The Federal Trade Commission

Federal Trade Commission Act

The primary law regulating advertising and marketing practices is the Federal Trade Commission Act, 15 U.S.C. §§ 41-58 (FTC Act). Section 5(a) of the FTC Act provides that “unfair or deceptive acts or practices... are... declared unlawful.” 15 U.S.C. § 45(a)(1).

A deceptive practice is defined in the Federal Trade Commission’s (FTC or Commission) Policy Statement on Deception to be “a material representation, omission or practice that is likely to mislead a consumer acting reasonably under the circumstances.” False or misleading advertising claims, and/or the failure to disclose material terms and conditions, are considered deceptive practices. In order to prove deception, the FTC must only show that the reasonable consumer is “likely” to be misled, not that the consumer was actual misled, and the FTC does not need to show any consumer injury.

Unfair practices are those that cause or are “likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition.” 15 U.S.C. § 45(n).

Other consumer protection statutes and trade regulation rules

The Commission enforces a variety of other consumer protection statutes and Trade Regulation Rules that apply to specific marketing practices or types of claims such as:

• warranties (Magnuson-Moss Warranty Act, 15 U.S.C. § 2301 et seq);
• fur products (Fur Products Labeling Act, 15 U.S.C. §§ 69-69j);
• substance abuse treatment (Opioid Addiction Recovery Fraud Prevention Act, Pub. L. No. 115-271 §§ 8021-8023);
• privacy (Children’s Online Privacy Protection Act (COPPA), 15 U.S.C. §§ 6501–6506; CAN-SPAM Act, 15 U.S.C. §§ 7701-7713, and National Do-Not-Call Registry, 15 U.S.C. §§ 6151-6155);
• consumer reviews (Consumer Review Fairness Act, 15 U.S.C. § 45b);
• package labels (Fair Packaging and Labeling Act, 15 U.S.C. § 1451 et seq);
• textiles (Textile Fiber Products Identification Act, 15 U.S.C. §§ 70-70k);
• COVID-19 treatments or benefits (COVID-19 Consumer Protection Act of 2021 Consolidated Appropriations Act, Pub. L. No. 116-260);
• online ticket sales (Better Online Ticket Sales Act, 15 U.S.C. § 45);
• cigarettes (Federal Cigarette Labeling and Advertising Act, 15 U.S.C. §§ 1331-1340; 21 U.S.C. § 387c);
• business opportunities (Business Opportunity Rule, 16 CFR Part 437);
• corrective eyewear (Contact Lens Rule, 16 CFR Part 315’; Eyeglass Rule, 16 CFR Part 456);
• delayed shipping (Main, Internet, or Telephone Order Merchandise Rule, 16 CFR Part 435);
• domestic origin (Made in USA Labeling Rule, 16 CFR 323);
• wool products (Wool Products Labeling Act, 15 U.S.C. §§ 68-68j);
• energy and water use (Energy Labeling Rule, 16FR Part 305); and
• recurring online sales (Restore Online Shoppers’ Confidence Act, 15 U.S.C. §§ 8401-8405; the Telemarketing Sales Rule, 16 C.F.R. Part 310; and the Telephone Consumer Protection Act, 47 U.S.C. § 227).

The FTC has also issued numerous guides that set forth how the agency will interpret Section 5 with respect to specific types of claims, such as environmental marketing claims, online disclosures, deceptive pricing, bait advertising, and endorsements and testimonials.

The FTC and other federal agencies

In addition, the FTC and the Consumer Financial Protection Bureau (CFPB) share jurisdiction over various financial services and practices. There are numerous federal statutes that regulate the provision of consumer financial services, including the following.

• The Truth in Lending Act, 15 U.S.C. §§ 1601-1667f.
• The Credit Repair Organizations Act, 15 U.S.C. §§ 1679-1679j.
• The Fair Credit Reporting Act, 15 U.S.C. §§ 1681-1681x.
• The Fair Debt Collection Practices Act, 15 U.S.C. §§ 1692-1692p.
• The Gramm-Leach-Bliley Act, 15 U.S.C. § 6801 et seq.

The FTC similarly shares jurisdiction with the Food and Drug Administration (FDA) over food, over-the-counter drugs, dietary supplements, and cosmetics. Under a long-standing memorandum of understanding, the FDA exerts primary jurisdiction over the labelling of foods, cosmetics and over-the-counter drugs, while the FTC has primary jurisdiction over the advertising of such products. The two agencies also share jurisdiction over the advertising and labelling of tobacco products.

Other federal agencies regulate more narrow industry segments. These include the Federal Communications Commission (FCC), the Department of Transportation (DoT), the Environmental Protection Agency (EPA), the Postal Service and the Bureau of Alcohol, Tobacco and Firearms.

State-Level Regulation

At the state level, all of the states have consumer protection statutes substantially similar to Section 5(a) of the FTC Act, which are generally referred to as Unfair Deceptive Acts and Practices (UDAP) laws. These UDAP laws generally prohibit deceptive acts and practices but also often contain regulations governing specific marketing practices and advertising claims such as “Made in USA” claims, marketing of time shares, automatic renewal programmes, automobiles, free offers, and sale and discount pricing. State laws are most often enforced by the state’s Attorney General. In some states, county district attorneys may bring enforcement proceedings.

The FTC

At the federal level, the FTC is the primary agency empowered to enforce deceptive advertising laws; the scope of their authority is outlined in 1.1 Source of Regulations. The FTC is able to bring enforcement actions either administratively or in federal court. Administrative actions are heard first by an administrative law judge, with any appeal being heard by the full Commission. Appeals from a Commission decision are heard by the federal appellate court in Washington, D.C. Enforcement actions filed in federal court can be filed in any federal district court that has jurisdiction over the defendant and where venue is proper.

The FTC has three primary remedies available to it. All of these remedies are civil in nature. The FTC lacks authority to bring criminal actions. However, the US Department of Justice (DOJ) can bring criminal charges under various fraud statutes for more serious conduct. The three remedies are:

• injunctive relief;
• equitable monetary relief in the form of consumer redress or disgorgement of profits for violations of prior orders; and
• civil penalties in instances where a defendant has violated a pre-existing order or has violated a trade regulation rule promulgated by the Commission.

As of this date (October 2021), the Commission can seek civil penalties of up to USD43,7920 per violation. This amount is annually adjusted for inflation.

The Commission has occasionally imposed other types of remedies under its broad equitable powers, including a requirement that the defendant engage in corrective advertising.

Other federal agencies such as the FDA and the CFPB generally have similar remedies available, although some, such as the FDA, have the criminal enforcement authority that the FTC lacks. The FTC will often bring cases with other federal agencies or the state enforcers to take advantage of broader federal or state statutes.

Challenges to the FTC's Authority

The FTC has historically relied on its authority under Section 13(b) of the FTC Act to sue for monetary relief in federal court. In 2021, in FTC v AMG Capital Mgmt., LLC, 593 U.S. __ (2021), the Supreme Court ruled that the FTC does not have authority to obtain consumer redress or disgorgement when filing a complaint in federal court under Section 13(b) of the FTC Act. The FTC still can obtain monetary relief but, currently, must go through a more complicated process. The FTC and consumer advocates have asked that Congress amend the FTC Act to allow for restitution or disgorgement, and several bills are pending.

The courts in some circuits have also ruled that the FTC cannot seek injunctive relief for practices that are not occurring or are not about to occur. This would severely restrict the FTC’s ability to obtain injunctive relief against practices that have been discontinued.

Most state UDAP laws similarly allow the states to obtain injunctive relief and monetary equitable relief but also generally carry civil penalties for violations of the law. 

