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North Bay Business Journal

Monday, February 6, 2012, 5:30 am

FTC reviewing online advertising rules

Uncertainty creates potential for litigation

By Daniel K. Slaughter

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     The rules of online advertising are about to change.  On Aug. 10, 2011, the Federal Trade Commission’s public comment period closed on its revised guidelines for Internet advertising. Now the difficult process of updating the guidelines begins and anyone who advertises or sells on the Internet should pay close attention to the FTC’s actions and consider submitting a late comment now or watching for draft rules that may provide another comment period. 

     First, some history.  In response to the explosion of Internet commerce at the end of the last century, the FTC published in May 2000 its Dot Com Disclosures guidelines, http://www.ftc.gov/opa/2000/05/dotcom.shtm. The 2000 guidelines attempted to address the unique issues that arise from the dynamic, interactive Internet advertising environment. They used the same basic advertising rules governing print and television ads, for example applying the standard that ads must contain “clear and conspicuous” disclosures. The FTC acknowledged that Internet advertising raises special issues – that the ad may be viewed by consumers in a variety of formats and by people with varying levels of tech “savvy,” for example.  The seventeen-page guidelines did not purport to cover all the different types of Internet ads, instead setting general rules that were difficult to apply in the real world.  In some cases, they were internally inconsistent. 

    For example, the guidelines endorse hyperlinking to more detailed disclosures, but also say that hyperlinks are inappropriate in certain circumstances. In short, the 2000 guidelines were a laudable attempt, but did not (and perhaps could not, at that time) provide a clear set of practical rules for the industry.

    The anticipated new rules may flesh out the earlier guidelines, but they must also address changes since 2000. Social networks have exploded and blend pure entertainment and personal interaction with commercial ventures. The Internet is readily available on a wider range of platforms including tablets and smartphones.  Enterprises are extensively tracking and gathering information on individual consumers and using it to target ads. Blocking and filtering software encourages ever more surreptitious advertising strategies. As the medium evolves it grows further and further away from the passive and one-way newspaper and television advertising upon which our advertising laws are based.

     Because of these changes, the FTC’s decision to examine online advertising again is a good one.  However, only 40 public comments were filed during the official comment period. See http://www.ftc.gov/os/comments/dotcomdisclosures/index.shtm.  This suggests that the FTC may not have sufficient information to come up with usable, relevant guidelines that cover the landscape.  For example, how does incorporation of GPS functions affect advertising disclosures?  If the advertiser “knows” that a consumer is in a place where a disclosure would be irrelevant must he make the disclosure? Must a Twitter message contain all disclosures, given its limited size? How can advertisers insure that their entire message, including qualifications, is effectively republished on a Facebook page or elsewhere?  Do the rules even apply to ads directed through a personal network?  Are “mouse-over” disclosures as acceptable as a visible hyperlink?  How should complicated disclosures be supplied for smartphone ads where even a small hyperlink will not fit?  How should advertisers address the scaling issues arising from multiple devices?

    Some of the comments address some of these issues and the revised FTC guidelines hopefully will address all of them and more.

     Should businesses and consumers even care about what the FTC says? After all, Internet advertising and sales have boomed and many advertisers have no doubt been proceeding completely unaware of the 2000 guidelines or the FTC’s proposal to update them.  The answer is a resounding yes because of litigation where these guidelines are potentially dispositive. 

     The FTC itself can enforce its guidelines (and its more generalized rules governing all advertising) through its regulatory power, obtaining far-reaching discovery and imposing a consent decree.  And private litigants may use the guidelines to gain an advantage.  For example, California’s Unfair Competition Law prohibits “unfair,” “fraudulent” or “false” advertising. The FTC’s guidelines are a “slam dunk” in determining whether an ad violates these standards. 

    Armed with that advantage, a single consumer representing a class of thousands can easily make out a case and avoid early dismissal, resulting in expensive discovery burdens, and, if she succeeds, an injunction as well as restitution of any moneys paid for products sold through the ad, plus attorneys’ fees. Competitors can also seek to stifle competition, using the guidelines to make out a case that their rival’s ads are “misleading” under the federal Lanham Act, which carries a right to damages based on profits.

    As with all litigation, the ability to tell a “story” often determines the outcome – and if the story is that the FTC has already found the activity to be wrong,  plaintiff has a winning case.

    The coming new guidelines have the potential to clarify advertisers’ responsibilities and thus prevent this type of litigation. But they also could provide a basis for attacking common practices; a private suit could proceed based on a single FTC example. Businesses active in online promotion would be wise to make sure to review the 2000 guidelines now and the new guidelines when they are released to avoid violating them and handing a class action lawyer or competitor a ready-made lawsuit.

    Daniel K. Slaughter is Of Counsel at the law firm of Stein & Lubin LLP in San Francisco.  He is a commercial litigator, with 20 years of specialized experience in false advertising, unfair competition and product liability business-to-business and consumer class actions under California and federal law.

     

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