FILE: TAB #4, FALSE, UNFAIR, DECEPTIVE, ARTICLE #190

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1 FILE: TAB #4, FALSE, NFAIR, DECEPTIVE, ARTICLE #190 o~ Page 1 of 8 ~ SHOLD MEDIA ~ OTLETS BE HELD LIABLE FOR ~ DECEPTIVE ~ ADVERTISING by Randal M. Shaheen* FTC's STAFF REPORT Nea the end of 2002, FTC issued a Staff Repot entitled "Weight Loss Advetising: An Analysis of Cuent Tends." The Repot concludes that despite unpecedented FTC enfocement activity, the use of false o misleading claims in weight loss advetising is ampant. The Repot also notes the potential effectiveness of media sceening standads in educing the amount of blatantly deceptive advetising and encouages inceasing adoption of such standads, notwithstanding the failue of past such effots by FTC. Although the Repot stopped shot of calling upon the Commission to hold media outlets that fail to execise such sceening legally esponsible, at least one Commissione at the time seemed to be suggesting such a position. COMMISSION LETTER ALERTED MAJOR RETAIL CHAIl~TS OF POTENTIAL LIABILITY In a speech in the sping of 2002, fome FTC Commissione Sheila F. Anthony noted that "all paties who paticipate diectly o indiectly in the maketing of dietay supplements have an obligation to make sue that the claims ae pesented tuthfully." She also noted that the Commission had sent a lette to majo etail chains caying a paticula supplement, aleting them to thei potential liability if they paticipated in deceptive maketing. ("Combating Deception in Dietay Supplement Advetising, Apil 16, In a moe ecent aticle, fome Commissione Anthony again called on the media to take on a moe esponsible ole. She noted that the FTC staff was developing a list of potentially false diet claims that should make it easy fo media outlets to sceen out obviously false ads. She concluded, athe ominously, by stating that the Fist Amendment does not potect faud. ("Let's clea up thediet-ad mess: But the Fedeal Tade Commission needs help and it's looking to get it fom Media" Advetising Age, Feb. 3, 2003, p.18) It may well be that the Commission is simply tying to cajole a eluctant media into voluntaily playing a lage ole in ad sceening by waning of possible civil liability. Howeve, to the extent that the Commission seiously intends to pusue such a couse, it is embaking upon a policy that is neithe legally sound no socially desiable. ~ Copyight 2004 JI,Com Publishing Co., I,.L.C. All ights eseved. Phis publication, pemission of JI.Com Publishing Co., L.L.C. *Randal M. Shaheen is a Counsel with the Washington, D.C. law fim Anold & Pote. M. Shaheen is a 1985 magna cum laude gaduate of Havad Law School. He is counsel with the law fim of Anold &Pote and is located in thei Washington D.C. office. He has advised clients in the consume potection aea fo almost 20 yeas. His pimay aeas of pactice include antitust and consume potection. A pio vesion of this aticle appeaed in the July 11, 2003 ~a1 Backgounde.