The FTC has cast a very wide net regarding persons or entities that can be held liable for deceptive advertising. With respect to the advertiser itself, there is strict liability, and a showing of intent or actual knowledge of the deception or misrepresentation is not required. The FTC can, and increasingly has, imposed liability on third parties that “assisted or facilitated” the advertiser in conducting the deceptive practices or provided the “means and instrumentalities” to the advertiser to effectuate the unlawful conduct. Under these principles, the FTC has held liable telemarketers, lead generators, merchant processors, list brokers, affiliate marketers and other service providers. The FTC has also imposed liability against advertising agencies and celebrity endorsers who have been involved with the misleading adverts. In many cases, the FTC has held the individual owners and operators of the company liable if they either actually participated in the creation of the deceptive advertising or had the authority to control the acts of the company. Liability is typically imposed on these individuals in cases of close corporations where the owners and operators have actual involvement in the advertising or marketing practices and/or the authority to control them.

The FTC has also brought actions against companies that market products manufactured by others, including catalogue companies, retailers and home shopping networks.

Self-regulation is an important part of deceptive advertising enforcement in the USA. For the most part, self-regulation occurs under the auspices of Better Business Bureau (BBB) National Programs. While BBB National Programs runs a number of self-regulatory programmes for specific industries such as direct selling and confectionery, there are two organisations with broader jurisdiction. First, the National Advertising Division (NAD) has jurisdiction over all national advertising. Competitors can file challenges with the NAD, and the NAD can also bring its own challenges under its monitoring programme. The scope of the NAD’s review is limited to determining whether particular advertising is false or misleading. The NAD has the authority to recommend that advertising be discontinued but does not have the authority to enforce its decision or to order monetary relief. Decisions by the NAD can be appealed to the National Advertising Review Board (NARB) which is comprised of a panel of advertising experts from various segments of the industry. While participation in an NAD proceeding is voluntary, if an advertiser does not participate in the proceeding and/or does not agree to follow the NAD’s recommendations, the NAD will refer the matter to the FTC or other appropriate federal agency.

The other BBB National Programs organisation with a broad mandate is the Children’s Advertising Review Unit (CARU). CARU operates in a fashion similar to the NAD except that it has its own self-regulatory guidelines geared specifically to children’s advertising. Unlike the NAD, CARU’s guidelines also regulate “inappropriate” advertising for children. This includes practices such as depicting unsafe activity, encouraging unhealthy food choices or portions, or encouraging children to pressure their parents to make a purchase. CARU also regulates practices involving children’s privacy, including operating a safe harbour programme under COPPA.

In addition to the self-regulatory programmes operated by BBB National Programs, a number of industries have set up their own self-regulatory codes and programmes. This includes distilled spirits, beer, pharmaceuticals and most recently, cannabis.

There is no private right of action under either the FTC Act or the Federal Food, Drug and Cosmetic Act (FDCA). State consumer protection laws, however, do provide consumers with a private right of action for deceptive or misleading advertising. Typically, these cases are brought as class actions, which seek both injunctive and monetary relief, as well as attorneys’ fees. However, the FDCA, but not the FTC Act, pre-empts certain state law claims.

Companies also have a private right of action against allegedly false or misleading advertising by their competitors under the Federal Lanham Act. 15 U.S.C. § 1125(a). See 3. Comparative Advertising for a more detailed discussion of comparative advertising.

As noted in 1.1 Source of Regulations, the FTC has issued Trade Regulation Rules and Guides that govern particular industries such as jewellery, textiles, contact lenses, funerals, fur and numerous others which are subject to specific FTC Rules or Guides. In addition, there are numerous industries, products and services that are subject to additional and more specific regulations at both the federal and state levels. These include alcohol, tobacco, firearms, gasoline, insurance, air travel, investment services, legal advertising, banking, gambling, sports betting, fantasy sports, cannabis and CBD, pesticides and dairy products, to name just a few. While the regulations vary, some of the more common requirements include restrictions on whether or how the products or services can be marketed (ie, restrictions on selling below cost or offering consumer incentives), registration or licensing requirements, and advertising restrictions and affirmative disclosure requirements.

The Supreme Court’s ruling in FTC v AMG Capital Mgmt., LLC, 593 U.S. __ (2021), discussed in more detail in 1.2 Regulatory Authorities (Challenges to the FTC’s Authority), finding the FTC did not have power under 13(b) to obtain monetary relief is the most significant development of the year. 

The co-ordinated enforcement response to COVID-19 fraud and the change of administration, discussed in 1.8 Impact of the COVID-19 Pandemic and 1.9 Political Climate, respectively, are also noteworthy. 

The FTC, FDA, EPA, and the states operated in swift and co-ordinated fashion to investigate and halt all manner of fraudulent schemes arising out of the global pandemic. The agencies sent warning letters and brought enforcement actions over unsupported claims that products could help prevent, cure or treat COVID-19, kill the virus, and/or boost immunity. The NAD supplemented these efforts bringing a number of its own monitoring cases. Additionally, the FTC and the states monitored for business and consumer fraud related to supplemental government benefits, including distressed small business loans. Congress passed the COVID-19 Consumer Protection Act of 2021, providing civil penalty authority to the FTC for violations.

With the election of President Biden, the FTC has a new chairperson, Lina Khan. Chair Kahn has stated her intent to engage in additional rule-making, converting much of the FTC’s general business guidance to formal forms, for which civil penalties can be obtained for violations. The first example of this was converting the Made in USA Policy Statement into the Made in USA Rule, under which the FTC can seek USD42,792 per violation. The FTC under Chair Khan has also sought to streamline agency processes through adoption of resolutions directing use of compulsory processes for investigations into key law enforcement priorities, amending rule-making procedures and holding public meetings to expedite agency decision-making. Practitioners expect a renewed focus on national advertising cases.

The FTC has defined a deceptive practice as follows.

• A representation, omission or practice misleads or is likely to mislead the consumer.
• A consumer’s interpretation of the representation, omission or practice is considered reasonable under the circumstances.
• The misleading representation, omission or practice is material.

An advertising claim will thus be considered misleading if the representation is literally false and/or if reasonable consumers are likely to take away a message that is false and/or cannot be substantiated. An advertising claim can also be considered misleading if information that is material to the truthfulness of the claim is omitted. The standard for deception is that of the reasonable consumer, unless the advertising is targeted to a particular segment of the population, in which case the determination as to whether the advertising is deceptive or misleading is made from the standpoint of a reasonable consumer within that segment of the population.

In determining whether an advertising claim is false or misleading, both express and implied claims must be considered. An express claim is the literal statement in the advert. Implied claims are defined as the net impression created by the ad in its entirety. In determining the net impression of an advert, both the textual and visual elements of the advert must be considered, and the specific representations must be considered in the context of the overall advert.

The FTC and state Attorneys General can, and often will, determine implied messages on their own without any empirical evidence. Similarly, the NAD, which is the self-regulatory body for the advertising industry, can step into the shoes of the consumer and determine implied messages on its own. In comparative advertising litigation brought in federal court under Section 43(a) of the Lanham Act, implied messages must be proven through a well-conducted consumer perception survey. The standard for deception is 15–20% of the surveyed consumers depending on the jurisdiction, meaning the advertising will be considered deceptive if at least 15–20% of consumers take away a message that cannot be supported.

Puffery

The USA recognises the concept of “puffery”. Statements that are deemed to be puffery are not required to be substantiated; however, drawing the line between an objective claim that must be proven and puffery is a difficult and very fact-specific task because there is no bright-line rule for determining whether a claim is puffery or not.

In general, puffery refers to statements that are so hyperbolic or exaggerated that no reasonable person would rely on them, or so subjective that they are incapable of being proven. The FTC defines puffery as marketing claims that “ordinary consumers do not take seriously”. The courts have adopted varying definitions, such as “exaggerated advertising, blustering and boasting upon which no reasonable buyer would rely” or “marketing that is not deceptive for no one would rely on its exaggerated claims”.

