Having a great product or service is not always enough. If customers are not aware of your business, it is difficult to build brand awareness, create demand, grow a customer base, and increase sales. Word-of-mouth marketing can be highly effective, but most small businesses also dedicate a portion of their budget to advertising.
Whether you turn to digital ads or more traditional ad forms, you must take care to follow federal and state laws that prohibit false advertising. Advertisements that run afoul of these laws can result in fines and costly legal action that may not only ruin a business’s advertising return on investment (ROI) but also cause significant reputational harm.
Small Business Ad Spend
Most small businesses spend about 1 percent of their sales revenue on advertising.[1] That means that a business with $500,000 annual revenue spends approximately $5,000 on advertising, while a business with $1 million annual revenue spends roughly $10,000 on advertising. However, how much a business actually spends on advertising can depend on their local market, competition levels, and the industry. Manufacturers and wholesalers tend to spend less than 1 percent of revenue on ads. Restaurants spend around 2 percent, and furniture stores spend 4–5 percent.
Most advertising dollars are now spent online, including social media advertising, video advertising, and targeted advertising.[2] However, TV, print, radio, billboards, direct mail, and other offline advertisements are still used to supplement internet ads.
Strong marketing ROI is considered to be five times the ad budget (i.e., 5:1). Exceptional marketing can produce an ROI of 10:1. Anything below 2:1 usually indicates a failed ad campaign.[3]
Truth-in-Advertising Laws
According to a Nielsen report on advertising effectiveness, creativity is the single most important factor for driving sales.[4] But there can be a fine line between creativity and fiction. And crossing that line could attract the attention of federal regulators, state attorneys general, consumers, competitors, and class action lawyers.
Federal Trade Commission Regulations
At the federal level, the Federal Trade Commission (FTC) regulates truth in advertising. It does so by enforcing the following requirements:
- Advertisements must be truthful and nondeceptive. According to the FTC, deceptive ads are those that contain material statements or omissions that are likely to mislead a reasonable consumer. A material statement or omission is one that is important to the consumer’s purchasing decision.
- Businesses must substantiate their marketing claims with evidence. The type of evidence needed depends on the claim being made. Health and safety claims, for example, require scientific evidence like tests or studies that are carried out using methods experts acknowledge as accurate.
- Advertisements cannot be unfair. The FTC considers an ad to be unfair if it causes, or is likely to cause, substantial injury to consumers that they could not reasonably avoid, such as health benefit claims that lead a reasonable consumer to buy a product that turns out to be harmful.
FTC truth-in-advertising standards apply to all media formats (digital, print, mailings, TV, radio, billboards or buses, etc.). The agency notes that it pays particular attention to health-related claims—including claims about food, over-the-counter drugs, dietary supplements, alcohol, and tobacco. The FTC also focuses on claims that consumers may have trouble independently evaluating (i.e., claims about energy costs and environmental impacts).[5]
As a federal agency, the FTC concentrates on national ad campaigns. Local matters are usually referred to city, county, or state agencies. This takes many small businesses off the FTC’s radar, but those that do advertise nationally should note that the FTC can impose false advertising fines of $46,517 per day.
You can find examples of FTC enforcement actions for deceptive and misleading conduct here.
State Consumer Protection Laws
States have their own consumer protection laws that prohibit false advertising and other deceptive trade practices. Most of these laws grant primary enforcement authority to the state attorney general (AG).
Depending on the state, they may be called Unfair and Deceptive Acts and Practices Acts (UDAPs) or Consumer Protection Acts (CPAs). Some states, including California, have specific false advertising laws besides UDAPs or CPAs. The FTC also gives AGs certain enforcement authority over unfair or deceptive acts or practices related to commerce.
State consumer protection and false advertising laws empower state AGs to conduct investigations and file lawsuits on behalf of a state’s citizens.[6] The following remedies may be available through such actions:
- Injunctions (legal orders that prohibit a party from engaging in specific acts (e.g., false or deceptive advertising)
- Monetary penalties
- Revocation or suspension of business licenses and permits
- Consumer restitution
- Attorney’s fees
In these state actions, the AG does not serve as legal counsel for individual consumers. It is possible, though, for consumers to hire a law firm and file a class action lawsuit that alleges violation of state consumer protection and false advertising laws. Class action lawsuits can be statewide or nationwide in scope, and sometimes, there are both state and national classes.
The Lanham Act
Another federal law that addresses unfair business practices is the Lanham Act. Although it primarily regulates the registration and use of trademarks, a business can make a claim against a competitor for false or misleading advertising under section 43(a) if the following elements are satisfied:
- The defendant made a factually false or misleading statement. The statement could be made about a business’s own products or about a competitor’s products.
- The false or misleading statement is used commercially in an advertisement or promotion.
- The deception is material (i.e., likely to influence a purchasing decision).
- The advertisement involves a product or service sold across state lines (interstate commerce).
- There is a likelihood of economic harm to the plaintiff.
The Lanham Act permits claims regarding factually false advertising claims and statements that are objectively true but likely to deceive. The first type of claim is easier to prove, but either type of claim, if proven, can result in an injunction against the advertising in question, damages, and attorney’s fees.
Legal Help for False Advertising Issues
When done right, advertising can create buzz around your business and boost its bottom line. But when done wrong, advertising can cost your business far more than it returns.
If you have questions about the legality of a claim in an advertisement, or if you have been accused of using unfair or deceptive advertising practices, it is important to talk to a local business attorney. Our lawyers are knowledgeable about FTC regulations, the Lanham Act, and state consumer protection laws. To set up a meeting, please contact us.
[1] Shawn Hessinger, How Much Do Small Businesses Spend on Advertising and Marketing?, Small Bus. Trends (Jan. 22, 2021), https://smallbiztrends.com/2018/04/much-small-businesses-spend-on-advertising-marketing.html.
[2] Carmen Ang, The Majority of Advertising Dollars Are Now Being Spent Online, Visual Capitalist (Oct. 28, 2020), https://www.visualcapitalist.com/majority-advertising-dollars-spent-online/.
[3] What Is Marketing ROI and How Do You Calculate It?, Marketing Evolution (Jul. 20, 2022), https://www.marketingevolution.com/marketing-essentials/marketing-roi.
[4] Are the Basics of Reach, Creative, Targeting, and Recency Still Critical to Good Advertising?, NCSolutions, https://ncsolutions.com/case-studies/five-keys-advertising-effectiveness/ (last visited Dec. 8, 2022).
[5] Advertising FAQ’s: A Guide for Small Business, Fed. Trade Comm’n (Jan. 2022), https://www.ftc.gov/business-guidance/resources/advertising-faqs-guide-small-business.
[6] Interjurisdictional Collaboration, Nat’l Ass’n Att’ys Gen., https://www.naag.org/issues/consumer-protection/interjurisdictional-collaboration/ (last visited Dec. 8, 2022).
