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CHAPTER 21
REGULATION OF ADVERTISING AND PROMOTION
Chapter Overview
The purpose of this chapter is to examine the regulatory environment in which advertising and promotion
operate including industry self-regulation and regulation by federal and state agencies. The chapter begins
by examining the various ways the advertising industry attempts to police itself through the use of selfregulation by various parties including advertisers and agencies, trade associations, the business
community, and the media. Attention is also given to appraising the value and effectiveness of selfregulation. The remainder of this chapter focuses on governmental regulation of advertising, particularly
at the federal level. We discuss the background of federal regulation of advertising and examine the role
and functioning of the Federal Trade Commission including its handling of deceptive advertising cases.
Additional federal regulatory agencies that have some influence or power over advertising are also
discussed along with advertising regulation at the state level. The chapter concludes with an examination
of regulations affecting other promotional areas such as sales promotion, direct marketing, and marketing
on the Internet
Learning Objectives
1. To examine how advertising is regulated including the role and function of various regulatory
agencies.
2. To examine self-regulation of advertising and evaluate its effectiveness.
3. To examine how advertising is regulated by federal and state governmental agencies, including the
Federal Trade Commission.
4. To examine rules and regulations that affect sales promotion, direct marketing, and marketing on
the Internet.
Chapter and Lecture Outline
I.
INTRODUCTION
Advertisers operate in a complex environment of local, state, and federal rules and regulations.
Additionally, there are a number of advertising and business-sponsored associations, consumer groups
and organizations and media that attempt to police advertising through various self-regulatory programs
and guidelines. While in most situations the various rules and regulations primarily influence individual
advertisers and their messages, there are situations where advertising for an entire industry can be
affected. The tobacco industry has already been banned from advertising on the broadcast media, while
there is currently strong sentiment to impose severe restrictions on the advertising and promotion of
alcoholic beverages.
Regulation and control over advertising come from internal or self-regulation by various groups within
the advertising industry and business community as well as from external federal and state regulatory
agencies such as the Federal Trade Commission. While only the governmental agencies have the force of
law, most advertisers will abide by the guidelines and decisions of internal or self-regulatory bodies. It is
important for all of those involved in the advertising decision making process, both on the client and
agency side, to have an understanding of various rules and regulations that affect advertising and
promotion and how the regulatory bodies operate.
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Professor Notes
II.
SELF-REGULATION
For many years the advertising industry has practiced and promoted the use of voluntary self-regulation
as a means of regulating and controlling advertising. Most advertisers and their agencies as well as the
media recognize the importance of maintaining consumer trust and confidence in advertising. Selfregulation has also been viewed as way of limiting government interference and control over advertising.
A.
Self-regulation by Advertisers and Agencies—The self-regulatory process actually begins with
the interaction of the client and agency when creative ideas are considered and evaluated. Most
advertisers recognize that their ads are a reflection of the company and want to be sure that their
advertising claims are truthful, verifiable, and do not mislead or deceive consumers. Internal
control and regulation also come from advertising agencies, which are responsible for verifying
all product claims made by the advertiser. Agencies generally take formal steps to protect
themselves from legal and ethical perils through agency-clients contracts. However, agencies
have been held legally responsible for fraudulent or deceptive claims along with the client in
some cases.
B.
Self-Regulation by Trade Associations—Many industries have developed self-regulatory
programs and guidelines or codes for advertising. This is particularly true in industries where
advertising is prone to controversy such as liquor and alcoholic beverages, drugs, and various
products marketed to children. Many professions also maintain advertising guidelines through
local, state and national organizations. While industry associations’ guidelines and codes are
meant to show that member firms are concerned with the impact and consequences of their
advertising, they have no legal basis for enforcing them and must rely on peer pressure or other
sanctions to gain compliance. The opening vignette to the chapter discusses how the Distilled
Spirits Council ended its long-standing, self-imposed ban on broadcast advertising in 1996.
C.
Self-Regulation by Business—A number of self-regulatory mechanisms have been established by
the business community in an effort to control advertising practices. The largest and best known
of these is through the Better Business Bureau (BBB) which promotes fair advertising and
selling practices in all industries in local areas. The parent organization of the local BBB offices
is the Council of Better Business Bureaus which plays a major role in the monitoring and
control of advertising at a national level through its National Advertising Division (NAD) and
Children’s Advertising Unit.
1. NAD/NARB—The National Advertising Division (NAD) works closely with the National
Advertising Review Board (NARB) to sustain truth, accuracy and decency in national
advertising. These two organizations are the operating arm of the National Advertising
Review Council and constitute the advertising industry’s most effective self-regulatory
mechanism. The NAD maintains an advertising monitoring system that is the source of many
of the cases it reviews along with complaints received from consumers, local BBBs, and
competitors’ challenges (which have become the primary source of NAD cases).
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2. Advertising associations - Various groups in the advertising industry have also been
proponents of self-regulation. These include the two major national organizations, the
American Association of Advertising Agencies (AAAA) and the American Advertising
Federation (AAF). These associations have established guidelines for truthful and responsible
advertising and have been active in the legislative area of advertising and in influencing
agencies to abide by their codes and principles.
D.
Self-regulation by Media - Another very important self-regulatory mechanism in the advertising
industry is that of the media. Most media maintain some form of advertising review process and
may reject any ads they regard as objectionable. Newspapers and magazines have their own set of
advertising standards, requirements, and restrictions that will often vary depending on the size
and nature of the publication.
Advertising on television and radio has been regulated for years through codes developed by the
industry trade association—the National Association of Broadcasters (NAB). Probably the most
stringent review process and standards of any media are those of the three major television
networks through their “Standards and Practices” divisions which carefully review all
commercials submitted to the network or affiliate stations. Figure 21-4 shows a sampling of the
TV network’s guidelines for children’s advertising.
E.
Appraising Self-regulation—The three major participants in the advertising process—the
advertisers, agencies and media- all work both individually and collectively to encourage truthful,
ethical, and responsible advertising. The advertising industry views self-regulation as an effective
mechanism for controlling advertising and prefers this form of regulation to government
intervention. Self-regulation has been effective and has probably led to the development of
standards and practices that are higher than those imposed by law and beyond the scope of proper
legislation. There are, however, limitations to self-regulation and this process has been criticized
in a number of areas. Concern has been expressed over the time it takes the NAD to resolve a
complaint, and over staffing and budgeting constraints which limit the NAD/NARB system’s
ability to investigate more cases and complete them more rapidly. Self-regulation has also been
criticized for being self-serving to the advertisers and the advertising industry and for lacking the
power to be a viable alternative to federal or state regulation.
