Snake-oil salesmen are back, but these days they don't have to rely on brightly painted horse-drawn carts to attract interested crowds of people. Who needs a soap box when outrageous claims made over the Internet can reach thousands of gullible buyers? But just like the sheriffs who used to run flimflammers out of town, the Federal Trade Commission (FTC) is watching. In addition, attorneys general in all 50 states keep tabs on advertising and take action against businesses that violate state regulations.
The same technology that makes it easier to hoodwink people also makes it easier to track down those who mislead consumers. On two Health Claim Surf Days in 1997 and 1998, FTC employees, working with their counterparts in 24 other countries, searched the Internet and found more than 800 Web sites and news-groups making questionable claims about products that could supposedly cure a host of illnesses. The Arthritis Pain Care Center of Arlington, Texas, offered a fatty acid derived from beef tallow, purported to cure arthritis by modifying the immune system. Body Systems Technology Inc. of Casselberry, Florida, claimed its shark cartilage capsules were scientifically proven to be effective in treating cancer, arthritis and HIV/AIDS--claims that turned out to be completely unfounded.
When FTC staff sent e-mail messages warning perpetrators that false advertising is against the law, more than one hundred sites quickly shut down or modified the claims in question. Others faced legal action. Last September, for instance, after an official investigation and complaint, the FTC ordered Body Systems Technology to stop claiming its products were effective in preventing or treating disease and to stop making fallacious claims about scientific research. The company was ordered to send a copy of the FTC notice to all its distributors, monitor its advertising, terminate any distributors who engaged in false advertising, and provide refunds to every customer who requested one.
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.
Lessons Learned
The Body Systems Technology case illustrates several points about the regulation of advertising--things every business owner needs to know.
1. It's against the law to make false and misleading claims in your advertising. The Lanham Act of 1946, amended in 1998, and the Federal Trade Commission Act of 1997, along with laws in all 50 states, prohibit the use of advertisements making claims that might mislead people into buying products or services they wouldn't buy if they knew the truth. That means you can't say your product cures cancer if it doesn't or advertise "two for the price of one" if you've just doubled the price of one. And if you compare your price to your competitor's or to the "suggested retail price," make sure the other price is the prevailing price in your area. Recent amendments to the Lanham Act prohibit half-truths and misleading statements in addition to outright lies. For instance, a company got into trouble for touting its soup's low-fat, low-cholesterol recipe while failing to disclose its high sodium content. The law also requires you to disclose what country a product was made in and whether it's been rebuilt.
2. The laws that govern radio, television and print ads apply equally to advertising on the Internet. Your Web site allows you to reach thousands of potential customers for very little money, but you're not allowed to deceive them with misleading claims. In recent years, several courts have assumed with little or no discussion that Internet advertising, just like any other advertising, is regulated by the Lanham Act.
3. The fact that Body Systems Technology had to monitor its distributors' claims illustrates the way the law has expanded to cover all types of promotions, not just advertisements. A major cosmetic company found it could not allow its salespeople to tell customers a bath oil was an effective insect repellent when it had no studies to support that claim. Likewise, telephone promotions, brochures, letters, videos and trade show presentations can all violate the law if they make false or misleading claims.
4. You'll run into trouble if you have no scientific evidence to support your product's or service's health claims. If you say that your shop serves the world's best coffee, don't worry about the FTC insisting you prove it. However, if you say nine out of 10 customers prefer your coffee to your competitor's, be prepared to show properly conducted, statistically valid customer surveys. The more specific the claims, the more the need to substantiate them. Be especially cautious with claims about health, safety and environmental impact, because consumer protection agencies police these areas vigilantly. If you use statistics, make sure your ad presents them accurately and with any needed qualifications.
5. The FTC's Health Claims Surf Days show that federal and state agencies are diligent about enforcing the law in this area.A local newspaper ad may be brought to the attention of your state attorney general's office because of customer complaints or because one of your competitors gets mad about it. Misleading claims on your Web site could come to light the same way or through a systematic search by FTC staffers. Either way, the first step in enforcement would be a letter to your business explaining the violation and asking you to stop. If you don't, you may be hit with an official complaint from the enforcing agency or even a lawsuit from a competitor who's been harmed by your ads.
The Simple Truth
Fortunately, it's fairly simple to stay out of trouble in this area: Don't lie and don't mislead customers. But what if you learn a competitor is disparaging your business or making misleading claims likely to siphon off your customers? You might want to notify the state attorney general's office. If that doesn't produce results, talk with an attorney experienced in this area. Often a letter from a lawyer is enough to get the other business to stop making false claims. If it isn't, you may be able to get a preliminary injunction that forces the other business to stop while the court sorts out the issues. The lesson here? Newfangled snake-oil salesmen should beware: The law is watching--and it bites back.
This story appears in the February 2000 issue of Entrepreneur. Subscribe »
