available and ripe for publication.”326 e court said that the McDonnell Douglas Corporation
did not mislead shareholders when it waited several days for results of an internal evaluation of reduced
earnings in the company’s aircra division before issuing a special report. “To be ripe,” the court said,
information “must be verified sufficiently to permit the officers and directors to have full confidence” in its
accuracy. e hazards from an erroneous statement are “obvious,” the court said, but it is “equally obvious
that an undue delay not in good faith, in revealing facts, can be deceptive, misleading, or a device to
defraud.” McDonnell Douglas, the court concluded, investigated the expected shortfall as soon as it became
known and wasted no time evaluating the information and preparing a release.
■ Summary ■
When publicly traded corporations disclose information, it should be disseminated broadly in a timely
fashion. But disclosure may be delayed until information is complete and accurate.
Notes
1 Daniel Pope, The Making of Modern Advertising 4–5 (1983).
2 See S. Watson Dunn, Arnold M. Barban, Dean M. Krugman, & Leonard N. Reid, Advertising: Its Role in Modern
Marketing 24–28 (1990).
3 425 U.S. 748 (1976).
4 Reed v. Town of Gilbert, 135 S.Ct. 2218 (2015); see also Adam Liptak, “Consequences Ripple Aer Court Expands
Free Spee,” N.Y. Times, Aug. 18, 2015, A15.
5 316 U.S. 52 (1942).
6 376 U.S. 254 (1964).
7 413 U.S. 376 (1973).
8 421 U.S. 809 (1975).
9 Roe v. Wade, 410 U.S. 113 (1973).
10 425 U.S. 748 (1976).
11 Posadas de Puerto Rico Assocs. v. Tourism Co., 478 U.S. 328 (1986).
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12 Bates v. State Bar of Arizona, 433 U.S. 350 (1977).
13 Zauderer v. Office of Disciplinary Counsel, 471 U.S. 626 (1985).
14 Linmark Assocs., Inc. v. Township of Willingboro, 431 U.S. 85 (1977).
15 Bolger v. Youngs Drug Prod. Corp., 463 U.S. 60 (1983); Carey v. Population Servs. Int’l, 431 U.S. 678 (1977).
16 Central Hudson Gas & Elec. Corp. v. Public Serv. Comm’n, 447 U.S. 557 (1980).
17 Posadas de Puerto Rico Assocs. v. Tourism Co., 478 U.S. 328 (1986).
18 Board of Trustees v. Fox, 492 U.S. 469 (1989).
19 447 U.S. 557 (1980).
20 425 U.S. 762.
21 Dun & Bradstreet v. Greenmoss Builders, 472 U.S. 749 (1985) (Brennan, J., dissenting).
22 463 U.S. 60 (1983).
23 Kasky v. Nike, 27 Cal. 4th 939 (2002), cert. dismissed, 539 U.S. 654 (2003).
24 Stephanie Kang, “Nike Seles Case with an Activist for $1.5 Million,” Wall Street Journal, Sept. 15, 2003, at A10.
25 539 U.S. 654.
26 Ragin v. New York Times Co., 923 F.2d 995 (2d Cir.), cert. denied, 502 U.S. 821 (1991).
27 Housing Opportunities Made Equal v. Cincinnati Enquirer, Inc., 943 F.2d 644 (6th Cir. 1990).
28 455 U.S. 489 (1982). See also Camille Corp. v. Phares, 705 F.2d 223 (7th Cir. 1983).
29 Dunagin v. City of Oxford, 718 F.2d 738 (5th Cir. 1983), cert. denied, 467 U.S. 1259 (1984).
30 Joe Conte Toyota, Inc. v. Louisiana Motor Vehicle Comm’n, 24 F.3d 754 (5th Cir. 1994).
31 433 U.S. 350 (1977).
32 Ohralik v. Ohio State Bar Ass’n, 436 U.S. 447, 457 (1978).
33 Pub. L. No. 108–197, 117 Stat. 2699 (2003) (codified at 15 U.S.C. §§ 7701–7713).
34 Metromedia, Inc. v. City of San Diego, 453 U.S. 490 (1981).
35 478 U.S. 328 (1986).
36 44 Liquormart, Inc. v. Rhode Island, 517 U.S. 484 (1996); Rubin v. Coors Brewing Co., 514 U.S. 476 (1995).
37 Edenfield v. Fane, 507 U.S. 761 (1993).
38 National Association of Manufacturers v. Securities and Exange Commission, 800 F.3d 518 (D.C. Cir. 2015).
39 American Meat Institute v. United States Department of Agriculture, 760 F.3d 18 (D.C. Cir. 2014).
40 800 F.3d at 525.
41 44 Liquormart, Inc. v. Rhode Island, 514 U.S. 476 (1995).
42 44 Liquormart, Inc. v. Rhode Island, 517 U.S. 484 (1996).