Professor Notes
III.
FEDERAL REGULATION OF ADVERTISING
Governmental control and regulation of advertising comes from various federal, state and local laws and
regulations with enforcement being the responsibility of various government agencies. The most
important source of external regulation of advertising comes from the Federal Trade Commission (FTC).
A.
Advertising and the First Amendment—Freedom of speech or expression, as defined by the First
Amendment to the U.S. Constitution, is the most basic federal law governing advertising in the
United States. The courts have extended First Amendment protection to commercial speech,
which is speech that promotes a commercial transaction. The text discusses some of the landmark
cases over the past three decades where the federal courts have issues rulings supporting the
coverage of commercial speech by the First Amendment.
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B.
Background on Federal Regulation of Advertising—federal regulation of advertising originated in
1914 with the passage of the Federal Trade Commission Act, which created the FTC. This act
was originally passed to help enforce antitrust laws, and false advertising was not prohibited
unless there was evidence of injury to a competitor. Another important piece of legislation was
the Wheeler-Lea Amendment, which Congress passed in 1938. It amended Section 5 of the FTC
act and empowered the FTC to act against unfair or deceptive acts or practices if there was
evidence of injury to the public. Proof of injury to competition was not necessary.
C.
The Federal Trade Commission—The FTC is charged with the responsibility of protecting both
consumers and businesses from anticompetitive behavior and unfair and deceptive practices. The
major divisions of the FTC include the Bureaus of Competition, Economics and Consumer
Protection. The Bureau of Consumer Protection investigates and litigates cases involving acts or
practices alleged to be deceptive or unfair to consumers. The FTC has had the power to regulate
advertising since the passage of the Wheeler-Lea Amendment. The authority of the FTC was
increased considerably throughout the 1970s. The passage of the Magnusson-Moss Act of 1975
broadened the powers of the FTC and increased its budget as the second section of this act, the
FTC Improvements Act, gave the FTC the power to establish trade regulation rules (TRRs).
These are industry-wide rules that defined unfair practices before they occurred. During the 1970s
the FTC made enforcement of laws regarding false and misleading advertising a top priority as
several new programs were instituted. However, many of these programs, as well as the expanded
powers of the FTC to develop regulations on the basis of “unfairness,” became the source of
controversy. At the source of this controversy is the fundamental issue of what constitutes unfair
or deceptive advertising.
D.
The Concept of Unfairness—Under Section 5 of the FTC Act, the Federal Trade Commission has
the mandate to act against unfair and deceptive advertising practices. While the FTC has taken
steps to define and clarify the meaning of deception, for many years the Commission was less
clear with regard to the meaning of unfairness. In response to this problem, the FTC sent
Congress a statement in 1980 that contained an interpretation of unfairness. According to the FTC
policy the basis for unfairness is that a trade practice (a) causes substantial physical or economic
injury to consumers (b) could not be reasonably avoided by consumers, and (c) must not be
outweighed by countervailing benefits to consumers or competition.
E.
Deceptive Advertising—Deceptive advertising can take a number of forms ranging from
intentional false or misleading claims by an advertiser to ads that may be true in a literal sense but
leave consumers with a false or misleading impression. Regulatory agencies must make a
distinction between false or misleading messages and those that rely on puffery, which refers to
the use subjective claims or statements about a product or service. IMC Perspective 21-2
discusses the legal battle between Pizza Hut and Papa John’s over the latter’s use of puffery as a
defense for its “Better Ingredients. Better Pizza” tagline.
While unfair or deceptive acts or practices in advertising are the primary focus of the FTC, these
terms have never really been precisely defined. In 1983 the FTC put forth a new working
definition of deception which argued that the commission will find deception “if there is a
misrepresentation, omission or practice that is likely to mislead the consumer acting reasonably in
the circumstances to the consumer’s detriment.” There are three essential elements to this
definition or deception. The first element is that the misrepresentation, omission or practice must
be likely to mislead the consumer. The second element is that the act or practice must be
considered from the perspective of the reasonable consumer. The third key element is materiality
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which means that the act influenced the consumer’s decision-making process in a detrimental
way. The FTC does have several programs for helping in the evaluation of an ad for deception.
1. Affirmative disclosure—the FTC may require advertisers to include types of information in
their ads so consumers will be aware of all the consequences, conditions, and limitations
associated with the use of the product or service. The goal of affirmative disclosure is for
consumers to have sufficient information to make an informed decision. Another area where
the FTC is seeking more specificity from advertisers is in regard to country of origin claims.
In 1998 the FTC issued new guidelines for advertising or labeling a product as “Made in
USA” which requires that all significant parts and processing that go into the product must be
of U.S. origin and the product should have no or very little foreign content.
2. Advertising substantiation—this FTC advertising substantiation program requires
advertisers to have documentation to support the claims in their ads and to prove they are
truthful. The program requires substantiation of claims made with respect to safety,
performance, efficacy, quality, or comparative price. The FTC’s challenge to Abbott
Laboratory’s claims over whether its research substantiated claims that doctors would
recommend Ensure brand nutritional beverage as a meal replacement for healthy adults is an
interesting example to discuss here.
F.
The FTC’s Handling of Deceptive Advertising Cases—Allegations that a firm is engaging in
unfair or deceptive advertising come to the attention of the FTC from a variety of sources
including complaints from competitors, from consumers, from other governmental agencies, or
from the commission’s own monitoring and investigations. Once the FTC decides that a
complaint is justified and warrants further action, it notifies the offender, who then has 30 days to
respond to the complaint. The FTC complaint procedure will then depend on the response and
actions taken by the advertiser.
1. Consent and cease and desist orders—An advertiser charged with deceptive advertising can
agree to a settlement with the FTC by signing a consent order which is an agreement to stop
the practice or advertising in question. This agreement is for settlement purposes only and
does not constitute an admission of guilt by the advertiser. Most FTC inquiries are settled by
consent orders. If the advertiser chooses not to sign the consent decree, a hearing can be
requested before an administrative law judge. The judge’s decision can be appealed to the full
five-member commission by either side. If the commission upholds the complaint, the
advertiser can appeal the case to the federal courts. Since the appeal process may take some
time, the FTC has the power to issue a cease and desist order requiring the advertiser to stop
the specified advertising claim until a hearing is held. Violation of a cease and desist order is
punishable by a fine of up to $10,000 a day. Figure 21-4 summarizes the FTC complaint
procedure.
