policy paper final

False Advertising and the Lanham Act

Gerard K. Bahri

University of California, Riverside

Ethics and Law in Business and Society

Dr. Sean Jasso

Shahid Mohammed Section 22

December 9th, 2015

FALSE ADVERTISING AND THE LANHAM ACT

Table of Contents

Introduction ................................................................................................................................... 3

History / Background ................................................................................................................... 3

Implementation ............................................................................................................................. 6

Impact on Business and Society ................................................................................................... 9

The Libertarian Approach ......................................................................................................... 11

The Utilitarian Approach .......................................................................................................... 12

Critical Analysis .......................................................................................................................... 13

Appendix .............................................................................................................................. 16

References ............................................................................................................................ 19

2


Introduction Since the turn of the Twentieth Century, the United States has witnessed a rapid rise in the power

of corporations. These modern powerhouses provide great value for society though their

enhancement of the economy and the unique products and services they create through

specialization. In recent years, corporations have become even deeper entwined into the fabric of

Western society as the services they provide become more and more essential to living a modern

life. The authority that this has developed for them creates the potential for exploitation of the

consumer by taking advantage of their trust and assumption that all big business is legitimate. As

modern business transactions become more streamlined, consumers rely more heavily on

appearances and advertisements to evaluate and decide which products to purchase. Because of

this, “It is often said that we consume the advertising, not the product” (Twitchell, 2000, page 14).

This elevates the power that advertisements have in the consumer decision-making and buying

process. On July 5th, 1946, the federal government of the United States enacted the Lanham Act

to address growing concerns of deceptive advertisements taking advantage of consumers. This

report aims to address the history behind the Lanham Act, specifically the sections that focus on

false advertising. The report then examines how successful the act has been since its

implementation and the impact it has had on American society.

History / Background Communication through advertisements has existed since long before the United States became

its own sovereign nation. Merchants throughout the world have relied on signs, fliers, and

billboards to communicate with potential buyers on what they are selling. As the global economy

grew, there became increasingly more competition from substitute products and services, all trying

to be the ones that customers gave their business to. This propelled advertising into a new era by

forcing sellers to differentiate themselves from one another. With the ever-increasing amount of

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choices in the market, consumers had difficulty remembering the products that were not unique

enough to stand out. Because advertisements are the central communication tool between sellers

and buyers, ads have to be unique and novel in themselves to gain attention for the products or

services they are representing. Similarly, because markets continually grow, consumers have less

and less time and energy for each advertisement they see, making the ability to capture their

attention even more essential to success. In modern society, the internet and social media create

billions of connections for buyers and sellers to communicate. Though it has made reaching out to

consumers easier for companies, it has even further heightened the overexposure of advertisements

the public gets. According to a recent article from SJ Insights, recent studies estimate that

Americans receive over five thousand advertisements and brand exposures per day (Johnson,

2014). This can be anything from viewing television ads to seeing a brand logo on the tee shirt of

a stranger on the bus. Social media is now the most common form of advertising. According to

Figure 1, American adults spend

an average of five hundred and

ninety minutes a day exposed to

media, a number which has almost

doubled since 1945. (Johnson,

2014). Though we are exposed to

many more advertisements, an

average of only twelve make a

lasting engagement that will be remembered later on (Johnson, 2014). This hostile and highly-

competitive environment encourages sellers to do whatever is necessary to capture the attention of

their prospects.

Figure 1

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Though brand communication has skyrocketed in the past few decades, sellers have been

manipulating advertisements to get consumer attention for centuries. Before and throughout the

1800s, there was absolutely no regulation on what could be said in advertisements in the United

States. Swindlers were able to get away with making ridiculous claims about their products in their

ads. For example, an 1800s ad for a machine called a “Wonderful Lung Expander” asserted that

many people were dying from different lung diseases, and the device was the only way to

strengthen ones lungs to prevent contagion (Dick, 1966, page 38). Frequently, sellers capitalized

on the fears and self-conscious emotions of the public to get away with selling miracle products

that ended up not working. An especially impacted industry was the field of medicine and personal

health, which at the time was not very advanced. Thousands of seemingly-magical “cures” were

sold that claimed to fix every kind of illness, from bronchitis to physically ugliness and bad breath

(Dick, 1966, page 41). Because advertising was left up to the creativity of the seller, many

consumers wasted time and money on bogus products, some of which that discouraged them from

seeking actual medical help. For the sake of protecting both consumers and legitimate businesses,

a form of regulation was needed for the advertising industry.