The context of the advertising is critical to determining whether a statement will be viewed as “puffery”. In the seminal case on puffery, Pizza Hut, Inc. v Papa John’s Int’l, Inc., 227 F.3d 489 (5th Cir. 2000), Pizza Hut sued Papa John’s over a comparative advertising campaign that included the slogan “Better Ingredients Better Pizza”. While the case went through several rounds of court battles, ultimately the Court of Appeals held that while the slogan in the context of advertising comparing specific ingredients used in each of the products was not puffery, the slogan as a standalone on Papa John’s pizza boxes was puffery.

The FTC’s general requirements for substantiating advertising claims are set forth in the FTC Policy Statement Regarding Advertising Substantiation. Thompson Med. Co., 104 F.T.C. 648, 839 (1984), aff’d, 791 F2d 189 (D.C. Cir. 1986). Where an advertisement either expressly or impliedly makes a representation regarding the amount or type of support the advertiser has for its claims, such as “clinically proven” or “tests prove” or “doctor recommended” then the advertiser must have at least that level of support for its claims. These are often referred to as “establishment claims” because the advertiser in the advert has set forth the level of substantiation.

In the absence of any such establishment claims, the general standard is that the advertiser must have a “reasonable basis” for the claims being made. What constitutes a “reasonable basis” will depend on a variety of factors including:

• the type of product;
• the type of claim;
• the consequences of a false claim;
• the benefits of a truthful claim;
• the cost of developing substantiation for the claim; and
• the amount of substantiation that experts in the field believe is reasonable. Pfizer, Inc., 81 F.T.C. 23, 62-64 (1972).

Based on an application of these factors, any health and safety claims are generally held to a higher substantiation standard, requiring “competent and reliable scientific evidence.” The FTC has in recent years generally determined this standard to require at least one well-conducted clinical study. For other types of products or claims where the consequences of a false claim are not as severe, such as cosmetic claims or general performance claims, the advertiser must have competent and reliable evidence; however, such evidence may consist of laboratory testing, and testing on equivalent products with comparable ingredients and mechanisms of action, rather than testing conducted on the product itself.

The general standard for product testing is that the testing must be competent and reliable, conducted in accordance with the product directions and under consumer-relevant conditions. While there are no legal or regulatory laws or regulations that set standards for testing, some general standards have evolved as a result of FTC and state enforcement actions, NAD cases and court decisions. In general, testing should be conducted on a sufficiently large and representative sample, for a sufficient duration of time, in accordance with product directions for use; and the results must be statistically significant at the 95% confidence level. While there is no formal requirement for third-party independent testing, it is generally considered more reliable than internal testing. Ultimately, the level and type of testing required will depend on the claims being made. For certain types of testing, such as sensory and preference claims, there are recommended sample sizes and geographic requirements.

There are also industry standards that may apply to certain products or claims. Where such standards exist, they should generally be followed unless the advertiser can show that a different testing methodology would be equally or more reliable. For example, the American Society for Testing and Materials (ASTM) has numerous standards for testing to support different types of claims across a variety of product categories.

The FTC and the NAD typically require human clinical studies to support specific health benefit claims. The “gold standard” for these studies is that they be double blind and placebo controlled, conducted on the actual product being advertised or on a substantially similar product (meaning the exact same active ingredients and delivery mechanism). The methodology for the study should be objective and should be one that is generally recognised by experts in the industry as competent and reliable. The length of the study depends on the nature of the product and the claims. While there is no required minimum sample size, the sample size should be sufficiently large as to render the results statistically significant at the 95% confidence level. While there is no regulatory standard regarding the sample size required for clinical testing, the larger the sample size the more likely it is that the FTC and the NAD will consider it to be adequate.

There are several types of claims that are subject to specific rules or regulations. Some of the most common are set out below.

Free Claims

Free claims are subject to the FTC’s Guide Concerning Use of the Word “Free” and Similar Representations. This Guide addresses the frequency with which free offers should be made and generally requires that all material terms and conditions of the free offer be clearly and conspicuously disclosed. Several states also have regulations specifically governing use of the term “free” that set forth disclosure requirements for such claims and minimum type size requirements for the disclosures (see 7.5 Free and Reduced-Price Offers).

Natural Claims

The US Department of Agriculture (USDA), which regulates and defines food labelling, has defined “natural” to mean “does not contain artificial ingredients or preservatives and the ingredients are only minimally processed”. Although neither the FTC nor the FDA have issued formal rules and regulations governing the term “natural”, the FDA has stated that it considers the term “natural” to mean that nothing artificial or synthetic has been included in, or has been added to, a food that would not normally be expected to be in that food. The FTC has brought enforcement actions against marketers using the term “all natural”, and stated that the claim means the product contains only ingredients found in nature and no artificial ingredients or chemicals. The FTC has suggested that there is a distinction between “all natural” and “natural” claims, and that consumers would not necessarily interpret a “natural” claim to mean that the product contains “only” natural ingredients. In the absence of specific rules, the FTC will apply the same traditional standards to determine whether a “natural” claim is false or misleading. It is generally recommended, however, that an unqualified “natural” claim should not be used to describe the product if there is more than a de minimis amount of non-natural ingredients and/or the product has been heavily processed. If the “natural” claim applies only to certain ingredients in the product, that fact should be made clear in the advertising.

Environmental Claims

Environmental claims are subject to the FTC’s Green Guides. These guides are comprehensive and set forth both general guidance and guidance regarding specific claims. In general, the Green Guides caution against making broad unqualified environmental claims, as such claims will be difficult to substantiate. Environmental claims should be qualified to indicate the specific environmental benefit and should also indicate whether the benefit applies to the entire product or to a component such as its packaging. The Green Guides also contain more specific guidance regarding certain types of claims. For example, unqualified degradable claims can only be made if all the materials in the product and package will break down into, or become part of, usable compost safely and in about the same time as the materials from which it is composed. Unqualified degradable claims can only be made if the product or package will completely break down within a year after disposal. Recycling claims should be qualified when recycling facilities are not available to at least 60% of consumers or communities where a product is sold.

Other specific claims addressed in the Green Guides include carbon offset claims, use of certifications and seals of approval, non-toxic claims, renewable energy and renewable materials claims, source reduction claims and ozone-safe and ozone-friendly claims.

“Free of” claims

“Free of” claims are also addressed in the Green Guides. “Free of” claims should only be used for a product:

• that does not have more than a trace amount or background level of the substance;
• where the amount of the substance is not harmful; and
• where the substance was not intentionally added to the product.

US Origin Claims

“Made in USA” claims are subject to a specific FTC rule that provides that an unqualified Made in USA claim should not be made unless “all or virtually all” of the product has been made in the USA All significant parts, processing and labour that go into the product should be of US origin and the products should not contain, or should contain only negligible, foreign content. The state of California has a similar statute but contains an exemption that allows the claim if the foreign parts or material constitute no more than 5% of the final wholesale value of the manufactured product (or 10% if those components are unavailable in the USA).

“Up To” Pricing Claims

Several states regulate “up to” pricing claims in which the maximum potential savings are advertised. Some states require that the full range be shown, while others require that at least a certain percentage (typically 10 or 15) of the covered items be available at the maximum price. The NAD also mandates, as a general rule, that for “up to” pricing claims, at least 10% of the covered items be available at the maximum savings.

Comparative advertising including the naming of competitors is permitted and encouraged in the USA. In 1979, the FTC issued a Statement of Policy Regarding Comparative Advertising in which the FTC voiced strong support for comparative advertising, noting that “Comparative advertising, when truthful and non-deceptive, is a source of important information to consumers and assists them in making rational purchase decisions”. The statement continues, “Commission policy in the area of comparative advertising encourages the naming of, or reference to competitors” and stated that the Commission would “carefully scrutinise” restrictions on the use of comparative advertising. As a result, comparative advertising has become common in the USA.