43 Sorrell v. IMS Health Inc., 564 U.S. 552 (2011).
44 492 U.S. 469 (1989).
45 507 U.S. 410 (1993).
46 533 U.S. 525 (2001).
47 Destination Ventures, Ltd. v. FCC, 46 F.3d 54 (9th Cir. 1995).
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48 15 U.S.C. § 53.
49 Kenneth Plevan & Miriam L. Siroky, Advertising Compliance Handbook 109 (2d ed. 1991).
50 15 U.S.C. § 45(a)(1).
51 International Harvester, Inc., 104 F.T.C. 949 (1984).
52 FTC v. Sperry & Hutinson, 405 U.S. 223 (1972).
53 “Statement of Policy on the Scope of Consumer Unfairness Jurisdiction,” 4 Trade Reg. Rep. (CCH) 13,203 (Dec. 17,
1980).
54 15 U.S.C. § 45(n).
55 Holland Furnace Co. v. FTC, 295 F.2d 302 (1961).
56 Philip Morris Inc., 82 F.T.C. 16 (1973).
57 International Harvester Co., 104 F.T.C. 949 (1984).
58 FTC, “Facebook Seles FTC Charges at It Deceived Consumers By Failing To Keep Privacy Promises,” Press
Release, Nov. 29, 2011.
59 Somini Sengupta, “F.T.C. Seles Privacy Issue at Facebook,” N.Y. Times, Nov. 29, 2011.
60 Id.
61 FTC, “Facebook Seles FTC Charges at It Deceived Consumers By Failing To Keep Privacy Promises,” Press
Release, Nov. 29, 2011.
62 FTC, “Google to Refund Consumers at Least $19 Million to Sele FTC Complaint It Unlawfully Billed Parents for
Children’s Unauthorized In-App Charges,” Sept. 4, 2014.
63 FTC, “Policy Statement on Deception,” appended to Cliffdale Assocs., Inc., 103 F.T.C. 110, 165 (1984).
64 Id. at 184.
65 Id.
66 International Harvester Co., 104 F.T.C. 949, 1057 (1984).
67 See Heinz W. Kirner, 63 F.T.C. 1282, 1290 (1963).
68 Patricia Bailey & Miael Pertsuk, “Deception Policy Statement Prepared by Commissioners Bailey and Pertsuk
and Transmied on Feb. 29 to the House Energy and Commerce Commiee,” 46 Antitrust & Trade Reg. Rep. 372,
393 (1984).
69 Travel King, Inc., 86 F.T.C. 715, 719 (1975).
70 Porter & Diets, Inc., 90 F.T.C. 770, 864–65 (1977), aff’d, Porter & Diets, Inc. v. FTC, 605 F.2d 294 (7th Cir. 1979),
cert. denied, 445 U.S. 950 (1980).
71 Ideal Toy Corp., 64 F.T.C. 297, 310 (1964).
72 Lewis Galoob Toys, Inc., 56 Fed. Reg. 11,516 (consent order, Mar. 19, 1991).
73 E.g., Canandaigua Wine Co., 56 Fed. Reg. 32,575 (consent order, July 17, 1991).
74 Pinkerton Tobacco Co., 57 Fed. Reg. 4634 (consent order, Feb. 6, 1992).
75 “Phillip Morris Agrees to Sele DOJ Charge of Violating Ban on Cigaree Advertising,” BNA Management Briefing,
June 7, 1995.
76 In re Audio Communications, Inc., FTC File No. 892–3231 (consent order to cease and desist) (Apr. 3, 1991). See
Edmund L. Andres, “F.T.C. Obtains Accord Regulating ‘900’ Numbers Aimed at Children,” N.Y. Times, May 9, 1993,
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at A1, B5.
77 Ko v. FTC, 206 F.2d 311 (6th Cir. 1953).
78 See “Policy Statement on Deception,” appended to Cliffdale Assocs., Inc., 103 F.T.C. at 182 (1984).
79 Fedders Corp. v. FTC, 529 F.2d 1398 (2d Cir.), cert. denied, 429 U.S. 818 (1976).
80 American Home Prods., 98 F.T.C. 136 (1981), aff’d, American Home Prods. Corp. v. FTC, 695 F.2d 681 (3d Cir. 1982).
81 ompson Medical Co., 104 F.T.C. 648, 788 (1984).
82 State v. Cohn, 188 A.2d 878 (Conn. Cir. Ct. 1962).
83 Perfect Mfg. Co., 43 F.T.C. 238 (1946).
84 Masland Duraleather Co. v. FTC, 34 F.2d 733 (3d Cir. 1929).
85 FTC v. Colgate-Palmolive Co., 380 U.S. 374 (1965).
86 ompson Medical Co., 104 F.T.C. 648, 788 (1984).