With overwhelming support from consumers and businesses alike, the first attempt at

regulating the ad industry was The Trademark Act of 1870, which was passed by Congress. The

Trademark Act mainly addressed the growing issue of trademark infringement, wherein businesses

sold products and services under the guise of other brands, such as stealing and using popular

names and logos. Fakes capitalized on the hard work that companies put into establishing their

original and authentic products in the marketplace and building the trust in their brands. Though

The Trademark Act of 1870 was a progressive first-step towards eliminating deception in

advertising, it was unsuccessful as a law because it did not give the federal government enough

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regulatory power, and was eventually found to be unconstitutional (Phelps, 2005). In 1898

President McKinley’s administration replaced it with The Trademark Act of 1905. This too was

unsuccessful because its registration system was very limited, its enforcement was weak, and it

failed to address the forms of deception discussed above (Levine, 2010, page 23). Despite The

Trademark Act of 1905’s failure as a form of regulation, attempts of lobbying and reforming the

act were unsuccessful for the next forty years. In 1937, Fritz Lanham, a democrat representative

in the House of Representatives from Texas, drafted a new statute that aimed at correcting the

shortcomings of the previous acts. Despite the opposition of the United States Department of

Justice, the statute “Was greeted with unprecedented fanfare by the business community as the

culmination of more than seventy years of congressional forays into trademark territory” (Levine,

2010, page 22). Titled after its main advocator, the Lanham Act of 1946 addressed both trademark

infringements and false advertising on a national level.

Implementation The Lanham Act was officially enacted on July 5th, 1946 and was signed into law by President

Harry Truman. It was widely accepted by democrats and republicans alike, who both saw the

necessity and value of a stronger regulation on advertising. Restrictions on false advertising protect

consumers from illegitimate products and protects business from unfair competition through

copyright infringement and false advertising. The biggest opposition that the Lanham Act received

was from the Department of Justice. They argued that “Trademarks are monopolistic; that statutory

recognition and protection of trademarks favor big business; that provision should be made to

prevent trademarks from becoming instruments used in violating the antitrust laws; and that

Congress should not establish a register of trademarks that are no more than psychological

sensations and social reactions to symbols” (Levine, 2010, page 26). Despite the opposition, the

Lanham Act passed and was implemented the following year.

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The part of the Lanham Act that most clearly addresses deception in advertising is Section

43, which states that it “Proscribes false statements or representations that are made in commercial

advertising or promotion and are likely to deceive consumers” (Cannady, 2002, page 187).

Specifically, it prohibits the misinterpretation of the qualities, nature, or characteristics of any

goods or services with the intent to confuse or trick consumers. After the act was signed into law,

it was sent to the Federal Trade Commission (FTC) for enforcement. Established in 1914 by

Woodrow Wilson along with the Federal Trade Commission Act, the FTC was created to protect

consumers and businesses alike by preventing deception, fraud, and unfair business practices. The

FTC is responsible for the enforcement of many trademark and copyright laws and acts. It is

composed of three separate bureaus, which are the Bureau of Competition, Consumer Protection,

and Economics. Most false advertising claims go to the Bureau of Consumer Protection, but some

go to the Bureau of Competition because the false advertisements may take away business from

competing products. Though the FTC is in charge of enforcing consumer- and business-protection

laws, they rely on the United States Judicial System to determine legalities. “When the FTC finds

a case of fraud perpetrated on consumers, the agency files actions in federal district court for

immediate and permanent orders to stop scams; prevent fraudsters from perpetrating scams in the

future; freeze their assets; and get compensation for victims” (Federal Trade Commission, n.d.).