Comparative advertising claims are subject to the same standards as those of general advertising claims. The ultimate issue is whether the advertising is truthful and not misleading. While the same general standards apply to comparative advertising, there are some special considerations that apply. For example, the specific products or services that are the target of the comparison must be clearly and conspicuously disclosed, otherwise the claim will be interpreted as applicable to the entire line of products or services. It is permissible to make comparisons between dissimilar products (ie, apples to oranges comparisons), but in such cases additional disclosures conveying the differences between the products or services being compared will be required. For comparative performance claims, head-to-head testing between the two products is generally required. Comparative claims must also be based on data and studies conducted on the most recent version of the products and services being compared. If a competitor makes material changes to its product, testing conducted on a prior version of the product will no longer be acceptable even if disclosed.

Lanham Act Claims

There are generally two ways in which an advertiser can directly challenge claims made by a competitor. First, an advertiser can sue a competitor in federal court pursuant to Section 43(a) of the Lanham Act (“Section 43(a)”), 15 U.S.C. § 1125(a). While generally thought of as a trade mark statute, Section 43(a) of the Lanham Act is the primary vehicle for an advertiser to sue a competitor in federal court for false and misleading advertising claims.

Section 43(a) provides for a civil cause of action against “any person who, in connection with any goods or services, uses any word, term, name, symbol, or device, or any combination thereof, or any false designation of origin, false or misleading description of fact, or false or misleading representation of fact which in commercial advertising or promotion, misrepresents the nature, characteristics, qualities or geographic origin of his or her or another person’s goods, services or commercial activities.” 15 U.S.C. § 1125(a)(1)(B). Thus, to prevail on a Lanham Act claim, the plaintiff must satisfy the following elements:

• the claim is false or misleading;
• the claim is used in a commercial advertisement or promotion;
• the claim deceives, or is likely to deceive, in a material way;
• the claim is used in interstate commerce; and
• the claim has caused, or is likely to cause, competitive or commercial injury to the plaintiff.

Two types of false claims are generally actionable under the Lanham Act: claims that are literally false (ie, express claims) and claims that, while literally true, are likely to deceive or mislead (ie, implied claims). Some jurisdictions also recognise a third category of false claims, known as “false by necessary implication.” These are claims that, while not literally false, are unambiguous and not capable of being interpreted as conveying any message other than a false one. If a claim is literally false, deception is presumed. If the claim is an implied claim, the plaintiff must show with extrinsic evidence (typically a consumer perception survey) that the advertising conveyed the implied message and deceived a significant percentage of consumers (generally, 15–20%).

Plaintiffs who prevail in a Lanham Act case can obtain injunctive relief and monetary damages. To obtain an injunction, the plaintiff must show evidence of injury and irreparable harm unless the advertising specifically names the competitor, in which case injury and irreparable harm may be presumed. Damages are typically calculated based on loss of profits or disgorgement of ill-gotten profits.

NAD Proceedings

Advertisers may also challenge a competitor’s advertising in a proceeding before the NAD (see 1.4 Self-Regulation for discussion of the NAD). In an NAD proceeding, unlike a Lanham Act case, the advertiser has the burden of demonstrating that the challenged advertising is truthful and not misleading. Once the advertiser establishes this with competent and reliable evidence, the burden shifts to the challenger to show with better or more compelling evidence that the advertising is false or deceptive. Like the courts, the NAD will consider both express and implied claims. Unlike in Lanham Act cases, survey evidence is not required to establish implied claims but is permissible and can be helpful if properly conducted. In the absence of a valid survey, the NAD will step into the shoes of the reasonable consumer and determine the implied claims on its own. Because the NAD proceeding is voluntary, the only remedy available is a recommendation by the NAD that the claims be modified or discontinued. An advertiser’s failure to adhere to NAD recommendations, however, may result in a referral to the FTC or other regulatory agencies. The NAD has no authority to issue monetary relief.

Notable Recent Cases

Molson Coors and Anheuser-Busch corn syrup lawsuit

In one of the highest profile Lanham Act cases to be litigated in years, the 7th Circuit recently reversed a district court decision that had prohibited Anheuser-Busch from making claims that, Molson Coors alleged, falsely implied that Molson’s Coors Lite and Miller Light beers contained corn syrup. Molson Coors Beverage Co. USA v Anheuser-Busch Cos., 957 F.3d 837 (7th Cir. 2020). The case arose over a Bud Light ad campaign launched during the Super Bowl which touted the fact that Bud Light, unlike Molson Coors’ beers, did not contain corn syrup. While Molson Coors uses corn syrup in its brewing process, the corn syrup is eliminated during the fermentation process and is not present in the final product. Molson Coors relied on a survey that showed that nearly a third of respondents took away the misleading message that Molson Coors’ beers actually contain corn syrup. The trial judge partially granted Molson Coors’ request for a preliminary injunction requiring Anheuser Busch to pull some but not all of its adverts, MillerCoors, LLC v Anheuser-Busch Cos., 385 F. Supp. 3d 730 (W.D. Wis. 2019), and subsequently, following an appeal by Molson Coors, extended the ban to include all Bud Light packaging using the words “no corn syrup”.

The 7th Circuit on appeal reversed the district court’s ruling and held that Anheuser Busch could not be held liable for false or misleading claims because Molson Coors lists corn syrup as one of its ingredients on its packaging. In so ruling, the 7th Circuit dismissed as irrelevant Molson Coors’ survey showing a deception level of nearly 30%.

The 7th Circuit’s decision is noteworthy because it departs from many Lanham Act cases in which the courts have historically relied on consumer perception surveys to determine whether an implied claim is false or misleading. However, the fact that the ingredient listing contained the very claim being challenged may make this case unique. If other courts follow a similar approach, this could represent a significant change in Lanham Act jurisprudence. 

In California, class actions involving Mott’s applesauce, Ghiraradelli baking chips, and Westbrae soya milk were also dismissed, finding that consumer surveys were not sufficient to show consumers are misled when he complaint did not plausibly allege deception.

Ariix, LLC v NutriSearch Corp.

The 9th Circuit has ruled that fake or biased reviews can be actionable under the Lanham Act. 985 F.3d 1107 (9th Cir. 2021). At issue was a nutritional guide to dietary supplements that was launched by one of the plaintiff’s competitors. Ariix alleged it was positioned as a trustworthy source of unbiased reviews when in reality they were used to promote the competitor’s products. The District Court found the guide was not commercial advertising and beyond the scope of the Lanham Act, but the Ninth Circuit found the guide was “more paid review than product review” and found it actionable commercial speech.

The same rules and regulations that apply to traditional advertising apply with equal force to social media. It is sometimes challenging, however, for marketers to comply with the applicable laws in social media because of space or character limitations.

Some specialised federal regulatory agencies have issued specific rules and guidance for advertising on social media, including the Securities & Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), and the FDA (pharmaceuticals).

There are several legal challenges and regulatory issues that arise more frequently in social media than in other forms of advertising.

Disclosures

Because of the space constraints inherent on social media platforms, it is often difficult for advertisers to make all the necessary disclosures on the social media post itself. The FTC has specifically addressed this issue with its .com Disclosure Guides, which set forth specific guidance for making disclosures online and on mobile devices. The FTC’s general view is that space constraints are no excuse for failure to disclose; it has stated that if an offer is too complex to include all the necessary disclosures on a social media platform, that platform should not be used. The FTC guides also state that material disclosure must be unavoidable, which means they cannot be accessed through hyperlinks, hovers or similar tools. Nonetheless, the .com Disclosure Guides do recognise that in many cases disclosures will need to be made via hyperlinks, and set forth very specific guidance as to when and how hyperlinks should be used.