2 ~~ FILE: TAB #4, FALSE, itnfair, DECEPTIVE, ARTICLE #190 Page 2 of 8 HISTORY OF FTC REGLATION OF PARTIES OTI-~R THAN ADVERTISERS FTC's Authoity as to Deceptive Advetising Rests Pimaily in Section S of The FICAct FTC's authoity with espect to deceptive advetising ests pimaily in Section 5 of the Fedeal Tade Commission Act, which pohibits "unfai o deceptive acts o pactices in commece." See 15.S.C. Section 45(a)(1). Initially, FTC took a naow view of who could violate Section 5. In its 1949 decision in Bistol-Myes, 46 FTC 162 (1949), the Commission found Bistol-Myes had falsely epesented the esults of a suvey of dentists on toothpaste usage. With espect to the advetising agencies, although they admittedly paticipated in the ceation of the advetisements, the Commission dismissed the complaint "in 1i~e execise of its sound discetion": "[A]lthough these espondents paticipated in the dissemination of the advetising found to be false o misleading, they at all times acted unde the diection and contol of espondent Bistol-Myes Co., thei employe, with whom ested the final authoity and esponsibility fo such advetising, and fo the futhe eason that the pactices found to be against the public inteest will be stopped by the ode to cease and desist issued against Bistol-Myes Co." (Bistol-Mves, 46 FTC 176.) By atleast 1960, FTC Was Enteing Into Consent Odes With Ad Agencies FTC's position in Bistol-Myes was. elatively shot lived. By at least 1960, FTC was enteing into consent odes with advetising agencies. See, e.g., Standazd Bands. Inc., 56 FTC 1491 (1960). In 1961 an agency litigated and lost on the issue of its liability. See Colgate Palmolive Co., 59 FTC 1452 (1961). In Cow the deception elated to a pupoted demonstation of shaving ceam being shaved off sandpape, when in actuality Ple~glas was used. The agency, Ted Bates, not supisingly agued that it should not be held esponsible because it had acted as the "agent" of Colgate in pepaing the ads. 'The Commission, howeve, without so much as a nod towads its ealie pecedent, called Bates' contention "cuious." The Commission sta#ed "[w]e know of no doctine that penuts one to evade liability fo acions fo which he is as diectly esponsible as this, egadless of whethe be acted solely in his own inteest o also fo the benefit of anothe." Col ate Palmolive Co., 59 FTC at 1471.) On appeal, the.s. Cout of Appeals fo the 8 Copyight 2004 JLCom Publishing Co., pemission of JLCom Publishing Co., L.L.C. JLCom Publishing Co., L.L.C., 26 Hawthon Dive, Roxbuy, NJ 0787C2112. Phone (Toll fee):

3 FILE: TAB #4, FALSE, NFAIR, DECEPTIVE, ARTICLE #190.~ L 11 ~ 0.~ Page 3 of 8 Fist Cicuit expessed some misgivings about the agency's liability but concluded that "[w]hee, as hee, the Commission was waanted in finding that the advetising agency was an active, if not the pime, move, we could not say that the Commission lacked eithe juisdiction o discetion." (Collate-Palmolive Co. v. FTC, 310 F.2d 92 (1st Ci. 1962). The Cout, howeve, emanded the case to the Commission fo futhe claification. (Collate-Palmolive Co. v. FTC, 310 F.2d 89, 92, 95 (lst Ci. 1962).) On emand, the Commission found that Bates oiginated the advetisement and knew that the poduct could not pefom as claimed. FTC concluded that this was not a case whee the ad agency was "wholly without knowledge" o "any suspicion of the falsity of the claim" Colgate, 62 FTC at J L ti Q "[I]t would be stange indeed if Bates, as the moving paty in oiginating, pepaing and publishing the commecial, and having full knowledge not only that the claim was false but that the "poof' offeed to the public to suppot it was a sham, should be elieved fom esponsibility." (Id.) On appeal again befoe the Fist Cicuit, the Cout affimed, stating that [w]e see no eason why advetising agencies, which ae now big business, should be able to shik fom at least pima facie esponsibility fo conduct in which they paticipate." (Colgate-Palmolive Co. v. FTC, 326 F.2d 517, (1st Ci. 1963).) FTC: Ad Agencies Have Affimative Duty to Investigate