From the April 1998 issue of Entrepreneur

Suppose you've been competing with another business for customers. You're frustrated about your paltry market share--and you're convinced your competitor's product is nowhere near as good as yours. Can you say so in your advertisements?

Yes, as long as you're prepared to substantiate everything you say. Federal laws governing advertising allow businesses to sue each other over false or misleading claims, whether they're about your own product or your competitors'. Whether you're advertising on radio or television, in print media or even on the Internet, if you disparage a competitor's product without solid evidence, you could be held liable for the competitor's losses.


Steven C. Bahls, dean of Capital University Law School in Columbus, Ohio, teaches entrepreneurship law. Freelance writer Jane Easter Bahls specializes in business and legal topics.

On The Books

Until the 1960s, advertisers never mentioned competitors by name. Many businesses thought that would actually provide free advertising for the competition or feared that being confrontational would create sympathy for the other company. Attacking your competitors was seen as unethical. If a company wanted to put such ads on television, the networks refused to air them. A few companies in the 1960s made comparisons without actually naming the competition, such as Avis' famous "We try harder" campaign that never named Hertz. Advertisers would often compare their products to "Brand X," letting the audience figure out the name. In the 1970s, all that changed when the Federal Trade Commission (FTC) began pressuring the networks into accepting straightforward comparative ads in hopes of encouraging healthy competition.

Like all advertising, comparative ads are subject to the Lanham Act, first passed in 1946 and amended in 1988. This federal law was not designed to protect consumers but to allow businesses injured by another company's false or misleading advertising to seek relief in court. Under the original law, a business couldn't be sued for disparaging another company's product unless its ads made false claims about its own product. In 1988, Congress followed the lead of the courts in applying the same standard to both inflated claims about a company's own product and disparaging remarks about a competitor's product. The law says any false statement of fact is illegal if it tends to deceive a substantial segment of the intended audience and is likely to result in injury to the plaintiff.

"Usually these cases aren't black and white," says Kenneth Plevan, partner with New York City law firm Skadden, Arps, Slate, Meagher & Flom LLP and co-author of The Advertising Compliance Handbook (Practising Law Institute). "They turn on what consumers perceive."

Chances are you wouldn't risk a baldfaced lie about your competition, but you might state the facts in such a way that your ad fools people. That's when you can land in court with a judge demanding that you substantiate what you say or pay the price. The FTC can order your company to stop running the misleading ads, run a corrective advertising campaign or avoid certain practices in future advertising. The agency can also ask a judge to issue a permanent injunction, impose civil or even criminal penalties, or require you to repay consumers who've been hurt by your ads. All 50 states also have laws against false and misleading advertising, enforced by the state attorney general. In some states, a competitor who sues your business under these laws can collect double or even triple the actual damages.

The 1988 revisions applied the Lanham Act to all "commercial advertising." What that includes, however, is not spelled out. "Is a press release commercial advertising?" Plevan asks. "How about a business proposal in letter form?" Courts have ruled both ways. If one of your salespeople denigrates the competition over lunch with a buyer, that's less likely to trigger demands for proof than claims published in your brochures or systematically taught to your sales force.

Good Advice

So what can you say about other companies? Here's a brief overview:

  • Naming Brand X: In general, it's okay to use another company's name and trademark in your ad, as long as you're truthful in what you say and can back it up--with a recent scientific study, for instance.
  • Copycats: It's not okay to use the competitor's trademark in your ad or on your product if there's a likelihood of public confusion. If you're trying to show that your product is a less expensive alternative to a brand-name product, be careful. An overwhelming similarity in trade dress (colors, packaging and design) can lead to a court order to stop selling your version. Some courts have allowed obvious "knock-offs" if they're clearly identified as such, for example with a big sticker saying "designer impostor" or a centrally placed disclaimer stating that the other company has nothing to do with yours.
  • Using the language: Suppose your competitor's brand name is a word that could fairly describe your product as well. It's okay to use the word in your advertising, as long as it's not your intent to catch a free ride on the other company's advertising. For instance, the courts allowed a boot company to use the word "safari" to describe the boots it imported from Africa, even though a close competitor had registered the brand name Safari for its boots. However, Beer Nuts Inc. successfully stopped another food company from marketing peanuts under the name Brew Nuts.
  • Cheapest in town: If you compare your prices to those of a competitor, you must reflect the competitor's price accurately and ascertain that the goods are of similar quality.
  • Funny business: If you use another company's name or slogan in your own ad as a parody, be sure there's little likelihood of confusion--and that your parody won't tarnish the other company's image. For example, consider two parodies of Budweiser beer from the 1960s. When a florist appropriated a well-known Budweiser slogan to advertise flowers ("This bud's for you"), a court ruled there was little chance of confusion and the campaign wouldn't hurt the brewer. On the other hand, a court ruled that a chemical company adapting another well-known Budweiser slogan ("Where there's life, there's bugs") confused viewers about the source and added unwholesome connotations to the original slogan.

Because each case is different, the FTC considers false advertising charges on a case-by-case basis. Accordingly, it's often a judgment call whether or not a particular ad is misleading or unfair. Plevan advises business owners to plan ahead. "Read the advertisement before you run it," he says. "What are the claims you're making? What is the proof? In advertising, you can't always be right, but you have to have a good-faith position." The FTC and the courts look for a reasonable basis in fact. "You never want to be in a position where, if you get called on it, you haven't thought it through."

In particular, Plevan says, make sure the employees who would have to support your position agree with the claims in your ad. If several departments are involved, circulate the proposed ad to make sure everyone's on board because you may need their testimony later. Is it true? Is it fair? Do you have enough support? If not, head back to the drawing board.