Third-Party Responsibilities

Marketers frequently employ third parties to advertise on their behalf – such as influencers, affiliate marketers, consumers and employees – through social media. These adverts must comply with the FTC’s Guides Concerning the Use of Endorsements and Testimonials in Advertising (Endorsement Guides), 16 C.F.R. Part 255, and the advertiser is responsible for ensuring compliance with those guides (see 5. Influencer Campaigns). The advertiser is also responsible for the content of any third-party adverts posted on its behalf. Advertisers should, to the extent possible, review all such advertising before it is posted, and routinely and regularly monitor and reserve the right to take down or remove any non-compliant adverts.

Advertising on social media often occurs in real time, and advertisers are eager to use, share or repost content posted by others, including celebrities and consumers, about their products and services. Such use, however, constitutes commercial use under US law and is subject to all of the intellectual property protections afforded under US law, as well as to the individual’s rights of privacy and publicity, which prohibit use of a person’s name or likeness for advertising purposes without consent. Therefore, the advertiser should secure permission before sharing or posting any such third-party content. In a high-profile case, the actress Katherine Heigl sued Duane Reade for USD5 million for posting a picture of her carrying a Duane Reade bag on its social media channels. The case settled for an undisclosed amount.

The advertiser is responsible for any content posted by someone from whom it has solicited such content and/or with whom it has any material connection, including influencers, consumers and employees. The advertiser is responsible for the content of the post – including any claims made about the advertiser’s or a competitor’s products or services – as well as for ensuring that any disclosures required pursuant to the FTC’s Endorsement Guides are made (see 5. Influencer Campaigns). The advertiser is not responsible for content posted by others on the advertiser’s site or social media channels that the advertiser has not solicited, requested, or paid for or with whom the advertiser has no material connection. However, if the advertiser shares, reposts, likes or otherwise uses that content, on its site or its social media channels, it is responsible for that content and for the truthfulness of any advertising claims made.

Any necessary disclosure must be made clearly and conspicuously. The FTC has set forth specific guidance for making disclosures in space-constrained social media in its .com Disclosure Guides (see 4.2 Key Legal Issues). In addition, to the extent that advertisers use influencers or native advertising content in social media, the FTC’s Endorsement Guides and Native Advertising Guides apply, and the advertiser must ensure that the disclosures are made in such a manner that they will travel with the content if it is shared or reposted. The FTC has also provided specific guidance for making disclosures required under its Endorsement Guides on platforms like Instagram.

There are no specific federal or state laws or regulations that apply to the use of any of the major social media platforms in the USA. Advertisers using such platforms are expected to adhere to the same rules that apply to more traditional advertising. All of the platforms do, however, have their own rules and regulations governing the use of their platforms for advertising and promotions. These requirements can change with some frequency and should be checked regularly. Use of certain social media platforms that are directed at children may also trigger application of the Children’s Online Privacy Protection Act.

The FTC has issued an Enforcement Policy Statement on Deceptively Formatted Advertising and a Native Advertising Guide for Business. It must be clearly disclosed that any advertising that looks like editorial content is, in fact, advertising. This disclosure should be made at the beginning of any such content, either at the beginning of a video or with the title and by-line of an article. The FTC recommended such content be identified as “advertising” and has expressed a concern that disclosures such as “sponsored by” and “brought to you by” are ambiguous. Nonetheless, these terms have emerged as industry norms, and there has not been enforcement activity regarding use of these phrases.

If content is native advertising, just like in traditional advertising, the advertiser is responsible for the substance, including for substantiating any product claims, securing permission from any individuals mentioned or shown to use their name or likeness, and licensing use of any trade-marked or copyrighted material.

As use of influencers has grown, so has influencer fraud. This includes companies that purport to sell followers or otherwise act to inflate an individual’s actual level of influence. The FTC has brought several enforcement actions attempting to crack down on this activity. Some advertisers have also tried to address this directly by creating their own direct relationships with influencers rather than working through influencer agencies. There have also been efforts to fine tune the use of influencer campaigns and work with a broader base of micro-influencers with fewer but more dedicated followers, rather than working with a smaller number of larger influencers. Exercising control over a larger group of influencers to ensure compliance, however, can be a challenge. Brands have also turned to the use of computer-generated influencers (CGIs) and increased use of their own employees as another way to combat fraud and assert more control over these campaigns.

The FTC’s Endorsement Guides provide the primary guidance on how to lawfully execute influencer campaigns. In brief, any endorsement made by an influencer must reflect the truthful experience of the influencer. Even if truthful, if the endorsement relates to product performance, the experience of the influencer must be what typical users can expect to achieve, or, if not, it must be made clear what the typical experience would be. The influencer cannot make any claims about a product or service that the advertiser could not independently make on its own.

The FTC’s view of what constitutes an endorsement is quite broad and an express positive statement about the product is not required. Common social media actions such as appearing in a photo with the product, tagging a product or even sharing or reposting content about the advertiser can be considered an endorsement.

The FTC’s Endorsement Guides also require that any “material connection” between the endorser and the advertiser must be disclosed. The FTC takes a similarly broad view of what constitutes a “material connection”. While payment to an endorser or influencer clearly constitutes a “material connection”, any significant relationship between the endorser and the advertiser will be considered a material connection as well, including a gift of free product, free travel, or other perks. 

The FTC has also provided guidance regarding the manner in which the material connection should be disclosed and the placement of the disclosure. The disclosure must clearly indicate the nature of the relationship or material connection. Common terms, such as #ad or #sponsored, can generally be used, but more ambiguous language such as #partner, #ambassador or #team should additionally include the full name of the brand in the same hashtag.

The “material connection” disclosure must be made clearly and conspicuously and in a manner that ensures it will travel with the endorsement if it is shared or reposted. For Instagram posts, the FTC has stated that the disclosure should be no more than three lines down in the post and before the “more” button or similar device that the consumer must click to scroll down further.

The FTC has stated that the advertiser is ultimately responsible for any advertising done on its behalf. The advertiser has the responsibility to take care in selecting and training its influencers, and a duty to audit and monitor. The FTC has entered into several consent decrees with companies whose influencers failed to disclose material connections that can be used as guidance by marketers to develop influencer monitoring programmes. See, for example, In re Machinima, Inc., In re Lord & Taylor, LLC, In re Sony Computer Ent. Am. LLC, and In re Deutsch LA, Inc.

These include specifying the disclosure requirements in the influencer agreement, reviewing the content prior to publication, routinely and regularly monitoring the content, and terminating the relationship with habitual violators. Delegating such responsibilities to an advertising agency, digital media agency or influencer agency will not absolve the advertiser of ultimate responsibility.

Once subject to a patchwork of state laws, email marketing is now exclusively regulated by federal law, except to the extent the content is deceptive or fraudulent.

CAN-SPAM

The Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 (CAN-SPAM Act), 15 U.S.C. § 7701 et seq, does the following.

• Establishes requirements for those who send commercial (ie, promotional) and transactional email (though transactional emails are less regulated).
• Provides penalties for violators.
• Gives consumers the right to opt out of commercial emails.

It applies equally to emails to consumers and to businesses.

Among other things, the law:

• prohibits false or misleading header information (an email’s from and to routing information);
• prohibits deceptive subject lines;
• requires that recipients have a free, easy-to-use opt-out method;
• prohibits commercial emails to consumers who have opted out, unless they subsequently opt in;
• prohibits sharing emails that are subject to an opt-out with third parties for any purpose other than honouring an opt-out;
• requires an opt-in (that meets certain requirements) for emails to mobile domains;
• requires that commercial email be identified as an advertisement and include the sender’s valid physical postal address;
• requires that commercial emails contain a functioning, clearly and conspicuously displayed return email address that allows the recipient to contact the sender; and
• requires warning labels on commercial email that contains sexually oriented material.