2. Corrective advertising—A problem may exist even if an advertiser ceases using a false or
deceptive advertisement since consumers may still retain some or all of the deceptive claim in
memory. To address this problem of residual effects of prior deceptive advertising, the FTC
developed a program in the 1970s known as corrective advertising. Under this program, an
advertiser found guilty of deceptive advertising can be required to run additional advertising
(corrective ads) designed to remedy the deception or misinformation contained in previous
ads. Corrective advertising is probably the most controversial of all the FTC programs as
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advertisers have argued that it infringes on First Amendment rights of free speech. The
effectiveness of corrective advertising campaigns has also been questioned, as has the FTC’s
involvement in specifying the content of corrective message. The text discusses the landmark
corrective advertising case involving Listerine mouthwash and the more recent case involving
Novartis Consumer Health and its product Doan’s Pills.
G.
Current Status of Federal Regulation by the FTC—By the end of the 1970s the FTC became a
very powerful and active regulator of advertising in the United States. However, during the 1980s
the FTC became less active and cut back its regulatory efforts, due in large part to the laissezfaire attitude of the Reagan administration toward the regulation of business in general. In 198889 an 18-member panel chosen by the American Bar Association undertook a study of the FTC as
a 20-year follow-up to the 1969 report used by President Nixon to overhaul the commission. The
new report expressed strong concern over the FTC’s lack of sufficient resources and staff to
regulate national advertising effectively and called for more funding. The committee also
suggested that the FTC should retain its authority to use “unfairness” as the basis for issuing
industry-wide rules as well as complaints against individual advertisers. After nearly a decade of
relative inactivity, the FTC began taking a more activist role during the 1990s and is once again
aggressively enforcing advertising rules and regulations.
H.
Additional Federal Regulatory Agencies
1. The Federal Communications Commission—the FCC has jurisdiction over the radio,
television, telephone and telegraph industries. Its authority over the airways gives it the
power to control advertising content and to restrict what products and services can be
advertised on radio and television. It can also eliminate obscene and profane programs and/or
messages and those it finds in poor taste. The FCC generally works closely with the FTC in
the regulation of advertising. For example, the FCC and FTC have been investigating the
advertising of long-distance phone services, as they are concerned that many of these ads
deceive consumers.
2. The Food and Drug Administration—now under the jurisdiction of the Department of Health
and Human Services, the FDA has authority over the labeling, packaging, branding,
ingredient listing, and advertising of packaged foods and drug products. The FDA has limited
authority over nutritional claims made in food advertising and can set rules for promoting
food and drug advertising. In 1996 President Clinton signed an executive order declaring that
nicotine is an addictive drug and giving the FDA brad jurisdiction to regulate cigarettes and
smokeless tobacco. However, the U.S. Supreme Court ruled in March 2000 that the FDA has
no power to regulate the manufacture and sale of cigarettes. This decision blocks the FDA
rules that would have restricted tobacco advertising from taking effect.
3. The U.S. Postal Service—the U.S. mail is a major advertising medium, as a large number of
marketers use the mail to deliver advertising and promotional messages. The U.S. Postal
Service has control over advertising involving the use of mail and ads involved with lotteries,
fraud and obscenity regulations.
4. Bureau of Alcohol, Tobacco, and Firearms—the BATF is an agency within the Treasury
Department that enforces laws, develops regulations, is responsible for tax collection in the
liquor industry, and regulates and controls the advertising of alcoholic beverages.
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I.
The Lanham Act—While most advertisers have relied on self-regulatory mechanisms and the
FTC to deal with the problem of deceptive or misleading advertising by their competitors, many
companies are becoming more active in filing lawsuits against competitors who they feel are
making false claims under the Lanham Act. This act, which was originally written in 1947 as the
Lanham Trade-Mark Act, was amended to encompass false advertising and provides individual
advertisers with the opportunity to file a civil suit against a competitor. Many companies are
using the Lanham Act to sue competitors for their advertising claims, particularly since
comparative advertising has become so common. The Trademark Law Revision Act of 1988
closed some loopholes in the Lanham Act and has made it even easier to sue competitors for
making false advertising claims.
Professor Notes
IV.
STATE REGULATION
In addition to the various federal rules and regulations, advertisers must also concern themselves with
numerous state and local controls over advertising. State regulation of advertising was based for many
years on the Printers’ Ink Model Statutes. Many states have since modified the original statutes and
adopted laws similar to those of the Federal Trade Commission Act that serve as a basis for false and
misleading advertising.
As the federal government became less involved in the regulation of advertising during the 1980s, many
state attorneys general began to enforce state laws regarding false or deceptive advertising. The National
Association of Attorneys General (NAAG) has made concerted moves against a number of national
advertisers as a result of inactivity by the FTC during the Reagan administration. The foray of the NAAG
into the regulation of national advertising has raised the issue of whether states working together can
create and implement uniform national advertising standards that would, in effect, supersede federal
authority. However, the American Bar Association panel that examined the FTC concluded that the
Federal Trade Commission is the proper regulator of national advertising and recommended that the state
attorneys focus their attention on practices that harm consumers in a single state.
It remains to be seen how the NAAG will proceed and fare in its efforts to regulate national advertising.
However, it has become evident that states will become involved in the policing of national, as well as
local, advertising. Advertisers are concerned over this trend toward increased regulation of advertising at
the state and local levels, as they do not want to have to modify national advertising campaigns to comply
with regulations of individual states.
V.
REGULATION OF OTHER PROMOTIONAL AREAS
A.
Sales Promotion—Both consumer- and trade-oriented promotions are subject to various
regulations. The FTC regulates many areas of sales promotion through the Marketing Practices
Division of the Bureau of Consumer Protection. Many promotional practices are policed by the
state attorney general offices and local regulatory agencies. Various aspects of trade promotion
such as allowances are regulated by the Robinson-Patman Act. Specific sales promotion tools that
are subject to regulations include:
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1. Contests and sweepstakes—marketers must be careful to ensure that their contest or
sweepstakes is not classified as a lottery, which is considered a form of gambling. A second
important requirement in the marketer provide full disclosure of the promotion regarding
issues such as the number of prizes to be awarded, odds of winning, duration and dates of
termination, and availability of lists of prize winners.
