The business of advertising, marketing, promotions, and public relations has changed drastically over the years. Advertisers now work with various specialized agencies providing services on integrated marketing campaigns covering the full panoply of media. In that vein, the use of traditional media such as print, television, radio, and direct mail has ceded ground to newer marketing platforms such as social media, mobile marketing, search engine marketing, and word-of-mouth marketing.
The complexity of the legal and regulatory issues faced by advertising agencies and their clients has changed as well. Relatively simple compliance obligations under Section 5 of the Federal Trade Commission Act (which prohibits unfair or deceptive acts or practices) and its state analogs have evolved to encompass an array of specialized regulations and self-regulatory initiatives, aggressive state Attorneys General, and an active class action bar, all overlaid by an extremely competitive marketplace. Advertisers and their agencies must also be wary of third party rights and the risk of infringement of copyright, trademark, and rights of privacy and publicity.
The Regulatory Landscape
The advertising industry is dealing with an increasing array of new regulations and guidance. Both state and federal legislatures and regulatory bodies work quickly to deal with perceived new threats against consumers.
Given the broad authority wielded by the Federal Trade Commission (“FTC”), Congress rarely gets involved in consumer protection issues. However, the global economic downturn seems to have provided an increased impetus to ensure consumers are protected. In December 2010, Congress passed the Restore Online Shoppers’ Confidence Act, which imposes certain disclosure requirements on the online marketing practices of membership club sellers and their online retail partners.
The FTC has brought several enforcement actions arising out of its recently-revised Guides Concerning the Use of Endorsements and Testimonials in Advertising (“Endorsement Guides”), which require the disclosure of material connections for bloggers and word-of-mouth marketers who endorse or review advertisers’ products. In a settlement with Reverb Communications, Inc., a public relations agency and its sole owner were found in violation of the Endorsement Guides for instructing employees to post what appeared to be consumer reviews of video games online without disclosing their relationship with the video game company.
Another settlement involving guitar tutorial company Learning Legacy Systems, Inc. made clear that not only must advertisers and their agencies instruct affiliate marketers to make disclosures in their online posts about products, but they must also monitor the activities of affiliates and terminate any non-compliant affiliates.
The FTC announced in May 2011 that it will update its guidelines regarding disclosures in Internet advertising (“Dot Com Disclosures”) in effort to stay current with the ever-changing online world, online behavioral advertising, and online affiliate marketing.
In fall 2010, the FTC released proposed revisions to its Guides for the Use of Environmental Marketing Claims (the “Green Guides”), which would update the current Green Guides and also provide new guidance on claims that are not currently addressed. Notably, the proposed revisions offer new guidance on the use of claims about renewable materials, renewable energy and carbon offsets while updating guidance dealing with the use of terms such as “recyclable” and “biodegradable.” It is expected that the revised guides will be issued some time in 2011 after the FTC evaluates public comments received.
Lanham Act Litigation and NAD Challenges
Competitors have long had the ability to challenge each other’s advertising practices, either through litigation under the federal Lanham Act, or through the National Advertising Division of the Council of Better Business Bureaus (the “NAD”). The NAD is a self-regulatory organization formed with the cooperation of the advertising industry that can bring challenges against advertising it believes to be deceptive or misleading.
The global recession has spurred competitors to take advantage of the NAD’s benefits. In fact, the NAD handled 145 challenges in 2010 alone. The vast majority of advertisers comply with NAD decisions, since advertisers who fail to comply often have their advertising referred to the FTC for further review.
The types of challenges brought before the NAD are extensive, involving industries as diverse as pharmaceuticals, nutrition, food, pet care, telecommunications, and automotive. Most simply challenge the extent and sufficiency of support advertisers have for the claims being made.
Attorney General and Multi-State Attorney General Actions
State Attorneys General have increasingly been using their power to reign in practices believed to be deceptive, misleading, or unfair under state consumer protection laws. In December 2010, a multi-state investigation involving all fifty states was brought to a conclusion with a settlement with DirecTV relating to unfair and deceptive business practices in the marketing of its cable subscription services.
Promotion Marketing
Using promotions to market goods and services continues to be popular for consumers and profitable for marketers, but promotional techniques can also be risky if state and federal regulations are not followed. The extensive array of regulations at both the state and federal level in this area make running national promotions not impossible, but certainly problematic for those who are unaware of the coverage of such laws. Taking a promotion global only increases the complexity, requiring the advice of local counsel to ensure compliance with the applicable laws.