87 See Ivan Preston, “e Federal Trade Commission’s Identification of Implications as Constituting Deceptive
Advertising,” 57 U. Cin. L. Rev. 1243 (1989).
88 “FTC Policy Statement Regarding Advertising Substantiation,” in ompson Medical Co., 104 F.T.C. at 839–40 (1984).
89 Pfizer, Inc., 81 F.T.C. 23 (1972).
90 Gary Ford & John Calfee, “Recent Developments in FTC Policy on Deception,” 50 J. of Marketing 98 (1986).
91 “FTC Policy Statement Regarding Advertising Substantiation Program,” in ompson Medical Co., 104 F.T.C. at 839–
40 (1984).
92 Firestone Tire & Rubber Co. v. FTC, 481 F.2d 246 (6th Cir. 1973), cert. denied, 414 U.S. 1112 (1973).
93 In re National Media Group, Inc., 94 F.T.C. 1096 (1979).
94 In re Sterling Drug Co., Order Reopening and Modifying 1974 Cease and Desist Order, 48 Fed. Reg. 14,891, 14,892
(1983).
95 Firestone Tire & Rubber Co. v. FTC, 481 F.2d 246 (6th Cir.), cert. denied, 414 U.S. 1112 (1973).
96 Caroline Mayer, “Bayer Seles Ad-Claim Dispute,” Washington Post, Jan. 12, 2000, at E2.
97 In re Colgate-Palmolive Co., 77 F.T.C. 150 (1970).
98 In re Standard Oil Co., 84 F.T.C. 1401, 1470 (1974).
99 In re Standard Oil Co. v. FTC, 577 F.2d 653, 660 (1978).
100 In re Firestone Tire & Rubber Co., 81 F.T.C. at 457 (1972).
101 “e Federal Trade Commission’s Identification of Implications as Constituting Deceptive Advertising,” 57 U. Cin. L.
Rev. 1243 (1989).
102 In re Standard Oil Co., 84 F.T.C. at 1471 (1974).
103 P. Lorillard Co. v. FTC, 186 F.2d 52 (4th Cir. 1950).
104 In re Carnation Co., 77 F.T.C. 1547, 1549 (1970).
105 In re General Foods Corp., 84 F.T.C. 1572, 1573 (1974).
106 In re Bristol-Myers Co., 102 F.T.C. 21 (1983), aff’d, 738 F.2d 554 (2d Cir. 1984).
107 In re Sterling Drug, Inc., 102 F.T.C. 395, aff’d, 741 F.2d 1146 (9th Cir. 1984).
108 Kidder Oil Co. v. FTC, 117 F.2d 892 (7th Cir. 1941).
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109 In re Jay Norris, Inc., 91 F.T.C. 751 (1978), aff’d, Jay Norris, Inc. v. FTC, 598 F.2d 1244 (2d Cir.), cert. denied, 444 U.S.
980 (1979).
110 FTC, “Guides Concerning the Use of Endorsements and Testimonials in Advertising,” 16 C.F.R. § 255.0(b).
111 FTC, “FTC Publishes Finale FTC’s Endorsement Guides Governing Endorsements, Testimonials,” Oct. 5, 2009:
What People Are Asking,” May 2015.
112 In re Cooper, 94 F.T.C. 674 (1979).
113 “Guides Concerning the Use of Endorsements and Testimonials in Advertising,” 16 C.F.R. § 255.4.
114 In re Twin Star Productions, Inc., 55 Fed. Reg. 45,656 (1990).
115 Austen Hufford, “FTC Says YouTube Gamers Didn’t Adequately Disclose Payments,” Wall St. Journal, July 11, 2016.
116 John Hermann, “In Media Company Advertising, Sponsored Content is Becoming King,” N.Y. Times, July 25, 2016,
B1.
117 Joe Lazauskas, “Study: Article or Ad? When it Comes to Native, No One Knows,” Contently, Sept. 8, 2015.
118 Enforcement Policy Statement on Deceptively Formaed Advertisements, Federal Trade Commission, Dec. 22, 2015.
119 “FTC’s Lord & Taylor case: In native advertising, clear disclosure is always in style,” Federal Trade Commission,
Mar 15, 2016.