Veacity ofa Claim The "wholly without knowledge o any suspicion of the falsity" standad lasted fo a decade. In 1973, in ITT Continental Baking Co., 83 FTC 865 (1973), it was Ted Bates again who agued that it should not be liable because it neithe knew no had eason to know that the claims wee false. ITT Continental Baking Co, 83 FTC at 968.) The Commission, howeve, held that advetising agencies have an ~mative duty to investigate the veacity of a claim: "nless advetising agencies wee unde a duty to make independent checks of infomation elied upon to fame thei advetising claims, the law would be placing a pemium on ignoance." (TI'T Continental Baking Co., 83 FTC at 969.) This emains the law today. An advetising agency may beheld esponsible fo deceptive advetising whee the agency actively paticipated in the ~ Copyight 2004 JI,Com Publishing Co., system, o tansmitted in any fon o by any means whatsoeve without fhe pio witten pemission of JLCom Publishing Co., L.L.C. This publicafion is not intended to povide legal advice. Pesons who need legal sevices should contact a

4 FILE: TAB #4, FALSE, NFAIR, DECEPTIVE, ARTICLE #190.~ ~~ ~ ~ 2 C 0,~.~ ~~ Q Page 4 of 8 ceation of the advetisement and knew o should have known that the advetisement was false. (The Commission, howeve, has ecognized that advetising agencies ae not well equipped to assess the eliability of scientific o technical studies as opposed to what claims an advetisement makes. In the case of technical substantiation, the Commission has equied only that the agency ascetain that the substantiation is facially adequate and not obviously flawed.) FTC Enteed Into Ode With Catalogue Company Ove time, howeve, the Commission has stetched its theoy of advetising agency liability to cove othe actos as well. Fo example, the Commission enteed into an ode with a catalogue company that offeed fo sale poducts manufactued and sold by independent thid paties. In equiing substantiation, the Commission's ode did not distinguish between claims ceated by the catalogue company and claims by the manufactue which the catalogue meely paoted. (See Ri t Stat, 116 FTC 619 (1993).) In addition, the Commission ecently attempted unsuccessfully to hold a celebity endose esponsible fo a poduct's deceptive claims. (See FTC v. Gavev, 2002 WL (C.D. Ca1. Nov. 25, 2002).) ANALYSIS OF POTENTIAL MEDIA OTLET LIABILITY An attempt to hold a media outlet liable fo dissemuiating a deceptive advetisement could be seen as nothing moe than a logical extension of the Ri t Stat consent. If a catalogue company can beheld esponsible fo doing nothing moe than epublishing claims disseminated by a manufactue, then why not a media outlet fo disseminating the same claims? Although only the catalogue company is diectly selling a poduct to the consume, both companies pofit fom the claim's dissemination. But is thee a legal basis to hold the media outlet esponsible? Past Commission and cout pecedents suggest not. While a media outlet aguably might know o should have known that a weight loss ad was deceptive, what has happened to the active paticipation standad that the cowls and Commission have fashioned? Fa example, in an appeal of an ode enteed against an advetising agency, the Fifth Cicuit stated: "Is one caying out the will of anothe to be held esponsible fo the esults of his actions? It appeas to us that the pope citeion fo deciding this question should be the e~tent to which the advetising D Copyight 2004 JL.Com Publislung Co., pemission of JLCom Publishing Co., L.L.C. 7LCom Publishing Co., L.L.C., 26 Hawthon Dive, Roxbuy, NJ Phone (Toll fee):