The U.S. Judicial System determines the criteria for false advertising claims based on three

separate instances, which are literally false statements, misleading statements, and opinions and

puffery (Cannady, 2002). For literally false statements, the court must decide on two things:

determination of if the claim is false, and if the intent of the claim is to pretend to be true. If the

claim is false in itself, it is usually enough for the court to rule in favor of the plaintiff. An example

of this is the famous court case Coca-Cola Company v. Tropicana Products, Inc. Tropicana

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depicted a visual advertisement of an orange being squeezed and sealed directly into one of their

orange juice bottles. The court referred to the Lanham Act and ruled that this was in fact false

advertising because Tropicana’s orange juice is frozen and made from concentrate rather than

freshly squeezed. Tropicana had to pay reparations to Coca-Cola for the potential business they

took from them by marketing their product in a way that was false (Coca-Cola v. Tropicana, 1982).

Similarly, direct comparison to other products without proof also qualifies under false statements.

Though it is allowed to exaggerate slightly about one’s product, it is not allowed to do so by

making competing products appear inferior. Similarly, misleading statements are also actionable

under the Lanham Act, but are more difficult for plaintiffs to prove. Though a statement may be

not false in nature, if the plaintiff can prove that it intends to, or does confuse its audience, it will

be determined as false advertising.

The third common claim of false advertising is opinion and puffery, which is exaggeration

and self-promotion that no logical buyer would rely on for their decision. Though opinion and

puffery seem to be misleading, United States courts do not take action upon them when they are

clearly exaggerated or when they are vague and do not intend to deceive. To take away the right

to voice one’s opinion is a violation of free speech, so it can be tricky for the courts to rule on what

is and is not allowed. Court action is implemented when opinions specifically target or attack

competing products in specific ways. The plaintiff must also prove that the statement or message

at hand is intended for promotion or commercial advertising, because if it is not, there is no

advantage that the defendant is getting from the assertion. This specifically includes “Commercial

speech by a defendant who is in commercial competition with the plaintiff or for the purpose of

influencing consumers to buy the defendant’s goods or services” (Cannady, 2002, page 190).

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Once the court has ruled that an advertisement at hand is deceptive in nature, there are a

few different ways that the defendants will be expected to correct for their wrong actions. Because

of briefness and vagueness of the actual law in Section 43 of the Lanham Act, the court is given a

broad jurisdiction on how intensive the remedies of the losing defendant must be. The most

common form of reparation is when the court forces the defendant to remove the advertisement in

question from its communicative media outlets. In more serious cases, the court can force the

defendant to create ad campaigns that aim to correct the confusion by educating its audience with

true information. An example of this is the court case Rhone-Poulenc Rorer Pharmaceuticals, Inc.

v. Marion Merrell Dow, Inc., where the defendant had to fund an ad campaign that asserted that

their prescribed drug could be “Freely substituted for its competitor’s product” (Cannady, 2002,

page 193). The court can also order the defendant to pay back money to the plaintiff if the plaintiff

is able to prove one of two things. The first, called marketplace damages, is when the plaintiff has

lost profits due to the defendants attack on their product. The second, called unjust enrichment, are

the revenues earned by the defendant as a result of falsely making their own product look better

than their competition. Similarly, much discretion is left up to the court as to how much the

defendant must pay. However, the court cannot require the defendant to pay punitive damages,

which are sums that are significantly higher than the measurable value of the damage inflicted

(Cannady, 2002, page 194).