The FTC is the chief enforcer of CAN-SPAM and can seek injunctive relief and civil penalties (up to USD11,000 per email). Internet service providers can bring a private right of action. The Act also gives the DOJ the authority to enforce it and, in certain circumstances, to seek criminal sanctions. There is no private right of action under CAN-SPAM, other than for internet service providers. However, deceptive commercial email is also subject to laws banning false or misleading advertising, including state laws that permit a private right of action and class action claims.

Telemarketing is governed by several different federal and state laws.

Telemarketing Consumer Fraud and Abuse Prevention Act (Telemarketing Act)

The Act:

• prohibits specific deceptive and abusive telemarketing acts or practices;
• requires disclosure of certain material information;
• requires express verifiable authorisation for certain payment mechanisms;
• sets record-keeping requirements; and
• specifies exempt transactions.

The Telemarketing Act is enforced by the FTC, which can seek civil penalties and may seek injunctive relief to prevent further violations as well as financial and other equitable redress for injured consumers. Each violation of the Telemarketing Act also gives private persons a right of action if the amount in controversy exceeds USD50,000 in damages. The court may also award litigation costs and attorneys' fees to the prevailing party.

Telemarketing Sales Rule (TSR)

The TSR was adopted by the FTC in 1995 and has subsequently been amended several times. It applies to calls to induce the purchase of goods or services, or a charitable contribution, by the use of one or more telephones, and which involve more than one interstate telephone.

The TSR prohibits sellers and telemarketers from engaging in various activities and imposes various restrictions and requirements on telemarketing calls. Most of the requirements apply to outbound calls, although some provisions apply to inbound calls and upselling as well. For example, the TSR:

• prohibits deceptive or abusive telemarketing acts or practices;
• allows calls only between 8am and 9pm (same as under the FCC Rule under the TCPA);
• requires that telemarketers screen and “scrub” names against the national Do Not Call (DNC) Registry;
• requires that telemarketers abide by do-not-call requests and maintain an entity-specific do-not-call list;
• requires that pre-recorded calls include an automated interactive opt-out mechanism;
• requires telemarketers to honour requests to call back at a later time;

• requires that caller ID information be displayed;
• requires the telemarketer to identify themselves and what they are soliciting at the beginning of the call;
• requires accurate disclosure of all material information and terms;
• prohibits the abandonment of outbound calls to consumers;
• requires certain disclosures for prize promotions;
• prohibits unauthorised billing;
• sets payment restrictions for the sale of certain goods and services;
• imposes record-keeping requirements;
• requires a recording of a consumer’s express authorisation to be charged for certain purchases; and
• imposes various requirements for transactions involving a negative option feature and upselling transactions.

Exemptions

With some exceptions, all businesses or individuals engaging in telemarketing must comply with the TSR, as well as with applicable state laws. However, there are some exemptions such as business-to-business calls, calls placed directly by a non-profit organisation (but not by a for-profit solicitor working for a charity) or a political candidate or organisation, and calls placed by entities not subject to FTC jurisdiction.

Some calls are partially exempt from the TSR. For example, calls to existing customers where there is an “established business relationship” are exempt from the DNC Registry provisions, a list of phone numbers of consumers who have registered a desire not to receive telemarketing calls (see below). Inbound calls and upselling made during an inbound call are also exempt from the DNC.

An “established business relationship” exists if the consumer has purchased, rented or leased the seller’s goods or services within the preceding 18 months or the consumer has made an inquiry regarding the seller’s products or services within the preceding 90 days.

Compliance is required, both for the telemarketers that actually place the calls and for the sellers on whose behalf the calls are made.

Penalties

The FTC may directly bring a federal court action for injunctive relief for a breach of the TSR and may bring an action for civil penalties in conjunction with the DOJ. Violators of the TSR are subject to civil penalties of up to USD43,792 per breach. In addition, the TSR provides for private rights of action for a consumer if they have suffered USD50,000 or more in actual damages.

State-Level Regulation

At a state level, many states have enacted opt-out legislation for telephone marketing, requiring the creation of state-wide registries containing the telephone numbers of consumers in the state who do not wish to be contacted by telephone for marketing purposes. The national DNC Registry does not pre-empt state do-not-call laws.

Telephone Consumer Protection Act (TCPA)

The TCPA was adopted to reduce the number of nuisance calls by sellers and to protect consumers’ right to privacy. It overlaps in many respects with the Telemarketing Act but has broader and deeper coverage (including coverage of fax and text “calls”). The FCC has adopted rules to implement the TCPA (FCC Rule).

The FCC Rule requires that all artificial or pre-recorded telephone messages:

• state clearly the identity of the entity initiating the call at the beginning of the message; and
• during or after the message, state clearly the telephone number of the entity to which any residential phone recipient may make a do-not-call request during regular business hours.

Furthermore, the FCC Rule prohibits telemarketers from:

• disconnecting unanswered calls before at least fifteen seconds or four rings; and
• abandoning more than 3% of calls that are answered.

Furthermore, the TCPA requires differing levels of consent to call a phone number (“call” includes both voice calls and SMS text messages), depending on the nature of the call and the number called. In particular, the TCPA requires “express written consent” for telemarketing calls and texts sent using an automatic telephone dialling system (ATDS) to wireless numbers.

To obtain written consent from recipients, sellers must satisfy a checklist of requirements, including informing the consumer that:

• they are authorising the seller to engage in advertising or telemarketing;
• consent is not required as a condition of purchase of any good or service and no purchase is necessary; and
• the calls will be made using automated technology.

Automated calls and texts must also have an opt-out mechanism to quickly end the call, and a way to take the consumer’s phone number off the caller’s call list (that is, an individual entity DNC list).

Under the TCPA, a seller may be held vicariously liable for breaches that are committed by third-party telemarketers or vendors retained by the seller, even if the seller does not initiate the calls.

Exemptions

Some non-telemarketing or informational calls made using an ATDS do not require prior consent from landline recipients (callers are required to obtain consent from wireless recipients).

Penalties

Enforcement of the TCPA is achieved through an administrative proceeding by the FCC for civil forfeiture. If the forfeiture is not paid, the DOJ may initiate a collection action in federal court. Its “do-not-call” provisions are enforced by both the FCC and consumers. In addition, there is a private right of action and, unlike other telemarketing laws, it does not have a damages threshold for private citizens and allows a plaintiff to recover the greater of USD500 per breach (treble if wilful or knowing) or actual damages. Each call or text sent in violation of the law is a separate breach. Because of the private right of action and the potential for significant damages based on each call/text sent, these cases have been a hotbed of class action litigation.

As discussed in 6.2 Telemarketing, text messaging is subject to all the requirements of the TCPA.

Text messages that are sent to an address that references internet domains are also subject to the CAN-SPAM Act, which prohibits senders from sending mobile service commercial messages without the recipient’s express prior authorisation.

Many states have either express laws governing text messaging or more general laws against consumer deception that may apply.

There is currently no federal law in the USA that specifically regulates interest-based advertising. However, the California Consumer Privacy Act (CCPA) gives consumers the right to opt out of the “sale” of their personal information, which is defined to include device ID and usage information. A sale need not involve the exchange of cash consideration. There is not yet a consensus as to how tracking and targeting should be treated under the CCPA.

Google and the Internet Advertising Bureau (IAB) conclude that a publisher sells personal information when it makes it available to an operator of tracking technologies that does not commit to restrict data processing to the limited purposes of a service provider. To address this, they have developed privacy code strings for publishers to set to indicate if all or certain users are subject to such limited data uses.

The Digital Advertising Alliance (DAA) believes that publishers are not disclosing personal information to operators of tracking technologies associated with their digital properties, but rather that those operators are independent businesses (ie, controllers) that are independently collecting the data. While under this theory the publisher has no “do not sell” opt-out obligation, the operator of the tracker does if it engages in downstream sales. To address this, the DAA provides a central registry of its participants’ privacy notices and “do not sell” opt-out tools, which participating publishers give notice of to their users.