2. Premiums—marketers must make a fair representation of the value of a premium offer.
Marketers must also be careful in the use of premium offers for special audiences such as
children.
3. Trade Allowances—marketers using various types of trade allowances must be careful not to
violate any stipulations of the Robinson-Patman Act, which prohibits any form of price
discrimination. Certain sections of the Robinson-Patman Act prohibit a manufacturer from
granting wholesalers and retailers various types of promotional allowances unless they are
made available to all customers on proportionally equal terms. Vertical cooperative
advertising is also regulated by the Robinson-Patman Act.
B.
Direct Marketing—The Federal Trade Commission enforces laws in a number of areas that relate
to direct marketing including mail-order offers, the use of 900 telephone numbers, and directresponse television advertising. In addition to the FTC, the United States Postal Service enforces
laws dealing with the use of the mail to deliver advertising and promotional messages or receive
payments and orders that have been delivered by other means such as print or broadcast
advertising.
Both the FTC and Postal Service police direct-response advertising very closely to ensure that the
ads are not deceptive or misleading or misrepresent the product or service being marketed. Laws
also forbid mailing unordered merchandise to consumers and rules govern the use of negative
option plans whereby a company proposes to send merchandise to consumers and expects
payment unless a notice of rejection or cancellation is sent by the consumer. The FTC also has
rules requiring direct marketers to promptly ship merchandise.
Another area of direct marketing facing increased regulation is telemarketing. With the passage of
the Telephone Consumer Protection Act of 1991, marketers who use telephones to contact
consumers must follow a complex set of rules developed by the Federal Communications
Commission. Under these rules telemarketers are required to maintain an in-house list of
residential telephone subscribers who do not want to be called and consumers who continue to
receive unsolicited calls can sue for damages. This law also bans unsolicited “junk fax” ads.
The FTC has also been actively involved in the regulation of advertising that encourages
consumers to call telephone numbers with a 900 prefix, whereupon they are automatically billed
for the call. In 1993 the FTC issued its 900-Number Rule for advertising directed at children. The
rule restricts advertisers from targeting children under the age of 12 with ads containing 900
numbers unless they provide a bona fide educational service. The rule also requires that 900number ads directed to those under the age of 18 must contain a clear and conspicuous disclosure
statement that requires the caller to have parental/guardian permission to complete the call. The
name of this legislation was changed to the Pay-Per-Call Rule and in 1998 it was revised to give
the FTC the authority to broaden its scope and add new provisions.
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In 2003 Congress approved the FTC’s proposal for a national “do-not-call” registry under which
consumers can sign up to be put on a list that will bar them from receiving calls from
telemarketers. Companies will be fined $11,000 for each call that violates the FTC provisions.
In addition to governmental agencies, the direct marketing industry is also scrutinized by various
self-regulatory groups such as the Direct Marketing Association and the Direct Selling
Association. These associations have specific guidelines and standards that member firms are
expected to adhere to and abide by.
C.
Marketing on the Internet—Two major areas of concern with regard to marketing on the Internet
are privacy issues and online marketing to children. Several restrictions have been proposed
including:
 Banning unsolicited e-mail that cannot be automatically screened out.

Disclosing fully and prominently both the marketer’s identity and the use for which
information is being gathered in every communication.

Giving consumers the right to bar marketers from selling or sharing any information collected
from them as well as to review the personal information collected.
1. Recently the major privacy issue regarding the Internet that has emerged involves
undisclosed profiling whereby Web marketers can profile a user on the basis of name,
address, demographics, and online/offline purchasing data. Companies that collect Internet
usage data and information have joined together under the banner of the Network Advertising
Initiative and developed a self-regulatory code that requires websites to disclose their use of
ad servers and permit consumers to opt out of data collection that could be used for profiling.
2. One of the biggest concerns regarding the Internet is how to restrict marketers whose
activities or websites are targeted at children. Concerns over online marketing to children led
to the passage of the Children’s Online Privacy Protection Act of 1998, which the FTC
began enforcing in April 2000. This law requires posted privacy policies and verifiable
parental consent before marketers can collect personally identifiable information from
children, such as names and email addresses.
Professor Notes
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Teaching Suggestions
Regulatory factors are a major concern in the integrated marketing communications decision-making
process and consideration and attention must be given to the various laws, rules and regulations that can
constrain and restrict advertising and other forms of promotion. While students may have some
knowledge of the area of advertising regulation, it is unlikely that they will understand the extent to which
advertisers must deal with regulatory concerns from various governmental agencies or self-regulation by
various business, advertising and media organizations. Students should be encouraged to appraise and
evaluate self-regulation by the advertising industry and the media as a means of regulating and controlling
advertising. It is also important to discuss the Federal Trade Commission and the changes that have
occurred in its power and role over the past decade.
Several of the landmark cases supporting protection of advertising as a form of commercial speech under
the First Amendment are noted and should be discussed. At the time the instructor’s manual was being
written the U.S. Supreme Court was hearing the landmark case involving Nike and whether its statements
about the company’s labor policies and practices should be considered commercial in nature or protected
political speech. We suggest that you research the Supreme Court decision in this case as it could alter the
definition of commercial speech and lead to new restrictions on the claims that companies through press
releases and other forms of communication regarding their behavior. You may also find it helpful to
research some of the other important cases involving advertising in more detail and discuss them in class.
These include some of the older and well-known deceptive advertising cases such as Profile Bread, Ocean
Spray Cranberry Juice, STP and Listerine. There is an excellent article in October 17, 1994 issue of
Advertising Age on the landmark legal battle between Campbell Soup Co. and the FTC that was the
impetus for the FTC program of corrective advertising. An interesting area for discussion is just how
involved the government and FTC should be in the regulation of advertising and whether programs such
as advertising substantiation or corrective advertising are necessary. Attention should also be given to
discussing the Lanham Act, which has become a very significant development in the area of advertising
regulation. Competitors are now suing one another under this act rather than just complaining to the
NAD/NARB or the FTC. An excellent article on the Lanham Act and its implications for advertising is
“Us vs. Them: The Minefield of Comparative Ads,” by Bruce Buchanan and Doron Goldman, Harvard
Business Review, May/June 1989, pp. 38-50. The foray of states into the regulation of national advertising
through the actions of the National Association of Attorneys General is another important area to discuss.
