Who Foots the Bill (And/Or Gets the Boot) When an Ad Goes Bad?
By: STEPHEN R. BERGERSON
May 2005
Who pays the price when the Federal Trade Commission (FTC) cracks down on a bad (deceptive) ad … especially if created by an ad agency? Agencies that suddenly want to say, “It’s the client’s ad,” and advertisers who point a quick finger at the agency that created it, may both face surprise.
One of the basic principals of advertising law is that advertisers and their agencies are jointly liable for deceptive advertising.
Why? Let’s take a look.
1950: After Ipana Toothpaste advertised that twice as many dentists used its toothpaste, the FTC sued both Bristol-Myers and its advertising agency. The complaint against the agency was ultimately dismissed on the grounds that they were only acting as agents, following client directions.
1961: The FTC sued Colgate-Palmolive and its ad agency for a Rapid Shave television spot. A “mock-up” was used to show that the shaving cream was so moist, it could be used to shave sandpaper. Due to production limitations, the agency used clear Plexiglas sprinkled with sand instead – but did not disclose the substitution.
The agency argued that it shouldn’t be liable because it was only acting as Colgate’s agent. But because the agency had originated the sandpaper test idea and produced the ads, the FTC adopted a new principle for agency liability:
“If the ad agency has sufficient involvement so as to make it an ‘accomplice’ or joint tortfeasor under criminal and tort law, it would be accountable.”
An appellate court disagreed, and the FTC revised its order to allow two agency defenses: (1) lack of knowledge of the falsity of the representations; and (2) lack of reason to question the truthfulness of the representations. The U.S. Supreme Court upheld that position.
1963: Rise Shaving Cream showed a man using its product compared to what was characterized as an “ordinary” brand, which appeared to quickly lose its moisturizing quality. The competing “lather” was actually a 10% water solution and foaming agent concocted just for the TV spot.
The FTC found both the agency and advertiser liable for deceptive advertising. The agency appealed, arguing that as a “mere agent” it should not be held responsible for innocently following its client’s orders.
The court disagreed, saying agencies are liable if they participate in the deception to an extent sufficient to reasonably justify holding it accountable.
1966: In the most important of these cases, the FTC challenged a Sucrets ad, claiming it deceptively stated that its “active ingredient” would “kill germs which cause sore throats.” The agency argued that it should not be liable because it had relied on technical information supplied by its client, with no knowledge that the claims were deceptive.
The FTC disagreed, successfully arguing that agency liability should stem not from the falsity of the technical information supplied, but from its “participation” in making use of that information. In explaining its position, the FTC articulated what has been the standard for ad agency liability ever since:
“If an agency either knows or has reason to know of the ad’s deceptive nature, it is jointly liable with its client.”
Does this mean that ad agencies are responsible for conducting their own independent tests? No. That agencies should distrust their clients? Not at all. The FTC found that the Sucrets package itself had language that gave the agency reason to know the ad was deceptive. Later cases have proven that agencies can avoid liability by demonstrating genuine good faith when no “reason to know” exists.
The FTC elaborated by saying that writing copy, conducting ad-related consumer research, and assisting with campaign strategy is “active participation.” Merely placing ads in media is not.
According to the FTC, agencies have “reason to know” if (1) an ad shows “on its face” that the claim is false or without support, or (2) if the agency could have known that based on its own examination of or experience with the product.
If what the ad conveys to consumers is deceptive, the agency will be presumed to have reason to know, because it is regarded as possessing expertise in consumer’s perceptions of ads. The FTC also considers agencies as experts in consumer research, and will hold them accountable for defects in surveys they use to support claims.
1991: Lewis Galoob Toys, Inc. and its agency were charged with deceptive children’s advertising. The ads showed toys moving without human aid, displayed two or more toys together that are actually sold separately, and failed to disclose that assembly is required.
The FTC said “the ad represented the sorts of violations that an agency ought to be familiar with and know to avoid. This was not an instance where there is scientific substantiation involved that an agency might accept on faith … but rather basic issues about how to put an ad together.”
When that decision was announced, the FTC Chair said, “Advertising agency liability is an important tool to insure compliance,” noting, “We are seeking to reinforce the very useful role that the advertising agency review function plays in maintaining high levels of truthfulness in national advertising.”
In effect, the FTC gives agencies an incentive to help police the beat.
Today, most ad agencies know that – as a client relations matter - they’ll at least help foot the bill of an FTC challenge. And, to add insult to injury, the client may still give the agency the boot. . . even if the ad isn’t ‘bad.’