120 Kenneth Plevan & Miriam Siroky, Advertising Compliance Handbook 289 (2d ed. 1991).
121 Morales v. Trans World Airlines, Inc., 504 U.S. 374 (1992).
122 Maria Maldonaldo v. Nutri-System, Inc., 776 F. Supp. 278 (E.D. Va. 1991). 123
124 Fair Housing Council of San Fernando Valley v. Roommate.com, 666 F.3d 1216 (9th Cir. 2012).
125 Doe v. Bapage.com, 817 F.3d 12, 40 (1st Cir. 2016).
126 Advisory Opinions, 16 C.F.R. § 1.1–1.4 (1995).
127 See generally, George Rosden & Peter Rosden, 3 Law of Advertising § 32.04[2] (1995).
128 Guides Against Deceptive Labeling and Advertising of Adhesive Compositions, 16 C.F.R. § 235.
129 Guides for the Dog and Cat Food Industry, 16 C.F.R. § 241.
130 Guides for Labeling, Advertising, and Sale of Wigs and Other Hairpieces, 16 C.F.R. § 252.
131 See George Rosden & Peter Rosden, 3 Law of Advertising § 32.04[2] (1993).
132 Guide Concerning Use of the Word “Free” and Similar Representations, 16 C.F.R. § 251.
133 Guides for the Use of Environmental Marketing Claims, 16 C.F.R. § 260.
134 Enforcement Policy Statement on Food Advertising, 59 Fed. Reg. 28,388 (1994).
135 “Food Labeling Regulations Implementing the Nutrition Labeling and Education Act of 1990: Opportunity for
Comments,” 58 Fed. Reg. 2066 (1993) (codified in part at 21 C.F.R. parts 5, 20, 104, 105, and 130).
136 FTC “.com Dislosures: How to Make Effective Disclosures in Digital Advertising,” Mar 2013.
137 15 U.S.C. § 45(m)(1).
138 Regulations Under the Comprehensive Smokeless Tobacco Health Education Act of 1986, 16 C.F.R. § 307.
139 Rules and Regulations Under the Hobby Protection Act of 1973, 16 C.F.R. § 304.
140 16 C.F.R. pt. 310.
141 16 C.F.R. § 310.
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142 FTC Trade Regulation Rule for the Prevention of Unfair or Deceptive Acts or Practices in the Sale of Cigarees, 29
Fed. Reg. 8325 (1964).
143 Trade Regulation Rule: Relating to Power Output Claims for Amplifiers Utilized in Home Entertainment Products,
16 C.F.R. § 432.
144 Deceptive Advertising as to Sizes of Viewable Pictures Shown by Television Receiving Sets, 16 C.F.R. § 410.
145 FTC v. Sperry & Hutinson Co., 405 U.S. 233 (1972).
146 Magnuson-Moss Warranty Federal Trade Commission Improvement Act of 1975, 15 U.S.C. § 45.
147 Federal Trade Commission Improvements Act of 1980, Pub. L. No. 96–252 (1980).
148 15 U.S.C. § 45(n).
149 15 U.S.C. § 57a(b)(3).
150 George Rosden & Peter Rosden, 3 Law of Advertising § 33.01 (1999).
151 Synronal Corp., 59 Fed. Reg. 33,293 (1993).
152 National Media Corp., 58 Fed. Reg. 41,095 (1993).
153 Stuart Ellio, “Court Halts Ad for Credit Repair,” N.Y. Times, Sept. 15, 1994, at D17.
154 George Rosden & Peter Rosden, 3 Law of Advertising § 33.02[2] (1999).
155 FTC v. Klesner, 280 U.S. 19, 28 (1929).
156 Deceptive and Unsubstantiated Claims Policy Protocol, 4 Trade Reg. Rep. (CCH) 39,059 (1975).
157 George Rosden & Peter Rosden, 3 Law of Advertising § 34.03 (1999).
158 United States v. J. B. Williams Co., 498 F.2d 414 (2d Cir. 1974).
159 See FTC v. Sterling Drug, Inc., 317 F.2d 669, 671 (2d Cir. 1963).
160 517 F.2d 485 (7th Cir. 1975).
161 Commiee on Interstate and Foreign Commerce, H.R. Rep. No. 1613, 75th Cong., 1st Sess. 5 (1937).
162 Alberty v. FTC, 182 F.2d 36 (D.C. Cir. 1949), cert. denied, 340 U.S. 818 (1950).
163 Morton-Norwi Products, Inc. [1973–1976 Transfer Binder] Trade Reg. Rep. (CCH) ¶ 20,891 (1975).
164 Novartis Corp., 1999 FTC LEXIS 90 (May 13, 1999).
165 Novartis Corp. v. FTC, 223 F.3d 783 (D.C. Cir. 2000).
166 Warner-Lambert Co. v. FTC, 562 F.2d 749 (D.C. Cir. 1977), cert. denied, 435 U.S. 950 (1978).
167 United States v. Philip Morris USA, Inc., 907 F. Supp. 2d 1 (D.D.C. 2012); United States v. Philip Morris USA Inc., 2015
U.S. App. LEXIS 8469 (D.C. Cir., May 22, 2015).
168 15 U.S.C. § 1125(a).
169 Serbin v. Ziebart Int’l Corp., 11 F.3d 1163 (3d Cir. 1993).
170 Coca-Cola Co. v. Tropicana Prods., Inc., 690 F.2d 312 (2d Cir. 1982).
171 16 C.F.R. § 14.15(b) n.1.
