April 17, 2019 | By: Oliver Herzfeld and Ronald Crane

Marketing Architects, Inc., an agency that produced advertising with unsubstantiated claims for weight-loss products, has recently settled a joint complaint brought by the Federal Trade Commission and the State of Maine. As part of the settlement, Marketing Architects agreed to pay $2 million to the FTC and to the State of Maine Attorney General’s Office. The judgment represents the largest fine ever imposed by the FTC against an ad agency. The complaint accused Marketing Architects of pitching diet products with a host of allegedly misleading claims and practices and cited a history of creating similar unsubstantiated claims for other weight-loss marketers.

According to the complaint, Marketing Architects was previously made aware of the need to have competent and reliable evidence to back up claims in the advertising it created and disseminated. Among other things, the complaint alleged that Marketing Architects received documents from its client indicating that some of the weight-loss claims required scientific substantiation. Apparently, Marketing Architects ignored this legal requirement. In addition to the unsubstantiated claims, Marketing Associates was accused of disguising its ads as news, presenting consumer testimonials in which both the consumers and results were fictitious and engaging in other violations of the laws governing advertising claims.

The unprecedented size of the settlement was, in part, a result of Marketing Architects being charged with actual knowledge that its advertising was misleading. In particular, when FTC counsel raised concerns regarding the claims, Marketing Associates neither had any substantiation in its files nor was it aware that any substantiation existed. In addition, Marketing Associates was involved in a prior settlement with the FTC on similar issues relating to another client.

The foregoing were all deemed aggravating factors in determining the amount of the settlement. While this case is an extreme example, it nevertheless illustrates several common bases for liability.

FTC Act Claims of Unfair or Deceptive Trade Practices

The U.S. Federal Trade Commission Act prohibits unfair or deceptive trade practices affecting commerce. In practice, this prohibition requires that ad agencies maintain in their possession substantiation for all express and implied claims prior to any advertising being disseminated. Legal approval by a client's law department does not relieve the ad agency of its independent obligation to review and approve the adequacy of the substantiation. In addition to fines, a finding of unfair and/or deceptive advertising can result in a consent decree against the ad agency relating to a particular client or all of its clients, present or future, for a specified period of time, with potential future reporting requirements to the FTC. A client cannot indemnify the ad agency against a consent decree, which can have a chilling effect on all of the agency’s client relationships and on new business prospects.

Competitors can bring claims for false or misleading advertising under the U.S. Trademark Act. Although the Trademark Act is often thought of as solely a trademark statute, it also protects businesses against the unfair competition of misleading advertising or labeling. A plaintiff that prevails on a Trademark Act claim can obtain an injunction against false or misleading advertising, as well as damages and, in certain cases, attorneys’ fees.

Claims by State Attorneys General

False and/or misleading advertising can also result in a separate action being brought by one or more of the 50 states attorneys general, independently or in conjunction with other states attorneys general, based upon state equivalents of the FTC Act. When such an action or multiple actions are brought, the costs to defend, and the potential penalties, can be very significant. It is anticipated that 2019 will be a very aggressive year for such actions in part due to politics. States attorneys general are more political today. They are lawyers and prosecutors but also politicians and, many today have come up through the political system. The position of Attorney General can often be a stepping stone for greater political ambitions. In 2018, approximately 10 sitting state attorneys general ran for governor or Congress. High profile cases that garner press and public interest can be beneficial for an attorney general with aspirations or intentions to run for higher office.

Legal Review of Advertising To Avoid Claims

Ideally all advertising should be reviewed by legal counsel prior to being presented to a client, with all anticipated required substantiation duly-noted. It is not sufficient to rely on a client’s legal department’s approval of claims. The agency must review and satisfy itself that the substantiation provided by the client meets legal requirements. Legal review prior to presentation makes it possible to identify to the client the claims that will likely need to be substantiated so the client can advise if such substantiation either exists or can be developed. Additionally, the presentation will provide an opportunity to advise the client as to the availability and anticipated costs to acquire any required third-party intellectual property rights. Early presentation also obviates the need to later “unsell” proposed advertising that cannot be produced either due to claims that cannot be substantiated or the unavailability or cost of required licenses that may be integral to the proposed advertising. A more practical and productive approach may be to engage legal counsel in the process after the client has preliminarily expressed interest in the proposed advertising.

In view of the above, ad agencies should consider routinely having all advertising reviewed by counsel prior to any presentation to the client. In any event, prior to disseminating any advertising, either in-house or outside counsel must review and approve the substantiation. Adopting these practices will help avoid the weight and loss of an FTC action.

Oliver Herzfeld is the Chief Legal Officer at Beanstalk, a leading global brand extension agency and part of the Diversified Agency Services division of Omnicom Group. Follow @oherzfeld

Ronald L. Crane is the Senior Counsel of Advertising, Intellectual Property & Immigration at Omnicom Group.