Attention should also be given to legal developments affecting other IMC tools such as direct marketing
and the Internet. For example, in February 2003 Congress approved the FTC’s proposal for the formation
of a nation “do-not-call” registry and this program is supposed to go into effect in by October 2003.
However, several lawsuits against the FTC registry by direct marketing groups such as the Direct
Marketing Association. If this program is implemented, it will have a major impact on the direct
marketing industry, as it will greatly reduce the number of households to which telemarketers can make
phone calls. We suggest that you stay abreast of developments concerning the status of the FTC’s “donot-call” registry by referring to publications such as Advertising Age or going to the DMA web site at
www.the-dma.org.
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Answers To Discussion Questions
1. Do you agree with the DISCUS argument that hard liquor is at a competitive disadvantage against
beer and wine if it cannot advertise on television? Evaluate the decision by NBC to become the first
broadcast network to accept liquor advertising and then dropping its plans to do so.
The decision by the Distilled Spirits Council of the United States (DISCUS) to overturn the selfimposed ban on broadcast advertising has been very controversial. DISCUS has argued that marketers
of distilled spirits want to break down the public perception that spirits are stronger or more
dangerous than beer and wine and thus deserving of harsher social and political treatment. The vicepresident for marketing and strategy at Seagram, the company that actually ended industry’s ban by
airing an ad for Crown Royal Canadian whiskey, has argued that distilled spirits should have the same
access to broadcast media as beer and wine. He noted that “the average consumer talks about liquor
as being hard…so therefore liquor has to have sort of specialness or evilness about it.” The decision
by DISCUS to allow broadcast advertising was probably driven by the continuing decline in sales of
distilled spirits. The total number of cases of distilled spirits sold fell from 190 million in 1980 to 135
million in 1996. However, premium brands with large advertising budgets have not experienced a
decline. Thus, distilled spirits companies view TV advertising as a way to reverse the sales decline.
It is likely that distilled spirits are at a competitive disadvantage to beer and wine since the latter two
products can be advertised on radio and television. This is particularly true in today’s media
environment as narrowcasting is now possible through television, which means distilled spirits
marketers can target their advertising to specific segments of the adult population. Moreover, image
advertising is very common in the marketing of alcoholic beverages and television is an excellent
medium for creating brand images. It will be interesting to follow the developments surrounding the
advertising of distilled spirits as the major broadcast and cable networks have thus far refused to
accept these ads.
If the major broadcast and cable networks do begin accepting hard liquor advertising this may lead to
more controversy and eventually government regulations banning all alcohol advertising from
television and radio. For example, the Federal Trade Commission initiated a broad investigation of
alcohol advertising in 1998 and asked eight of the top marketers of beer, wine, and liquor for special
reports on their advertising and marketing practices. The FTC wants to know how the companies are
carrying out their own self-regulatory programs, which are supposed to keep alcohol ads from
reaching children. The FTC is also interested in ways these companies are promoting their products
on the Internet, through product placements in movies and making use of various other integrated
marketing tools.
The decision by NBC to become the first broadcast network to accept liquor advertising was very
controversial. NBC argued that it was tired of the double standard by which the networks could
accept beer and wine ads but not spots for hard liquor and noted that the distinction between the ads
for various alcoholic beverage categories was arbitrary. As part of its proposal to accept hard liquor
ads, NBC was going to require liquor companies to run four months of so-called social responsibility
ads promoting responsible drinking before general promotion ads could air. The network also
planned to limit liquor ads to programs for which 85 percent of viewers are 21 or older. However,
NBC was not joined by the other major networks and it received a considerable amount of criticism
from various medical and public advocacy groups who expressed concern that liquor ads on TV
would glamorize drinking and encourage teens to drink. The issue of alcohol advertising and the
repeal of the DISCUS ban can be the subject of a very interesting class discussion.
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2. Evaluate the controversy discussed in IMC Perspective 21-2 over the “Kenya” commercial from the
perspective of both Just For Feet and the Saatchi & Saatchi advertising agency. With whom does the
ultimate responsibility for the airing of this commercial lie, the client or the agency?
The legal battle that developed between Just For Feet and Saatchi & Saatachi over the controversial
“Kenya” spot is a result of many factors. Just For Feet claims that it had major concerns over the spot
and did not want to run it. However, the company argues that it relied on the Saatchi’s reassurance
that the commercial would be well received based on the agency’s expertise and experience with
national advertising and marketing. Just For Feet also argues that it ran the spot because it had spent
nearly a million dollars on production costs and had paid $2 million for a time slot on the Super Bowl
and it could not back out of this commitment. The company also sued the Fox Broadcasting
Company, which accepted the spot for broadcast on the Super Bowl. Just For Feet claims the agency
was guilty of professional negligence and malpractice because it advised the company to run the
Kenya spot and the alternative spot the agency created was rejected by Fox for being mean-spirited
and promoting antisocial behavior.
Saatchi & Saatchi claims that advertising is a business that has no explicit guidelines and standards
and therefore it cannot have committed malpractice. The agency also notes that the commercial was
presented to the Fox network before being broadcast and was approved. Another important issue in
this case is the fact that the litigation actually began as the controversy from the spot was settling
down but when the agency sued Just For Feet for failing to pay a $3 million media and production
bill. The retailer then filed its own malpractice suit against the agency and Fox Broadcasting.
The issue as to who has the ultimate responsibility for the airing of the commercial is an interesting
one. Most advertising and marketing experts argue that Just For Feet is ultimately responsible
because the company approved the spot. They note that agencies cannot run a commercial unless the
client approves it. Although the agency may have used bad judgment in creating the spot, the final
decision to air it was solely the client’s.
3. Discuss the role the media play in the self-regulation of advertising. Do you think media selfregulation is an effective way of protecting consumers from offensive or misleading advertising?
The media are an important self-regulatory mechanism in the advertising industry. Most major media
have some type of review process for advertising and can reject ads they find objectionable. Some
media exclude ads for an entire product class such as Reader’s Digest’s ban on tobacco and liquor ads.
Many magazines and newspapers have standards regarding the type of advertising they will accept.
