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Compliance

Sweeps, Standards and the FTC

The magazine’s resident legal wiz revisits the FTC’s standard for deception in response to the agency’s crackdown on false advertising.

March 2014, F&I and Showroom - Feature

by Michael Benoit

By now, you should all know the Federal Trade Commission has been busy looking for dealers engaged in deceptive advertising, and that a few unlucky ones are now subject to 20 years of FTC oversight of their marketing activities. If this is news to you, let me give you a recap.

It started in March 2012 when the FTC charged five dealers with deceptive advertising for campaigns that promised to pay off a consumer’s trade-in no matter what the buyer owed on the vehicle. The agency alleged the ads deceived consumers into thinking they would no longer be responsible for paying off loan balances on their trade-in.

Then, last September, the agency settled charges against two dealers in Maryland and Ohio for failing to clearly disclose qualifications or restrictions related to costs and available discounts of advertised vehicles. The settlement was approved right after the FTC completed an enforcement sweep in January that netted another 10 dealers in seven states for violating the FTC Act’s prohibition on deceptive advertising. Specific violations included promotions that specified low prices in the main portion of the ads; the fine print, however, stated that the price was actually $5,000 higher. Also involved were mailers that claimed consumers won a fictitious sweepstakes prize.

With that backdrop, I thought it might be helpful to address the yardstick the FTC uses to determine whether an advertisement is deceptive. The primary federal standard that regulates consumer advertising is Section 5 of the FTC Act, which prohibits unfair or deceptive acts and practices in or affecting commerce.

The FTC Act does not define the deception standard. Instead, the definition has evolved over many years of FTC jurisprudence, culminating in the FTC’s policy statement on deception, which was released in 1983. That statement is now more than 30 years old, but it continues to serve as the primary articulation of the deception standard. It says, in short, that an act or practice may be deemed deceptive under the FTC Act if it is a representation, omission or practice that is “likely to mislead” a “consumer acting reasonably” in the circumstances.

The “likely to mislead” element means the government doesn’t need to prove that any consumer was actually misled by an advertisement. Rather, it is sufficient for the government to show that reasonable consumers were likely to be misled. The “reasonable consumer” is neither the smartest person nor the dumbest. However, while the “reasonable consumer” standard generally considers the general population, it can refer to a reasonable member of a more limited population if an advertisement is targeted at a specific group.

The deception standard assesses the net impression of an advertisement in its entirety. That means a defendant cannot defeat a government challenge by focusing on one element of an advertisement if the overall message of the advertisement is likely to mislead reasonable consumers.

The final component of the deception standard refers to advertising that is likely to mislead “to the consumer’s detriment.” The standard explains that this means only material claims can be misleading, and a claim is material if it is likely to affect the consumer’s purchasing decision. The deception statement presumes that express claims are material; the FTC’s thinking is that the advertiser would not have made the express claim unless it intended to influence the consumer’s purchasing decision. However, mere puffery (e.g., “We’re the best ever!”) is not actionable under the deception statement because consumers do not rely on such statements.

Put simply, the “reasonable” consumer might read only the prominent parts of an advertisement and skip the fine print. The deception standard establishes that advertisements can be unlawfully deceptive if the prominent content is misleading because a footnote disclaimer does not always affect the overall “net impression” of an advertisement.

The FTC imposes another component to its analysis. It states that advertising claims that are capable of substantiation should not be made unless the advertiser actually has substantiation supporting the claim at the time the claim is made.

There is often a fine line between puffery and deception, so craft your ad copy carefully and have your counsel sign off on it.

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