Beyond the CCPA, there are also self-regulatory notice and opt-out programmes that allow consumers to block interest-based adverts. The DAA runs the main programme, and has integrated it with its CCPA programme such that consumers can opt out of both types of activities at the same time. Advertising networks have their own, more limited, opt-out programme administered by the Network Advertising Initiative (NAI). However, the NAI and its members are participants in the DAA’s interest-based advertising (IBA) opt-out programme so that an opt-out to IBA via the DAA will also be an opt-out to the NAI members. However, the NAI does not participate in either the IAB’s or the DAA’s CCPA compliance programmes.

Pending legislation, including in California, may very well add additional consumer rights and government regulation addressing IBA.

Both state and federal law regulate marketing to minors.

Federal Regulation

The federal Children’s Online Privacy Protection Act (COPPA), 15 U.S.C. §§ 6501-6505 and 16 C.F.R. Part 312, restricts collection of personal information by commercial parties from individuals under 13 years of age (child or children) in the absence of certain statutory exceptions.

FTC regulations adopted under the Act require that the operator of a website, mobile app or online service directed at children, or an operator that has actual knowledge that it is collecting information from a child or a child-directed service, may not collect personal information (including device identifier, IP address, photos or audio of children, geolocation data, name, email, and physical address) from a child without providing notice regarding what personal information is collected from children, how the operator uses that information, and the operator’s disclosure practices for the information, and without obtaining verifiable parental consent. The FTC regulations set forth various methods for obtaining parental consent and certain exceptions.

For example, there is a limited one-time use exception that can be used for contest and sweepstakes winner notification purposes. Send-to-friend email tools need to be implemented to avoid sending personal information. The FTC and state Attorneys General enforce COPPA and a court can hold operators who breach the law liable for civil penalties of up to USD16,000 per breach.

State-Level Regulation

In California, the CCPA requires opt-in to the sale of personal information of a child under 16, by the parent if the child is under 13. In addition, the California Privacy Rights for California Minors in the Digital World Act prohibits websites and online services from advertising alcoholic beverages, firearms, ammunition, spray paint, tobacco and cigarettes, fireworks, tattoos, drug paraphernalia, and obscene material to minors. Other states have similar laws for some of the same product categories. For instance, Delaware’s Online Privacy and Protection Act prohibits marketing directed to a child “based upon information specific to that child” and prohibits marketing of the same items covered by California’s law as well as tanning equipment, dietary supplement products, lottery games and other items. These state laws are typically enforced only by the state and local government consumer protection authorities.

Sweepstakes and contests are principally governed by federal and state lottery laws and in some cases gambling laws. While state laws vary, in general, under federal and all state laws, lotteries, except those authorised by a state, are prohibited. A lottery is generally defined as a promotion involving all three elements of prize, chance and consideration. Sweepstakes, by definition, contain the elements of prize and chance. Accordingly, the element of consideration must be eliminated in order for a sweepstakes to be lawful. Consideration has generally been defined as a purchase, payment or substantial expenditure of effort. Historically, there has been little to no enforcement based on the degree of effort required; however, marketers should be sensitive to this issue, as many sweepstakes today are designed to increase levels of consumer engagement. Consumers cannot be required to make a purchase or payment to enter; however, they can be requested to do so as long as there is an effective alternate method of entry (AMOE) that affords all participants the same opportunity to enter for free on the same basis for the same prizes as those who make a purchase or payment to enter. In order to be effective in eliminating the element of consideration, the AMOE must be free and must have “equal dignity” with the purchase/payment method of entry. This means that it must have the same deadline dates for entry and the same odds of winning and cannot in any way disadvantage those who choose to enter for free.

Prize Promotion

In addition to the lottery and gambling laws, many states have very detailed prize promotion statutes that govern – and in some cases – prohibit certain types of sweepstakes, such as “everybody wins” sweepstakes and sweepstakes in which a consumer, although not required to pay to enter, is required to pay to receive their prize. These state prize promotion laws also contain various disclosure requirements and other, often esoteric, requirements that must be met depending on the nature of the sweepstakes and where it is being conducted. Advertisers must be certain to check the requirements of all 50 states before conducting any prize promotion, whether a sweepstakes or a contest of skill.

A contest of skill is a promotion in which the winners are selected on the basis of skill rather than chance. It is distinguishable from a sweepstakes because if winners are selected on the basis of bona fide skill, the element of chance is eliminated, and a purchase or payment can be required to enter. The determination of whether a game is one of skill or chance involves a very fact-specific analysis. In making this determination, courts have generally established the following criteria.

• The tasks themselves must involve the exercise of real skill.
• Participants exercising real skill should have a real and decided advantage over the less skilled participants.
• The element of chance may not materially affect the selection of the winner.
• There must be clearly defined and objective criteria by which the winners will be selected.
• If winners will be selected by a panel of judges, the judges must have the expertise to apply the criteria for winner selection.

If a purchase or a payment is required in for participation in a contest of skill, the federal and state gambling laws must also be considered. Although definitions of gambling vary by state and under federal law, the gambling laws in many respects parallel the lottery laws and generally contain the following elements.

• A prize or reward.
• Betting wagering or risking something of value.
• Betting, wagering or risking being on an activity decided, in whole or in part, on the basis of chance or a contingent event over which the participants have no control.

Sweepstakes do not generally trigger application of the gambling laws because consideration cannot be required as a method of entry. However, if a skill contest requires a purchase or payment to participate, ensuring that the level of skill is sufficient to constitute a bona fide skill and that elements of chance are not present in any material way is critical to the legality of the promotion. Such promotions must also be carefully scrutinised under the various state laws as some states have more stringent definitions regarding what constitutes skill versus chance, and some states prohibit a purchase or payment even if the requisite level of skill is present.

Sweepstakes promotions with aggregate prizes in excess of USD5,000 must be registered in the state of New York at least 30 days prior to the start of the promotion and with the state of Florida within seven days prior to the start of the promotion, and the operator must furnish a bond to cover the full value of the prizes. Operators that consistently run sweepstakes may be eligible for a waiver from the bonding requirement in Florida. Rhode Island has a registration provision that applies to retail promotions and the state of Arizona has a registration requirement that may apply to skill contests requiring a purchase.

There are no federal or state laws that specifically apply to loyalty programmes. However, points, credits or other rewards earned as part of a loyalty programme may be subject to federal and state gift card laws, and if unused may also be subject to the state unclaimed property laws known as escheat laws.

Federal law and a majority of states have gift card laws that restrict expiration dates or fees on gift cards and gift certificates, require disclosure of material information, and in some cases require that issuers provide cash back to consumers for partially redeemed cards. While these statutes were intended primarily to apply to “gift cards” and “gift certificates”, these terms are broadly defined in some of the laws and therefore may apply to points, credits and other aspects of loyalty programmes. For example, Maine defines gift certificates as “an obligation of a business association arising from a transaction between the business association and a consumer to provide goods or services at a future date. This includes, but is not limited to, a gift certificate, gift card, online gift account or other representation or evidence of the obligation”. Me. Rev. Stat. Ann tit. 33 § 1952.

Many of these laws contain an express exemption for loyalty programmes or for promotional gift cards or gift certificates that are not specifically paid for, which could include loyalty programme points or credits. It is important, however, to review these laws carefully to determine whether they may be applicable to a particular programme, in which case restrictions on expiration dates, dormancy fees and mandatory disclosures may apply.

The gift card and abandoned property laws represent a complicated maze of statutes that vary by state but must be reviewed in tandem when a business is structuring a loyalty programme in order to best mitigate a business’s liabilities.

Privacy considerations are also of growing importance to loyalty programmes. Specifically, the CCPA regulates most loyalty programmes offered in California as “financial incentives,” which requires certain disclosures and other compliance steps.