Impact on Business and Society Still after over half of a century since its implementation, the Lanham Act has continued to have a

lasting impact on society. As the Lanham Act addresses trademark infringement as well as false

advertising, it has been argued that it supports monopolization by prohibiting fair competition

through advertising. Others agree that the Lanham Act has made competition more difficult by not

allowing businesses to employ unique and creative marketing campaigns to differentiate

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themselves from their competitors. In a famous instance of this, the FTC determined that ITT

Continental Baking Co., owner of Wonder Bread, violated the Lanham Act by advertising that

their bread helped build strong bodies in twelve different ways. The FTC and court system

concurred that Wonder Bread was deceiving its audience by making its bread appear healthier than

its competitors’ bread, which was arguably just as healthy. This ruling greatly impacted the world

of advertising, because it deteriorated many opportunities for companies to position their products

without appearing to deceive their customers. If companies are forced to say that competing

products are just as good as their own in their ads, there is no incentive for them to advertise or

compete in the marketplace at all (Crain, 2012). In this sense, the Lanham Act has created

additional regulations on the market. As the great economic theorist Milton Friedman argued, the

more regulations that the government places on society, the less-free the market will become.

Higher restrictions decrease businesses’ motivation for competition because there is less incentive

of profits (Jasso, 2015, page 4). Because of this, acts such as the Lanham Act have the potential to

dampen the United States’ economic system, resulting in much lost value.

Another popular argument is that the Lanham Act has given the FTC too much power in

how they choose to determine what is and is not acceptable in the advertisement sector. Because

of the ambiguity of the section about false advertising, much is left up to the discretion of the FTC

on what they feel is allowed. A famous instance of this is the Supreme Court case POM Wonderful,

LLC v. Coca-Cola Co. POM Wonderful, a seller of one-hundred percent pomegranate juice, sued

Coca-Cola for attempting to market a one of their juice products as pomegranate-blueberry juice.

The label on the bottles read ‘Pomegranate-Blueberry Juice Blend’ in large font, when in actually

it was a juice blend that contained less than one percent blueberry and pomegranate juice. The

court ruled in favor of the plaintiff, referring to Section 43 of the Lanham Act (Meier, 2014).

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Critics argue that this overstepped the jurisdiction of the Lanham Act, and should have been a case

for the Federal Food, Drug, and Cosmetic Act (FDCA), which is upheld by the Food and Drug

Administration. The court ruled that the Lanham Act and FDCA have coexisted since its inception

and can work together. This ruling significantly impacts both business and society in that

“Competitors can now take advantage of the Lanham Act in the context of mislabeled food

products normally governed by the FDCA,” (Quick, 2014) giving the FTC even more grounds for

regulation of the private business sector. The increased power given to the FTC can be interpreted

in both positive and negative ways, depending on the theoretical perspective one takes on justice.

Below are two different approaches to justice, and how each one might interpret the impact of the

Lanham Act.

The Libertarian Approach Libertarianism is a political philosophy that emphasizes the importance of maximizing

freedom within society. Libertarians believe that the government should aim to have as little

a role in the lives of its citizens as possible. The arguments of libertarians coincide with Milton

Friedman, who agree that heightened regulation diminishes the value created by the economy.

They also believe that the restrictions that the Lanham Act creates take away from the free

speech of the businesses trying to sell their products and services. By focusing on creating

equality for all of the businesses in the market, the government must restrict the liberties of

the most successful companies, making their performance weaker (Sandel, 2009, page 63). If

the United States claims to be a place where free speech and a free market are supported, it

seems impossible for legislation like the Lanham Act to be justified. Libertarians most likely

would argue that if the market is truly free, it will be able to regulate itself without the

intervention of the government. Through word-of-mouth, the companies that create the most

value will gain the most customer loyalty, and through that, the most profits. Brands that

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deceive and fail to deliver what they promise will swiftly lose the support of their clientele

and eventually die off due to lack of sales. This argument is especially valid in modern society,

where the amount of communication channels has exponentially heightened through the many

social media outlets the public has access to. If a consumer is dissatisfied with a product they

have recently purchased from a company, they can write a post, or ‘Tweet,’ on the social

media site Twitter addressing their unhappiness towards the product. If the individual is

trusted and prominent enough on social media, others will remember his or her review and it

will influence their decision-making process. A recent study by Manaman, Jamali, and Ale

Ahmad has shown that “Tweets generate a rich source of information on the common public

feelings which is valuable for both consumers and organizations” (Manaman, 2015, page 94).