Recent federal legislation in this area adds an additional regulatory burden in connection with the use of gift cards, while keeping state regulations on the same topic in tact. For example, class action lawsuits recently brought against online coupon retailer Groupon allege that its online discount coupons are subject to the five-year federal minimum expiration period for gift cards under certain federal laws, such as the Credit Card Accountability Responsibility and Disclosure Act and the Electronic Funds Transfer Act, as well as to relevant individual state expiration requirements.
Privacy, Data Security, and Behavioral Marketing
Nowhere have legal risks recently increased more than with respect to the use and security of personally identifiable information for marketing purposes. Because of the panoply of state laws and the FTC’s stance relating to data security and breach notification, most regulatory actions in this area have centered on data security breaches, which could have a far-reaching impact on business practices and advertisers’ bottom lines. Among other recent data security breaches, Sony shut down its Play Station Network for a prolonged period of time due to hacking of its online entertainment and game systems, and Epsilon Data Management experienced hacking of its database, exposing the e-mail addresses of millions of customers of twenty well-known companies.
Several data privacy bills, including a “Do Not Track” proposal, have been introduced in Congress while the industry continues to advocate for self-regulatory measures such as tracking opt-out buttons in order to preserve the practice of online behavioral advertising.
In December 2010, the FTC issued a preliminary staff report on consumer privacy and data collection practices for businesses. The FTC’s privacy “Framework” seeks to protect consumers through the principles of “privacy by design,” simplified consumer choice, and increased transparency. A final report based on public comments received is expected sometime in 2011.
Class Action Lawsuits
The plaintiff’s bar is another potential hotbed for legal risk in the advertising category. In certain states, individuals have a private right of action for violation of the state’s consumer protection laws, leading to class action lawsuits for alleged false or misleading marketing practices. Consumer class action lawsuits for false and misleading marketing practices may be prompted first by a regulatory inquiry, or independently by the plaintiff’s bar.
For example, in 2010, a federal district judge ordered Dannon to pay up to $45 million to settle a consumer class action lawsuit for deceptive advertising in connection with its Activia and DanActive yogurt products.
Children’s Advertising
Regulation of children’s advertising is an area where both regulators and self-regulatory organizations are active. The FTC continues to protect children’s interests and is currently reviewing its rules relating to the Children’s Online Privacy Protection Act to ensure they provide adequate protection for children’s online privacy and safety, especially in light of the explosion of the mobile marketplace.
In 2011, an interagency working group comprised of the FTC, FDA, CDC, and USDA published proposed guidelines for the nutritional quality of food marketed to children and adolescents ages 2 to 17.
The Children's Advertising Review Unit (“CARU”) is the children's arm of the advertising industry's self-regulation program and evaluates child-directed advertising and promotional material in all media. CARU is an active force in monitoring advertising for compliance with its guidelines, pursuing advertisers for violations relating to privacy issues, promotions, and false advertising. In 2010, CARU handled 65 challenges, one third of which involved Internet-related issues.
Intellectual Property Litigation
The creation of advertising and marketing materials relies heavily upon the use of external talent, as well as intellectual property created internally or licensed from third parties. Aside from the regulatory issues addressed above, working in a creative industry brings with it risks of claims relating to infringement of third party intellectual property rights (such as trademark, copyright, and patent), as well as claims relating to the violation of a person’s privacy and publicity rights.
For example, S. Victor Whitmill, a tattoo artist and the creator of Mike Tyson’s well known face tattoo, recently sued Warner Bros. Entertainment, for copyright infringement in connection with the creation of a nearly identical tattoo on the face of one of the main characters of the recently released film The Hangover Part II, a use which was featured prominently in both the movie’s plot and its marketing materials. Though a federal district court judge denied Whitmill’s motion for a preliminary injunction enjoining the release of the film, the judge stated that tattoos were entitled to copyright protection and that Whitmill was likely to succeed on the merits.
CONCLUSION
The advertising business is a highly regulated industry with complex and continually evolving legal issues to contend with. As new technologies and advertising platforms vie for consumers’ ever-dwindling attention, a comprehensive compliance system and knowledgeable team of legal professionals is more important today than ever in order to maintain appropriate risk tolerance levels.