5 ~~,~ FILE: TAB #4, FALSE, NFAIR, DECEPTIVE, ARTICLE #190 Page 5 of 8 ~ ~L 0 ~.~.~ Q agency actually paticipated in the deception." (Cate Poducts, Inc. v. FTC, 323 F.2d 523, 534 (5th Ci. 1963) (upholding liability because agency developed the maketing concept.)) SIXTH CIlZCIT PHELD AN AGENCY's LIABILITY In anothe agency appeal, the Smith Cicuit upheld an agency's liability based upon a showing that the agency had offeed geneal maketing consultation, fomulated advetising plans and oiginated the advetising ideas. Dohe Cliffod Stees & Shenfield Inc v. FTC, 392 F.2d 921, 928 (6th Ci, 1968).) Based upon these pecedents, in what way has a media outlet paticipated in ceating the deceptive epesentations? Futhe, if the active paticipation standad is to be swept aside then why stop at holding media outlets liable? Any company that pofits fom and facilitates the sale of the poduct could beheld esponsible. What about the company that pints the advetisement, the one that manufactues the poduct, the etailes that sell it o in the case of magazine advetisements, the nited States Post Office that delives the magazine o flye to consumes' doos. Any of these entities could have looked at the advetising mateial and known that the claims must be false. How many diffeent paties must a manufactue satisfy befoe its advetisement finds it way into the hands of consumes? Finally, why stop at advetising? Couldn't othe paties involved in the advetising and sale of a poduct be held to have an obligation to at least facially exploe whethe thee ae othe poblems with the poduct fo sample, safety poblems. Even if the legal poblems associated with media outlet liability wee not insumountable, thee ae sound policy easons why the Commission should not Mend liability in this fashion. Fist, an FTC ode the violation of which may esult in substantial civil penalties which is enteed against a media outlet theatens to have a dispopotionately geate competitive impact than one enteed against an advetise. An advetise's ode affects only how it makets and pomotes its own poducts. Howeve, a media outlet ode would likely apply to advetisements fo poducts sold by numeous manufactues. Advetises may avoid a media outlet unde an FTC ode, in favo of its competitos, so as to avoid the exta scutiny its ads may eceive fom a media outlet feaful of civil penalties. Futhe, the media outlet may unnecessaily eject ~ Copyight 2004 JI,Com Publishing Co., pemission of 7I.Com Publishing Co., L.L.C. 'Ibis publication is not intended to povide legal advice. Pesons who need legal sevices should contact a

6 FILE: TAB #4, FALSE, NFAIR, DECEPTIVE, ARTICLE #190 Page 6 of 8 advetising, losing the advetises to its competitas, because it feels the need to be cautious in evaluating the substantiation of claims fo poducts manufactued and sold by a thid paty. POTENTIAL COMPETITIVE PROBLEMS The potential competitive poblems do not stop thee. FTC odes typically contain a povision equiing peiodic submission of compliance epots. These epots must demonstate that the espondent is in compliance with the ode and usually povide documentation sufficient fo the FTC staff to scutinize advetisements coveed by the ode that wee disseminated duing the compliance peiod. Advetises may be undestandably leey of placing ads with a media outlet whee they may become pat of a compliance epot to FTC. FTC STAFF WAS PREPARING LIST OF NSPPORTABLE WEIGHT LOSS CLAIMS Fome Commissione Anthony's aticle peviewed the fact that the FTC staff was pepaing a list of unsuppotable weight loss claims. In Decembe of last yea, the FTC eleased a media guide on weight loss claims "Red Flag Bogus Weight Loss Claims: A Refeence Guide fo the Media on Bogus Weight Loss Claim Detection." FTC, howeve, stopped shot of equiing media outlets to eject advetisements containing one of the ed flags, settling only fo encouaging them to do so. Fa the easons stated above, FTC did well to eject the temptation of equiing media outlets to follow the Guide. Publishing a list is no answe to the legal question as to whethe media outlets have sufficient culpability to be held esponsible fo deceptive advetising. No does it eally make the poblem of decipheing substantiation any easie. Suely the unscupulous advetises FTC is lagely woied about ae sophisticated enough to stay clea of any FTC list. A claim can be modified slightly o an additional "active" ingedient included such that the poduct o its claims no longe match