Not only does social media connect consumers to each other, it also connects them to

businesses. Companies can use social media to address concerns and obtain data on reactions

to their products, which they can use to improve their brands. Libertarianism certainly concurs

that the Lanham Act and similar excessive government regulation are not needed in modern

society due to the connections we have to each other.

The Utilitarian Approach The philosophy of utilitarianism bases its resolutions to ethical dilemmas on the outcomes of

the choice events in question. Rather than pondering what choices might be of the highest

moral value in themselves, utilitarians turn their focus to the happiness that is created as a

result of them. Utilitarians theorize that the best ethical choices to make in terms of justice are

those that create the most happiness, or as they call it, utility, for the most amount of people

(Sandel, 2009, page 34). A common argument in support of this philosophy is the example of

lying to a murderer to save the life of a friend or family member. Though lying in itself may

be unethical, the outcome in which one lies to save a life is an outcome with much more utility

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than telling the truth. Before deciding whether or not the Lanham Act is justifiable, a utilitarian

would examine the value created from the law and the happiness lost as a result of it. Because

the Lanham Act restricts the freedoms and financial opportunities of businesses, it does create

a negative utility for them. However, the value created for every consumer from the protection

of being tricked by deceptive advertising greatly outweighs the small burden placed on

companies. Similarly, because of consumers’ higher levels of trust, they will be more willing

to spend more and stimulate the economy. Because of this, utilitarians would support the

Lanham Act for the utility it creates.

Critical Analysis Since its implementation in 1946, the Lanham Act has played a significant role in the progression

of modern business practices. As seen in the ridiculous claims that swindlers made in the

advertisements of their products and services in the years before the Lanham Act, some form of

federal regulation was greatly needed. When its provisions were formulated, the Lanham Act

addressed both trademark infringement and false advertising. The former part has been revised by

the Trademark Counterfeiting Act of 1984, which created new constraints and repercussions for

trademark infringement. It has been argued that there are too many inconsistencies between the

provisions in the Lanham Act and the Copyright Act of 1976. Similar to how the Lanham Act

protects identifiable logos and trademarks, the Copyright Act aims to protect intellectual property

by giving its creator the sole rights to reproduce and sell it. Both acts are vaguely worded and are

open to different interpretations based on individual cases. These inconsistencies create an

unfairness in the American Justice System because the rules are not clearly defined. In Keaton and

Goolsby’s 2009 article about the two, they suggest that “The Copyright Act should be reconciled

against the Lanham Act so that notions of fairness are consistent” (Keaton, 2009). The fusion of

13


the two could potentially address some of these concerns by creating a unified system rather than

two separate ones.

The intent behind the creation of the Lanham Act was to protect both businesses and

consumers from unfair competition in the market. Recently, it has been increasingly criticized as

to whether it truly protects consumers, as business competitors are usually the plaintiffs in the

court cases wherein which it is referred. In fact, courts have perpetually rejected consumers’ stands

for false advertising under the Lanham Act. “Courts generally root this conclusion in section 45

of the Lanham Act, which provides that the statute was enacted to protect persons engaged in . . .

commerce against unfair competition” (Cannady, 2002, page 192). Based on this, the courts

require plaintiffs to provide evidence of commercial or competitive injury. This is much more

difficult for consumers than for competing businesses, because businesses can prove how much

money they have lost in sales to defendants’ false advertising practices. This clause is a clear weak

point for the Lanham Act because it fails to protect many of the people who may suffer from

deceptive advertising practices. To remedy this may be difficult because the Lanham Act does not

administer punitive damages, which are what consumers most likely will sue for because they are

not losing sales to the defendants. A simple fix for this may be to add a clause that allows

consumers to sue businesses on behalf of society rather than for the individual losses they may

have encountered as a result of false advertising.