However, these standards vary depending on the nature and size of the publication. Large established
publications may have more stringent standards than those that are less financially secure and in need
of advertising revenue. The major television networks have incorporated many of the provisions of
the codes used by the National Association of Broadcasters into their own standards. The networks
have the most stringent advertising review process of any media as their standards and practices
division reviews all commercials before they can be aired on the network or an affiliate. Commercials
that are considered to be too offensive or potentially misleading are sent back to the advertiser for
revision and resubmission. However, most of the cable channels do not have the same standards as
the networks and advertisers often will run ads on cable to circumvent the review more stringent
requirements of the networks. Media self-regulation plays an important role in protecting consumers
from offensive or misleading advertising. However, given the myriad of magazines and newspapers,
as well as the increasing number of cable channels, it is possible for advertisers to find a way to reach
consumers with their messages.
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4. Do you agree with the decision by the California Supreme Court to view statements about a
company’s labor policies or operations in ads or press releases as commercial in nature and thus
subject to government regulation? Discuss how this ruling might affect various forms of integrated
marketing communications used by companies such as Nike?
Freedom of speech or expression is the most basic federal law governing advertising in the United
States. For many years, freedom of speech protection did not include advertising and other forms of
speech that support a commercial transaction. However, the courts have extended First Amendment
protection to advertising as a form of commercial speech. There have been a number of landmark
cases where the federal courts have issued ruling supporting the coverage of commercial speech such
as advertising under the First Amendment. However, the courts have ruled that only truthful
commercial speech is protected, not advertising or other forms of promotion that are false, misleading
or deceptive.
In the case involving Nike, the California Supreme Court reversed the decisions of two lower courts
and ruled that Nike’s public relations campaign defending its labor policies and working conditions
inside its factories in Asia should be considered commercial speech, even though it was not talking
specifically about its shoes. The court ruled that corporations know that issues such as labor
conditions and policies contribute to the public’s perception of a company and consumers’ willingness
to buy its products. At issue here is how to distinguish between political and commercial speech. The
U.S. Supreme Court has held that political speech, even when inaccurate, is protected by the First
Amendment. However, this is not true for advertising and other forms of commercial speech that are
used to sell a product or service. Nike has argued that its public relations activities defending its labor
practices and working conditions, which have included the issuing of press releases and writing letters
to colleges faced with student activists calling for the boycott of Nike products, are not the same as
advertising and cannot be considered commercial in nature. However, the California Supreme Court
ruled that if Nike could misrepresent the conditions under which its shoes are made without any
punishment through its public relations efforts, then any company could use the First Amendment to
make false statements about its products or practices with the intent of increasing sales. It is
important to note that the California Supreme Court did not decide whether Nike really was guilty of
abusing workers or misleading consumers, leaving these issues for an eventual trial court.
If the U.S. Supreme Court upholds the decision of the California high court, this will have a major
impact on the public relations function of companies marketing communication programs. The
outcome could alter the definition of commercial speech and lead to new restrictions on claims that
companies can make about their policies, practices and behavior. Treating press releases, letters, and
other public statements defending a company’s actions as equivalent to advertising could also result
in companies being less willing to speak out on important public issues and have a profound impact
on their public relations activities.
5. IMC Perspective 21-2 discusses the legal battle between Pizza Hut and Papa John’s over the latter’s
use of the tagline “Better Ingredients. Better Pizza.” Which company do you side with in this
controversy and why?
The battle between Pizza Hut and Papa John’s involved whether the latter’s use of this tag line in a
comparative context could be considered puffery. Puffery has been defined as “advertising or other
sales presentations which praise the item to be sold with subjective opinions, superlatives, or
exaggerations, vaguely and generally, stating no specific facts.” Defenders of puffery argue that it
represents a form of “poetic license” or allowable exaggeration and does no harm as consumers can
recognize it and do not really believe the claims. However, critics of puffery argue that consumers
cannot distinguish between puffery and verifiable, fact-based claims.
Papa John’s began using the “Better Ingredients. Better Pizza” tagline in its advertising in 1995 and
argued that the claim was defensible since general superiority claims constitute puffery. However, in
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1997 the ads made specific mention of Pizza Hut which the court ruled created a context that no
longer qualified as puffery. Pizza Hut filed suit arguing that the commercial was false and misleading
as defined by the Lanham Act since an obvious comparison was being made. The courts ruled in
favor of Pizza Hut arguing that Papa Johns had failed to prove the superiority of its tomato sauce and
pizza dough. However, the appeals court ruled that the tagline was legally acceptable puffery since
Pizza Hut could not prove that the misrepresentation was “material” and had a negative effect on
consumers’ purchase behavior. Pizza Hut appealed the ruling to the US Supreme Court arguing that
the lower courts had required an unusually high standard of evidence to prove that consumers had
been misled by Papa John’s advertising claim.
You might ask your students whether they think advertisers should be permitted to make claims that
they cannot substantiate and defend them as puffery. Critics of puffery argue that its use burdens
consumers with untrue beliefs and has a negative effect on their purchase decisions. The argument
over puffery concerns how much latitude advertisers should be given in their use of superlatives and
subjective claims. One could take the position that puffery may make advertising more interesting;
however, it may also have the capacity to mislead consumers.
6. What is meant by advertising substantiation? Should advertisers be required to substantiate their
claims before running an ad or should they be required to provide documentation only if their
advertising claims are challenged?
Advertising substantiation is a FTC program which requires advertisers to have supporting
documentation for their claims and to be able to prove that they are truthful before running their ads.
It can be argued that advertisers should be required to substantiate their claims before running an ad
so that they have a reasonable basis for making the claim. Prior substantiation provides consumers
with a basis for believing advertising claims such that they can make rational and informed decisions
and also deters companies from making claims that they cannot adequately substantiate. Opponents of
prior substantiation argue that it is too expensive to have a company document all of their claims and
that most consumers would not be interested in the technical data and evidence used to substantiate
them. Requiring formal, prior substantiation might also result in advertisers resorting in puffery rather
than making specific performance or efficacy claims.
7.
Discuss the Lanham Act and how it affects advertising. What elements are necessary to win a false
advertising claim under the Lanham Act?
The Lanham Act is a very important piece of legislation as it provides companies with a basis for
suing competitors for making false or misleading advertising claims. The Lanham Act makes it
possible for a company to take civil action against a competitor who might be engaging in deceptive
advertising rather than relying on self-regulatory or governmental remedies to deal with the problem.
Comparative advertising is most likely to be affected by the Lanham Act as this law deals with
advertising claims that misrepresent the nature, characteristics or qualities of either the advertiser’s or
the competitor’s products or service. Comparative ads are most prone to litigation under this act since
they involve direct claims or comparisons of one company’s product or service against another.