Free claims are subject to the FTC’s Guide Concerning Use of the Word “Free” and Similar Representations (Free Guide), 16 C.F.R. Part 251. The Free Guide regulates both the advertising for, and frequency of, such offers. The Free Guide generally requires that all material terms and conditions of a free offer be disclosed in “close proximity” to the word free. Furthermore, where an item is offered for free with the purchase of another (ie, Buy One Get One Free), the price of the item to be purchased cannot be inflated in order to cover the cost of the free item. The Free Guide also specifies that a product or service should not be offered for free for longer than six months in any 12-month period, there should be no more than three free offers in any 12-month period and there should be a 30-day hiatus between such offers. A number of states also have laws regarding the use of the term “free”, which typically require that the material conditions of the free offer be disclosed in either the same or at least half the type size as the word “free”.

Savings claims are subject to many of the same rules as “free offers”. The advertised savings should be based on a “bona fide” selling price which is generally defined to mean the price at which the item was sold for at least six months during the preceding rolling 12 months. Some states have even more stringent rules regarding the frequency of such offers. Continuous sales of products and services at a “sale” or “discounted” price have been a major target of class action litigation in recent years, resulting in substantial monetary settlements.

Automatic renewal/continuous service offers are heavily regulated at both the state and federal levels and have been a major target of regulatory enforcement and consumer class actions.

ROSCA

At the federal level, the primary regulation is the Restore Online Shoppers’ Confidence Act (ROSCA), which applies to any online transaction with a negative option feature. ROSCA adopts the TSR’s definition of a negative option, which is defined as “an offer or agreement to sell or provide any goods or services, a provision under which the customer’s silence or failure to take an affirmative action to reject goods or services or to cancel the agreement is interpreted by the seller as an acceptance of the offer”. 68 Fed. Reg. 4670 (29 January 2003). This definition encompasses arrangements such as pre-notification option plans, continuous service programmes, subscription programmes and automatic renewals under which the consumer is billed on a recurring basis without having to authorise each recurring charge. Free trial offers under which a consumer may receive goods or services for free for an initial period of time and is then automatically billed at the end of the free trial are also considered negative option programmes. ROSCA has three basic requirements. It prohibits a seller from charging any consumers for goods or services sold over the internet that contain a negative option feature unless the seller:

• discloses the material terms and conditions before obtaining the consumer’s billing information;
• obtains the consumer’s express informed consent before charging the consumer; and
• provides a simple method of cancellation.

Both the FTC and the state Attorneys General have the authority to enforce ROSCA and violations are subject to civil penalties. The FTC has been aggressively enforcing ROSCA and has taken a restrictive view on what constitutes “clear and conspicuous” disclosure and “express informed consent”. FTC settlements of ROSCA cases have required that the material terms and conditions be disclosed in close proximity to where the consent is obtained and that consent be evidenced by a check box or other mechanism that clearly evidences that the consumer is consenting to the negative option feature of the sale.

State-Level Regulation

In addition to ROSCA, many states also have laws regulating negative option programmes that similarly require clear and conspicuous disclosure of the material terms and conditions of the offer, express consent, and disclosure of the cancellation method. California’s automatic renewal law, which has been a hotbed of consumer class action litigation and enforcement by the district attorneys, is very prescriptive; it sets forth detailed type size/font and placement requirements for the disclosures and requires an online method of cancellation for online sales. Many states require renewal or reminder notices to be sent for longer-term contracts. Vermont’s law is notable in that it requires companies to obtain an affirmative opt-in to the automatic renewal, through a checkbox for example, in addition to acceptance of the underlying contract. Unlike ROSCA, the state laws are not limited to online sales but apply to all transactions involving a negative option feature. Visa and Mastercard have also recently imposed their own requirements. Any marketers considering such a programme should carefully consult all state laws and the Visa and Mastercard rules. Legislation and rule-making continues in this area, which, while it is already subject to significant regulations, appears likely to have more onerous compliance measures in its future.

Prior to 2018, the USA permitted almost no sports betting or gambling with limited exceptions for certain jurisdictions. A 2018 Supreme Court decision, however, found that federal law requiring states to maintain sports gambling bans violated the Constitution’s anti-commandeering principle because it regulated state law rather than the conduct itself. While this decision did not legalise sports betting nationally, it did remove the constraint that had previously prohibited any progress on sports betting. State law typically classifies sports betting as gambling, which is unlawful in most jurisdictions despite some well-known exceptions such as Las Vegas, Nevada. Since the 2018 decision, states have been able to amend their law on gambling in order to create an exception for sports betting. Several states have now passed legislation legalising sports betting in some capacity, which has created a complicated regulatory structure. Not only may the conduct be legal or illegal depending on the state, but within the states where it is legal there are different regulatory regimes. Generally, states have instituted a licensing process in order to offer sports betting, and, in some cases, there are also limits on advertising.

Daily fantasy sports are a specific sub-section of skill contests related to sports betting. For a general overview of skill contests, see 7. Sweepstakes and Other Consumer Promotions, and particularly 7.2 Contests of Skill, for further detail. When a consumer enters a daily fantasy contest, they select a certain number of real athletes playing in sports contests to be on their virtual team. The virtual team’s performance tracks the statistics of the real athletes, and the highest performing virtual teams in a pool of contestants receive a prize, usually cash. The most popular version in the USA involves National Football League (NFL) players, but the same principle can be applied to any sport. The legal issue here arises when companies offer daily fantasy contests that require a cash buy-in to participate. Entrants pay a certain amount of money to enter a contest, and then based on the performance of the team, they can win a prize. Because users are responsible for selecting their virtual team, most jurisdictions consider this a contest of skill and not an unlawful lottery consisting of consideration, chance, and prize, as detailed in the sweepstakes section. However, in some states there have been court decisions finding that daily fantasy contests are a form of unlawful gambling. This is a minority of jurisdictions, but similarly to sports betting, it’s necessary to check the law in the relevant state prior to offering or advertising daily fantasy sports in it.

Key legal issues related to non-fungible tokens (NFTs) include copyright law, terms and conditions, and regulatory issues. In general, images, video or other digital media that are attached to NFTs will be subject to US copyright laws, as well as to trade mark and name/image likeness protections. NFT sellers should ensure that they have obtained all applicable rights in the digital media. NFT sellers should also clearly define the scope of rights that they intend to grant to NFT purchasers and secondary market transferees. This can be accomplished through "clickwrap" terms and conditions that are attached to the NFT through the sales platform or, if technologically feasible, through functionality that is coded into the NFT token. NFT sellers should also carefully consider legal issues – whether contractual, regulatory or otherwise – related to the database used to host the NFT media file, and the platform used to facilitate NFT sales.

In general, the regulatory regimes that apply to cryptocurrencies include regulations issued by the Internal Revenue Service (IRS), Financial Crimes Enforcement Network (FinCEN), SEC and Commodities Futures Trading Commission (CFTC). These regulations may also apply to NFTs. Income from the of NFTs is likely to be treated as income from the sale of property under IRS guidance, which will require calculation of basis, gain and loss. While FinCEN has not issued guidance specifically addressing NFTs, FinCEN may deem NFTs to be “convertible virtual currencies” under FinCEN guidance. In this instance, persons who create and sell NFTs, host NFT wallets on behalf of third parties, or facilitate the transmission or exchange of NFTs on behalf of third parties may be deemed by FinCEN to meet the definition of a “money transmitter” or “money services business” under FinCEN regulations.

The SEC and CFTC have been active in regulating the cryptocurrency market. However, neither agency has issued guidance specific to NFTs, so the application of SEC and CFTC regulations to NFTs is currently unclear. In general, NFTs that are limited to viewing an image or other media file will typically carry less regulatory risk. In contrast, NFTs that include additional rights may carry more risk of implicating SEC or CFTC regulations. For example, in a recent speech, SEC Commissioner Hester Peirce noted that “fractionalised” NFTs may be considered to be securities.