172 16 C.F.R. § 14.15(b).
173 American Home Prods. Corp. v. Johnson & Johnson, 577 F.2d 160 (2d Cir. 1978).
174 U-Haul Int’l, Inc. v. Jartran, Inc., 793 F.2d 1034 (9th Cir. 1986).
175 George Rosden & Peter Rosden, 3 Law of Advertising § 31.05 (1999).
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176 18 U.S.C. §§ 1961–1968.
177 United States v. Philip Morris USA, Inc., 449 F. Supp. 2d 1 (D.C.D.C. 2006).
178 Family Smoking Prevention and Tobacco Control Act, Pub. L. No. 111–31.
179 Id., Congressional findings are contained in Section 302 of the statute.
180 FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120 (2000).
181 National Association of Aorneys General, Leer regarding Doet No. FDA-2009-N-0294, Dec. 9, 2009.
182 Commonwealth Brands, Inc. v. United States, No. 1:2009cv00117 (W.D. Ky. filed Aug. 31, 2009).
183 Duff Wilson, “Philip Morris’s Support Casts Shadow Over a Bill to Limit Tobacco,” N.Y. Times, Mar. 31, 2009.
184 R.J. Reynolds Tobacco Company v. Food & Drug Administration, 696 F.3d 1205 (D.C. Cir. 2012).
185 Jennifer Corbe Dooren, “FDA Scraps Graphic Cigaree Warnings, Wall St. J., Mar 19, 2013.
186 CDC.gov/iing/Tips
187 Tripp Mile, “U.S. Tobacco Companies File Suit Against FDA Over Label Regulations,” Wall St. J., April 14, 2015.
188 Children’s Television Programming, 6 F.C.C.R. 2111, 68 P & F Rad. Reg. 2d 1615 (1991).
189 47 C.F.R. § 73.670 (broadcasting); 47 C.F.R. § 76.225 (cable).
190 Clear Channel Television, Inc., 10 F.C.C.R. 3773 (1995).
191 Mass Media Bureau Advises Commercial Television Licensees Regarding Children’s Television Commercial Limits,
13 F.C.C.R. 10265 (1998).
192 Tampa Bay Television, Inc., 8 F.C.C.R. 411 (1993).
193 Children’s Television Obligations of Digital Television Broadcasters, Second Order on Reconsideration and Second
Report and Order (FCC 06–143) (Sept. 29, 2006).
194 Children’s Television Programming, 6 F.C.C.R. 2111, 68 P & F Rad. Reg. 2d 1615, modified on reconsideration on
other grounds, 6 F.C.C.R. 5093, 69 P & F Rad. Reg. 2d 1020 (1991).
195 In re Complaint of Nat’l Ass’n for Beer Broadcasting against Television Station KCOP(TV), 4 F.C.C.R. 4988, 66 P &
F Rad. Reg. 2d 889 (1989), aff’d, 902 F.2d 1009 (D.C. Cir. 1990).
196 Television Deregulation, 98 F.C.C.2d at 1105, 56 P & F Rad. Reg. 2d at 1028.
197 47 U.S.C. § 317(a)(1).
198 47 C.F.R. § 73.1212(f), (g), (h).
199 15 U.S.C. § 1335, 4402(f). e ban on cigaree advertising was upheld in Capital Broadcasting Co. v. Mitell, 333 F.
Supp. 582 (D.C. Cir. 1971), aff’d without opinion, 405 U.S. 1000 (1972).
200 Davis Wright Tremaine, Broadcast Law Blog, www.broadcastinglawblog.com, Nov. 30, 2007.
201 “Congress Passes FDA Bill Without DTC Ad Limits,” Mana, Advertising Law, Oct. 19, 2007,
mana.com/newsleers; “Prescription Drugs: FDA Oversight of Direct-to-Consumer Advertising Has Limitations,”
U.S. General Accounting Office, GAO-03–177, Oct. 2002.
202 omas Abrams, “FDA Issues Dra Guidance for Industry on Social Media and Internet Communications About
Medical Products: Designed With Patients in Mind,” FDA Voice, June 14, 2014.
203 Steve Lohr, “Surging Losses, but Few Victims in Data Breees,” N.Y. Times, Sept. 27, 2006.
204 Tom Zeller, Jr., “Link by Link: 93,754,333 Examples of Data Nonalance,” N.Y. Times, Sept. 25, 2006.
205 See Tom Zeller, Jr., “Your Life as an Open Book,” N.Y. Times, Aug. 12, 2006, at B1.
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206 Peter Maass, “How a Lone Grad Student Scooped the Government and What It Means for Your Online Privacy,”
ProPublica, June 28, 2012.