To win a false advertising lawsuit under the Lanham Act the plaintiff must prove that false statements
have been made about the advertiser’s product or your product; the ads actually deceived or had the
tendency to deceive a substantial segment of the audience; the deception was material or meaningful
and is likely to influence purchasing decisions, the falsely advertised product or service is sold in
interstate commerce; and you have been or likely will be injured as a result of the false statements,
either by loss of sales or loss of goodwill.
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8. IMC Perspective 21-3 discusses the debate over direct-to-consumer advertising. Do you agree with
the decision by the Food and Drug Administration to issue new guidelines making it easier for
pharmaceutical companies to advertise prescription drugs on television as well as in print media?
In 1997, the Food and Drug Administration (FDA) issued new guidelines making it easier for
pharmaceutical companies to advertise their prescription drugs directly to consumers. Reasons given
for easing the restrictions are that increased advertising will help educate consumers by providing
them with more information about their options and encourage people to see doctors about
medications who might not have done so otherwise. However, physician, consumer, and health
groups who question whether the ads will be accurate and whether they will inform consumers of the
risks associated with taking these drugs have raised concern over the increase in drug advertising.
Critics argue that much of the advertising done by pharmaceutical companies only show the benefits
of taking a drug and that the disclaimers and cautionary voiceovers are not sufficient in getting
consumers to research the potential side effects associated with many drugs. Insurance companies
and employers who pay for medical coverage of their employees have also raised concern over the
increase in prescription drug advertising. They argue that the ads will drive up the costs of health
care since advertising is expensive and is added to the costs of drugs and encourages consumers to
request higher-cost brand names rather than less expensive generic alternatives.
9. The Federal Trade Commission is in the process of developing a national “do-not-call” registry.
Discuss how this registry will impact the direct marketing industry. What arguments might direct
marketers use in trying to prevent the implementation of such as program?
Congress approved the FTC’s proposal for the formation of a nation “do-not-call” registry in
February 2003 and this program is supposed to go into effect in by October 2003. Marketers face
penalties of $11,000 per incident for calling someone on the list. When implemented, the registry will
have a major impact on the direct marketing industry as it will greatly reduce the number of
households that telemarketers can call. Predictions are that as over half of the residential phone
subscribers in America's 105 million households will sign up for a national do-not-call registry.
However, the new federal rules do not cover telemarketing activities that occur within a state and,
thus, do not involve interstate commerce. Many states now have their own “do-not-call” registries and
these will continue to be important to protect consumers from unwanted calls originating from
companies doing business within the state where they reside.
The primary arguments direct marketers can use in trying to implement this program is that it violates
their First Amendment rights and that such a program is not needed. The Direct Marketing
Association, which is the primary trade group for the direct marketing industry, has argued that
consumers already have a number of do-not-call options. They can already ask to be excluded from
an individual company's telemarketing list at the same time they can sign up with state lists or pay $5
to sign up on the voluntary national list maintained by the Direct Marketing Association. The DMA
argues that the national registry will impose more bureaucracy on the direct marketing industry and
that the industry that the same goal can be achieved by the industry itself with better education and
enforcement. The Direct Marketers Association and the American Teleservices Association, which
represents callers, each has separately sued the Federal Trade Commission over its "do not call"
telemarketing rules. The DMA's lawsuit contends the FTC has overstepped its legal authority to
prevent fraud by attempting to ban legitimate telemarketing, and that its action also violates
marketers' First Amendment rights at free speech. The American Teleservices Association, which
represents callers, made similar claims in its suit.
10. What are the major areas of concern with regard to marketing on the Internet? Evaluate the steps
being taken to address these concerns?
Marketing on the Internet is not yet subject to any formal government regulations as Internet industry
leaders have encouraged the FTC to allow the industry to regulate itself. However, the Federal Trade
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Commission has been active in the regulation of fraud and misleading advertising though this new
medium. The FTC has noted that the same laws that protect consumers when they shop by mail or
phone apply when shopping online. The two major areas of concern with regard to marketing on the
Internet are privacy issues and online marketing to children. With regard to privacy, several consumer
groups have proposed significant restrictions in the way marketers can use the Internet to get
information from consumers, the types of information they can get and what they can do with this
information. The major privacy issues involving the Internet that has emerged recently involves
undisclosed profiling whereby Internet marketers can profile a user on the basis of name, address,
demographics and online/offline purchasing data. In response to this controversy 10 companies that
collect data joined forces under the banner of the Network Advertising Initiative and announced plans
to develop a self-regulatory code that will require websites to disclose their use of ad servers and
permit consumers to opt out of data collection that could be used for profiling.
The second major area of concern with regard to marketing on the Internet involves placing
restrictions on marketers whose activities or websites are targeted at children. A number of children’s
advocacy groups have been critical of online marketing to children. Their concerns led to the passage
of the Children’s Online Privacy Protection Act of 1998, which the FTC began enforcing in March
2000. This act places tight restrictions on collecting information from children via the Internet and
requires that websites directed at children and young teen have a privacy policy posted on their home
page and areas of the site where information is collected.
Additional Discussion Question (not in text)
11. Discuss the pros and cons of self-regulation of advertising through organizations such as the
NAD/NARB. What are the incentives of advertisers to cooperate with self-regulatory bodies?
For many years the advertising industry, business community, and the media have promoted the use
of voluntary self-regulation as a means of regulating and controlling advertising. These organizations
recognize the importance of maintaining consumer trust and confidence and for advertising to be
perceived as truthful and non-offensive. It can be argued that self-regulation has resulted in
advertising standards and practices that are higher than those imposed by law. On the other hand,
critics of self-regulation argue that it is self-serving to the advertisers and advertising industry as
groups such as the NAD/NARB lack the power and authority to properly regulate and control
advertising. These agencies do not have the staff or budget to investigate cases and it takes them too
long to resolve them.
The incentive for advertisers to cooperate with self-regulatory bodies is based on several factors.
First, it is in the best interest of all advertisers to maintain consumer trust and interest in advertising.
Peer group pressure and sanctions may also provide an incentive to cooperate with self-regulation.
Finally, most advertisers view self-regulation as preferable to government interference and control
over advertising as the latter may result in more stringent and troublesome regulations.
12. Although it is legal, do you think advertising by professionals, such as doctors, lawyers, and dentists
is ethical? Defend your position.