Despite its shortcomings, the Lanham Act of 1946 has successfully provided much-needed

structure and regulation to the American free market. Overall, its clauses that address false and

deceptive advertising practices have positively affected the United States by creating a more

reliable and trustworthy marketplace. The Lanham Act has played an important role in the

industrialization and globalization of American economics by supporting and encouraging both

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consumers and the fair competition of businesses. Though the Lanham Act has proven to be

successful in the past half-century since its implementation, it is important to ask is if will continue

to address concerns in a rapidly fluctuating market. As Western society has modernized with many

revolutions in communications, we rely more and more on new technologies to conduct business.

Search Engine Optimization (SEO) is a new concept that search engines such as Google are trying

to implement to present searchers with better results. This advanced technology is one of many

examples of the new ways that companies are able to communicate and advertise to consumers.

Though they provide us with many new opportunities, they come with new risks that laws like the

Lanham Act could not have predicted when they were made. For example, marketers can falsely

tag their posts or pay to appear first in online search results to capture the attention of unknowing

consumers (Nilsson, 2012, page 805). To stay effective and relevant in a modern market, the

Lanham Act will have to find new ways to regulate unfair competition over the internet. It is the

government’s responsibility to investigate the possibilities of making this new form of advertising

more legitimate. As seen in the success directly after the implementation of the Lanham Act, new

revisions have the potential to continue to grow America’s powerful economy.

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Appendix

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17


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References

Cannady, M. and Reichman, C. (Spring 2002). False Advertising Under the Lanham Act.

Franchise Law Journal. Volume 21. Retrieved from:

http://www.kslaw.com/library/pdf/reichmancannady-rp.pdf

Coca-Cola Company v. Tropicana Products, Inc., 690 F.2d 312 (1982). Retrieved from:

https://law.resource.org/pub/us/case/reporter/F2/690/690.F2d.312.82-7422.1524.html

Crain, R. (2012). How Wonder Bread Played a Key Role in the Battle Between Marketers and an

Overzealous Government. Advertising Age, 83(4), 32.

Federal Trade Commission. (n.d.) Truth In Advertising. Retrieved from:

https://www.ftc.gov/news-events/media-resources/truth-advertising

Jasso, S. (2015). The Contemporary Perspective of Responsibility. [PowerPoint Slides].

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%20Exam%20One%281%29.pdf

Johnson, Sheree. (September 29th, 2014). New Research Sheds Light on Daily Ad Exposures. SJ

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daily-ad-exposures/

Keaton, A. M., & Goolsby, J. (2009). In the Trenches of Copyright Law: Challenges and

Remedies. Tulane Journal Of Technology & Intellectual Property, 122 11-220.

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http://sjinsights.net/2014/09/29/new-research-sheds-light-on-daily-ad-exposures/

http://sjinsights.net/2014/09/29/new-research-sheds-light-on-daily-ad-exposures/


Levine, S. (2010). The Origins of the Lanham Act. Journal of Contemporary Legal Issues, 19(1),

22-27.

Meier, P., & Dorsi, E. (2014). Limiting Lanham Act Claims after POM Wonderful. Business

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Nilsson, V. T. (2012). You’re Not from Around Here, Are You? Fighting Deceptive Marketing

in the Twenty-First Century. Arizona Law Review, 54(3), 801-828.

Phelps, S. & Lehman, J. (2005). Lanham Act. West's Encyclopedia of American Law (2nd ed.,

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Claims. Commercial & Business Litigation,

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and Giroux

Shad Manaman, H., Jamali, S., & AleAhmad, A. (2015). Online Reputation Measurement of

Companies Based on User-Generated Content in Online Social Networks. Computers in

Human Behavior, 5494-100. doi:10.1016/j.chb.2015.07.061

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Sutphen, Dick. (1966). The Mad Old Ads. New York, New York: McGraw-Hill Book Company.

Twitchell, James B. 20 Ads that Shook the World: The Century’s Most Groundbreaking

Advertising and How it Changed Us All. (2000). New York, New York: Crown

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