207 Cited in, FTC, “Online Profiling: A Report to Congress, Part 2” (July 2000).
208 FTC, “Self-Regulatory Principles for Online Behavioral Advertising,” 2008.
209 See FTC, “FTC Staff Revises Online Behavioral Advertising Principles,” Feb. 12, 2009.
210 “FTC Grapples with Privacy at Roundtable with Industry Professionals, Privacy Advocates, Academics,” Online
Media Daily, Dec. 7, 2009.
211 Tanzina Gega, “Opt-Out Provision Would Halt Some, but Not All, Web Traing,” N.Y. Times, Feb. 28, 2012.
212 FTC, “Facebook Seles FTC Charges at It Deceived Consumers by Failing to Keep Privacy Promises,” Press
Release, Nov. 29, 2011.
213 Somini Sengupta, “F.T.C. Seles Privacy Issue at Facebook,” N.Y. Times, Nov. 29, 2011.
214 Kevin J. O’Brien, “Facebook Offers More Disclosure to Users,” N.Y. Times, April 12, 2012.
215 FTC, “Sears Seles FTC Charges Regarding Traing Soware,” June 6, 2009.
216 For the European directive, see “Directive 97/46/EC of the European Parliament and of the Council,” Oct. 24, 1995,
on the protection of individuals with regard to the processing of personal data and on the free movement of su
data, Official Journal of the European Communities, Nov. 23, 1995, No L. 281, p. 31.
217 15 U.S.C. § 1681.
218 To learn more about this and the other statutes cited here, visit the Center for Democracy and Tenology,
www.cdt.org/privacy/guide.
219 35 U.S.C. § 3401.
220 15 U.S.C. §§ 6501–6506.
221 Ronald G. London and David M. Silverman, “FTC Announces COPPA Rule Changes,” Davis Wright Tremaine, Jan.
17, 2013.
222 15 U.S.C. §§ 6801–6810.
223 United States v. Horner, 44 F. 677 (S.D.N.Y. 1891), aff’d, 143 U.S. 207 (1892).
224 18 U.S.C. §§ 1301–1306.
225 Indian Gaming Regulatory Act, 25 U.S.C. § 2720.
226 18 U.S.C. § 1307.
227 509 U.S. 418 (1993).
228 Greater New Orleans Broadcasting Association v. United States, 527 U.S. 173 (1999).
229 47 U.S.C. § 509.
230 47 C.F.R. § 73.1216.
231 WMJX, Inc., 85 F.C.C.2d 251 (1981).
232 468 U.S. 641 (1984).
233 Treasury Directive No. 15–56, FR 48539 (Sept. 15, 1993).
234 412 U.S. 94, 124 (1973).
235 418 U.S. 241 (1974).
236 435 F.2d 470 (7th Cir. 1970), cert. denied, 402 U.S. 973 (1971).
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237 George Rosden & Peter Rosden, 3 Law of Advertising § 31.02 (1999).
238 NAD/NARB Procedures § 2.1 (Apr. 1, 1990), quoted in Keven Plevan & Miriam Siroky, Advertising Compliance
Handbook 334 (2d ed. 1991).
239 National Advertising Division, Council of Beer Business Bureaus, Inc., “Self-Regulation of National Advertising:
Twelh Year-End Report,” in NAD Case Rep., July 15, 1983.
240 Andrea Sas, “NAD Turns Ad Monitor to Cyberspace,” Advertising Age, May 8, 1995, at 20.
241 Borden, Inc., NAD Case Report (No. 1931).
242 Steven W. Colford, “Paper Tiger Litmus Test: FTC Gets Eggland’s, Its First NARB Case,” Advertising Age, Dec. 20,
1993, at 2.
243 Eggland’s Best, Inc., 59 Fed. Reg. 8638 (1994).
244 “Networks Hit for Ad Clearance Cuts,” Advertising Age, Sept. 12, 1988, at 6.
245 National Association of Broadcasters, “e Television Code,” 21st ed., 1980, § IX, in Practicing Law Institute, Legal
and Business Aspects of the Advertising Industry 1982, at 88.
246 United States v. National Ass’n of Broadcasters, 536 F. Supp. 149 (D.D.C. 1982).
247 George Rosden & Peter Rosden, 2 Law of Advertising § 17.01[4] (1999).
248 Donald Kirs, Financial and Economic Journalism 241 (1978).
249 SEC v. Capital Gains Resear Bureau, Inc., 375 U.S. 180, 186 (1963).
250 Ch. 2 A, 48 Stat. 74 (codified as amended at 15 U.S.C. § 77a).
251 Ch. 2A, 48 Stat. 881 (codified as amended at 15 U.S.C. § 78a).
252 Ch. 2A, 54 Stat. 847 (codified as amended at 15 U.S.C. § 80b–1).
253 Municipal Securities Disclosure, 59 Fed. Reg. 59,590 (1994).
254 SEC, “SEC Adopts Rules to Enhance Information Reported by Investment Advisors,” Aug. 25, 2016.
255 See Donald Langevoort, “What Is a Security?: Some ings You Won’t Believe,” in Nuts and Bolts of Securities Law
at 33 (1995).