Students should be asked to take a position on advertising by professionals. Those in favor argue that
in addition to having a First Amendment right to advertise, it is beneficial for consumers to see
professional advertising and be aware of the availability of these services. They also argue that
professional associations are critical of advertising because they are concerned that it may lead to
lower prices. Critics argue that decisions regarding the choice of a doctor, lawyer or dentist should
not be made on the basis of advertising. They are also very concerned that advertising can hurt the
image of their professions.
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13. Discuss the three essential elements to the definition of deception adopted by the Federal Trade
Commission in 1983.
In 1983 the FTC put forth a new definition of deception which states that “the commission will find
deception if there is a misrepresentation, omission, or practice that is likely to mislead the consumer
acting reasonably in the circumstances to the consumer’s detriment. The first element in this
definition is that the representation, omission or practice must be likely to mislead the consumer. The
second element is that the act or practice must be considered from the perspective of the reasonable
consumer. In determining reasonableness the FTC considers the group to which the advertising is
targeted and factors such as their age, education level, intellectual capacity and frame of mind. The
third element to the FTC’s definition is materiality, which means that the misrepresentation or
practice is one that is likely to affect a consumer’s choice or conduct with regard to a product or
service. This means that the information, claim, or practice in question is important to consumers, and
if acted upon, would be likely to influence their purchase decision.
14. What is corrective advertising? Why do you think corrective advertising is so controversial? Evaluate
the arguments for and against corrective advertising?
Corrective advertising is a Federal Trade Commission program whereby and advertiser found guilty
of deceptive advertising can be required to run additional ads designed to remedy the deception
resulting from consumer exposure to the previous ads. The purpose of corrective advertising is to
remedy the misinformation, incorrect beliefs or perceptions that consumers may have developed as a
result of deceptive or misleading advertising. Corrective advertising is also designed to help restore
competition to the stage which prevailed before the deceptive advertising occurred. The FTC can
determine the extent of corrective advertising effort required of an advertiser by considering the
length of time for which the deceptive ads were run and the extent to which the market holds
misperceptions or incorrect beliefs as a result of the deceptive ads. Consumer research may be needed
to determine the prevalence of the misperceptions in the market, their impact on purchase behavior
and how strongly these false beliefs are held. With respect to media in which corrective ads should
appear, the FTC should consider the media which the advertiser used in running the deceptive ads and
require that corrective ads be run in these vehicles.
Corrective advertising is very controversial because advertisers feel that they feel it is a drastic
remedy that infringes on First Amendment right of freedom of speech by requiring them to run the
corrective messages. They argue that corrective advertising puts the FTC in the business of creating
ads when they require particular content in corrective messages. Moreover, the monies that must be
spent to run corrective messages comes out of the advertisers media budgets and means they have less
funds available for messages promoting their brands. They also question whether corrective messages
are effective.
15. Discuss the FTC definition of unfairness. Why do you think there has been so much opposition to
having the FTC use unfairness as a legal foundation for regulating advertising?
According to the Federal Trade Commission policy, the basis for determining unfairness is that a
trade practice (a) causes substantial physical or economic injury to consumers, (b) could not
reasonably be avoided by consumers, and (c) must not be outweighed by countervailing benefits to
consumers or competition. Practices considered unfair are claims made without prior substantiation,
claims that might exploit such vulnerable groups as children and the elderly, and instances where
consumers cannot make a valid choice because the advertiser omits important information about the
product or competing products mentioned in the ad.
There has been considerable controversy to having the FTC use unfairness as a legal foundation for
regulating advertising because the commission has been vague over the meaning of the concept of
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unfairness. Advertisers feel that it is not always clear whether their ads constitute an unfair practice
and they are hoping for a more precise definition from the FTC.
16. Campbell Soup was accused of running deceptive ads in the early ‘90s, not because of any claims it
makes for the product, but rather because its advertising did not warn consumers that Campbell soups
are high in sodium. Do you feel that advertisers should be found guilty of deceptive advertising for
what they do not say, or should their responsibility be limited to the claims they do make?
This question deals with the issue of what should constitute deceptive advertising. The question here
is whether the Campbell’s soup ads are deceptive not for what they said, but rather for their failure to
disclose information that might undermine or refute the specific claim they made.
The position of the FTC is not that all nutritional information must be disclosed but that information
that would refute a given claim should be noted. While the Campbell’s claim that its soups are low in
fat and cholesterol, and thus helpful in fighting heart disease, are true, one must ask whether the high
sodium content of the product offsets these attributes. A consumer with full knowledge of all the
information, including sodium content, might draw a different conclusion about the ability of these
soups to fight heart disease.
17. Discuss the various rules and regulations that affect the use of IMC tools such as sales promotion and
direct marketing. Do these promotional areas require as much regulatory attention as advertising?
Why or why not?
Both consumer and trade-oriented promotions are subject to various regulations. Consumer-oriented
promotions such as contests and sweepstakes must adhere to certain guidelines so as to not be
classified as a lottery, which is considered a form of gambling and violates federal and state laws.
Contests, games and sweepstakes must also meet various disclosure requirements. Trade-oriented
promotions such as trade discounts and allowances as well as vertical cooperative advertising are
governed by the Robinson-Patman act, which deals with price discrimination.
Direct marketing is also subject to various rules and regulations from the Federal Trade Commission
as well as the United States Postal Service. These regulations are designed to ensure that direct
response ads are not deceptive or misleading or misrepresent the product or service being offered.
Laws also forbid sending unordered merchandise to consumers and the use of option plans whereby a
company proposes to send merchandise to consumers and expects payment unless a notice of
cancellation or rejection is sent by the consumer. The FTC also has rules requiring direct marketers to
promptly ship merchandise that has been ordered.
These areas do require regulatory attention since they are becoming as prevalent as advertising and
can actually be more damaging to consumers in terms of economic loss. For example, many small
companies use direct marketing as the basis for selling and distributing their products and they require
careful regulation.
IMC Exercise
Contact a trade or industry association or go to the web site of an industry whose advertising or marketing
practices are prone to controversy such as the Direct Marketing Association (www.the-dma.org), the
Wine Institute (www.wineinstitute.org), the Distilled Spirits Council (www.discus.org), or the Beer
Institute (www.beerinstitute.org). Request or find a copy of the advertising and marketing guidelines or
codes that the member companies are expected to abide by from the association. Review and evaluate the
industry association’s advertising guidelines. Do you think their voluntary regulations and guidelines are
adequate? What could be done to improve the industry’s advertising code or guidelines?
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