pecisely with its countepat on the FTC list. Fo sample, athe than make a "ed flag" claim of two pounds o moe of weight loss pe week without diet o execise, a company can make a two pounds pe week weight loss claim with only five minutes of execise once a week. Media outlets would once again be left to fend fo themselves with espect to claims o clinical testing substantiation. Futhe, the list concept sounds stikingly simila to a pio estaint. Afte all, if media outlets, unde pain of sanction, ae told not to disseminate cetain advetisements, they ae unlikely to be ciculated. This is a fa moe sevee 8 Copyight 2004 JI,Com Publishing Co., pemission of JI,Com Publishing Co., L.L.C. Subsciption and Editgial Inquiies:

7 FILE: TAB #4, FALSE, NFAIR, DECEPTIVE, ARTICLE #190 Page 7 of 8 sanction than that which FTC typically imposes on advekises. An advetise odinaily is pohibited fom making cetain epesentations unless those epesentations can be substantiated. Thus, the advetise is fee to continue advetising, but subject to penalties if it lacks adequate substantiation. Suppose that in the wold fome Commissione Anthony posits an advetise comes up with new substantiation fo a poduct o claim on FTC's blacklist. It may be legitimate o it may not, but how does that issue get esolved? Even if a media outlet had the sophistication to eview the substantiation, it would do no good to pesent it to them. A.s long as the poduct emained on the FTC list the media outlet dae not un the claim. Possibly the advetise could pesent the new substantiation to FTC in the hope of being emoved fom the list but thee is no specific mechanism fo this at pesent o any assuances that such a eview would take place in a imely manne. In shot, the poposed use of a "black list" is potentially a fa geate estaint than any cuently used by FTC. CONCLSION No one can dispute that deceptive weight loss claims ae ampant, and FTC's goal of educing thei numbe is laudable. Having successfully ecuited advetising agencies, and to a lesse e~tent, the television netwoks, to the ole of pivate policeman, it is seductively tempting to deputize even moe paties. Doing so though voluntay encouagement is pefectly appopiate. Indeed, FTC ecently pevailed in a cout challenge to its authoity to send etailes a lette infoming them of a ecent consent ode against a poduct they caied. Ceative solutions like this, as well as the ecent voluntay Media Guide on weight loss claims should be exploed and encouaged. Haweve, expanding the scope of those who can beheld liable fo deceptive advetising is not the answe. Such a solution would face substantial legal hudles as well as aising a numbe of significant policy issues. LAWYER'S REFERENCE SERVICE Bistol-M~, 46 FTC 162 (1949). FTC Decisions Colgate Palmolive Co., 59 FTC 1452 (1961). ITT Continental Bakin~Co., 83 FTC 865 (1973). D Copyight 2004 JL.Com Publishing Co., system, o tansmitted in any foan o by any pemission of JI,Com Publishing Co., L.L.C. Subsciption and Editoial Ingwies:

8 # # # FILE: TAB #4, FALSE, NFAIR, DECEPTIVE, ARTICLE #190 Page 8 of 8 Ri t Stat, 116 FTC 619 (1993). Standad Bands. Inc., 56 FTC 1491 (1960). Cout Cases Cate Poducts. Inc. v. FTC, 323 F.2d 523, 534 (5th Ci. 1963) (upholding Dohety, Cliffod, Stees &Shield. Inc. v. FTC, 392 F.2d 921, 928 (6th Ci, 1968).) Colgate-Palmolive Co. v. FTC, 310 F.2d 89, 92, 95 (1st Ci. 1962). Colgate-Palmolive Co. v. FTC, 326 F.2d 517, (1st Ci. 1963). FTC v. Gavev, 2002 WL (C.D. Ca1. Nov. 25, 2002). FTC Sta, ffrepot "Weight Loss Advetising: An Analysis of Cuent Tends." [FTC Staff Repot, Issued 2002.] Speech "Combating Deception in Dietay Supplement Advetising," [Speech by fome FTC Commissione Sheila F. Anthony, Apil 16, 2002.] See Aticle "Let's clea up the diet-ad mess: But the Fedeal Tade Counission needs help and it's looking to get it fom Media," by fome FTC Commissione Sheila F. Anthony, Advetising Age, Feb. 3, 2003, p.18 D Copyight 2004 JL,Com Publis3ing Co., pemission of JI,Com Publishing Co., L.L.C. (888) Intenet: lawpublish@aol.wm.