256 SEC v. Arvida Corp., 169 F. Supp. 211 (S.D.N.Y. 1958).
257 Id. at 213–14.
258 In re Carl M. Loeb, Rhoades & Co., 38 S.E.C. 843, 851 (1959).
259 15 U.S.C. § 78m; 17 C.F.R. § 240.13a-1 et seq.
260 15 U.S.C. § 78n; 17 C.F.R. § 240.14a-1.
261 17 C.F.R. § 230.175.
262 17 C.F.R. § 240.13a-11.
263 SEC, “SEC Says Social Media OK for Company Announcements If Investors Are Alerted,” April 2, 2013.
264 15 U.S.C. § 78n; 17 C.F.R. § 240.14a-1.
265 Long Island Lighting Co. v. Barbash, 779 F.2d 793 (2d Cir. 1985).
266 Long Island Lighting Co. v. Barbash, 625 F. Supp. 221 (E.D.N.Y. 1985).
267 17 U.S.C. § 78m(d). See also Piper v. Chris-Cra Indus., Inc., 430 U.S. 1, 26–37 (1977).
268 TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976).
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269 Dirks v. SEC, 463 U.S. 646 (1983); Northern Trust Co. v. Essaness eatres Corp., 103 F. Supp. 954 (N.D. Ill. 1952); In re
Ward La France Tru Corp., 13 S.E.C. 373 (1943).
270 Wesley Walton & Charles Brissman, Corporate Communications Handbook 4–37 (1990).
271 Basic, Inc. v. Levinson, 485 U.S. 224 (1988).
272 Sarbanes-Oxley Act of 2002 (Pub. L. No. 107–204, 116 Stat. 745), also known as the Public Company Accounting
Reform and Investor Protection Act of 2002 and commonly called SOX or SarbOx.
273 17 C.F.R. §§ 228, 229, 232, 240, 249, 270, and 274.
274 Sprayregen v. Livingston Oil Co., 295 F. Supp. 1376 (S.D.N.Y. 1968).
275 501 U.S. 1083 (1991).
276 SEC v. Pig ‘N’ Whistle Corp. [1971–1972 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 93,384 (N.D. Ill. 1972).
277 In re Howard Bronson & Co., SEC Release No. 21138 (July 12, 1984).
278 104 Pub. L. No. 67, 109 Stat. 737 (1995).
279 Mills v. Electric Autolite Co., 403 F.2d 429, 434 (7th Cir. 1968), vacated and remanded, 396 U.S. 375 (1970).
280 SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 845 (1968), cert. denied, 394 U.S. 976 (1969).
281 Gould v. American-Hawaiian Steamship Co., 535 F.2d 761, 774 (3d Cir. 1976).
282 Zuer v. Sable, 425 F. Supp. 658 (S.D.N.Y. 1976).
283 15 U.S.C. § 77q(b).
284 H.R. Rep. No. 85, 73d Cong., 1st Sess. 24 (1933), cited in United States v. Ami, 439 F.2d 351, 365 n.18 (7th Cir. 1971),
cert. denied, 404 U.S. 823 (1971).
285 SEC v. Wall St. Publishing Inst., 851 F.2d 365 (D.C. Cir. 1988), cert. denied, 489 U.S. 1066 (1989).
286 Howard Bronson & Co., SEC Release No. 21138 (July 12, 1984). See also SEC v. Pig ‘N’ Whistle Corp. [1971–1972
Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 93,384 (N.D. Ill. 1972).
287 SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 862 (1968).
288 Heit v. Weitzen, 402 F.2d 909 (2d Cir. 1968), cert. denied, 395 U.S. 903 (1969).
289 SEC v. Electrogen Indus., Inc. [1967–1969 Decisions] Fed. Sec. L. Rep. (CCH) ¶ 92,156 (E.D.N.Y. 1968).
290 Sprayregen v. Livingston Oil Co., 295 F. Supp. 1376 (S.D.N.Y. 1968).
291 See Donald Feuerstein, “e Corporation’s Obligations of Disclosure under the Federal Securities Laws When It Is
Not Trading Its Sto,” 15 N.Y. L. Forum 385, 393 (1969).
292 SEC Release No. 34–20560 (Jan. 20, 1984).
293 358 F. Supp. 413 (D. Or. 1973).
294 Elkind v. Ligge & Myers, Inc., 635 F.2d 156, 163 (2d Cir. 1980).
295 Wesley Walton & Charles Brissman, Corporate Communications Handbook 4–9 (1990).
296 Ross v. A. H. Robins Co., 465 F. Supp. 904 (S.D.N.Y. 1979), rev’d, 607 F.2d 545 (2d Cir. 1979), cert. denied, 446 U.S. 946,
reh’g denied, 448 U.S. 911, on remand, 100 F.R.D. 5 (1982).
297 SEC v. Shau Denn Mining Corp., 297 F. Supp. 470 (S.D.N.Y. 1968). See also Financial Indus. Fund, Inc. v.
McDonnell Douglas Corp., 474 F.2d 514 (10th Cir.) (per curiam) (en banc), cert. denied, 414 U.S. 874 (1973).
298 Wesley Walton & Charles Brissman, Corporate Communications Handbook 2–11 (1990).
11/6/2018 Chegg: The Law of Public Communication
https://ereader.chegg.com/#/books/9781351692342/cfi/6/32!/4/694/2/2@0:85.7 71/71
299 Donald Langevoort, “Corporate Disclosure and Insider Trading: Keeping Your Client Out of Trouble,” in Nuts and
Bolts of Securities Law at 304 (1995).
300 See John Sheffey, “Securities Law Responsibilities of Issuers to Respond to Rumors and Other Publicity:
Reexamination of a Continuing Problem,” 57 Notre Dame Law 755 (1982).
301 Electronic Specialty Co. v. International Controls Corp., 409 F.2d 937, 949 (2d Cir. 1969). See also Greenfield v.
Heublein, Inc., 742 F.2d 751 (3d Cir. 1984).
302 426 F. Supp. 658, 663 (1976). See also Mills v. Sarjem Corp., 133 F. Supp. 753 (D.N.J. 1955).
303 See SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969). But see Henry G.
Manne, Insider Trading and the Stock Market (1966).
304 Dirks v. SEC, 463 U.S. 646, 653 (1983), citing Chiarella v. United States, 445 U.S. 222, 227 (1980), and in re Cady,
Roberts & Co., 40 S.E.C. 907 (1961).
305 Dirks v. SEC, 463 U.S. at 655, n.14. See also Elkind v. Ligge & Myers, Inc., 635 F.2d 156 (2d Cir. 1980); SEC v. Texas
Gulf Sulphur Co., 401 F.2d 833 (2d Cir. 1968).
306 SEC v. Franco, Lit. Release No. 11206, 1986 LEXIS 909 (D.D.C. Aug. 26, 1986).
307 15 U.S.C. § 78u-1. See also H.R. Rep. No. 910, 100th Cong., 2d Sess., reprinted in 1988 U.S.C.C.A.N. 6043.
308 Jesse Eisinger, “What Do 50 Cent, Carmen Electra & Shaquille O’Neal Have in Common? Touting Penny Stos,”
ProPublica.org, Jan. 12, 2011.
309 Joe Weisenthal, “50 Cent’s Most Hysterical Penny Sto Tweets Yet,” Business Insider, Jan. 11, 2011.
310 United States v. O’Hagan, 521 U.S. 642 (1997).
311 472 U.S. 181 (1985).
312 See Maria Galeno, “Drawing the Line on Insiders and Outsiders for Rule 10b-5: Chiarella v. United States,” 4 Harv. J.
L. & Pub. Pol. 203, 207 (1981).
313 SEC v. Materia, 745 F.2d 197 (2d Cir. 1984), cert. denied, 471 U.S. 1053 (1985). See also United States v. Newman, 664
F.2d 12 (2d Cir. 1981), aff’d after remand, 722 F.2d 729 (2d Cir.), cert. denied, 464 U.S. 863 (1983).
314 Carpenter v. United States, 484 U.S. 19 (1987).
315 SEC v. Capital Gains Resear Bureau, Inc., 375 U.S. 180 (1963).
316 United States v. Carpenter, 791 F.2d 1024 (2d Cir. 1986).
317 In re Faberge, Inc., 45 S.E.C. 249, 255 (1973).
318 SEC Release No. 33–8230 (May 7, 2003).
319 SEC, Selective Disclosure and Insider Trading, 17 CFR Parts 240, 243, and 249.
320 NYSE Manual ¶ 202.6(C).
321 In re Faberge, Inc., 45 S.E.C. at 255.
322 401 F.2d 833, 856 (2d Cir. 1968) (en banc), cert. denied, 394 U.S. 976 (1969).
323 401 F.2d at 850, n.12.
324 Matarese v. Aero Chatillon Corp. [1971–1972 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 93,322 (S.D.N.Y. 1971).
325 Segal v. Coburn Corp. [1973 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 94,002 (E.D.N.Y. 1973).
326 Financial Indus. Fund, Inc. v. McDonnell Douglas Corp., 474 F.2d 514, 519 (10th Cir. 1973), cert. denied, 414 U.S. 874
(1973).