Free Advertising – What does the FTC Think?
“Free” offers in advertising are governed partially by the FTC Act in the United States.
The offer of “Free” merchandise or service is a promotional device frequently used to attract customers. Providing such merchandise or service with the purchase of some other article or service has often been found to be a useful and valuable marketing tool.
The Federal Trade Commission (FTC) possesses extensive investigative authority to enforce antitrust and consumer protection laws under various statutes, including the FTC Act, the Clayton Act, and the Sherman Act. The FTC can gather information, issue subpoenas, and conduct investigations into businesses that affect commerce, as outlined in Sections 6, 9, and 20 of the FTC Act (15 U.S.C. §§ 46, 49, 57b-1). Section 6(a) allows the FTC to investigate businesses except banks and common carriers (15 U.S.C. § 46(a)), and Section 9 authorizes subpoenas to obtain evidence (15 U.S.C. § 49). Section 20 permits the issuance of Civil Investigative Demands (CIDs), expanding the scope to require written reports or answers to questions (15 U.S.C. § 57b-1(c)(1)). The Clayton Act’s premerger notification provisions (15 U.S.C. § 18a) mandate parties to report certain acquisitions, ensuring compliance before consummation. Failure to comply with these requirements can result in enforcement actions, civil penalties, and court orders.
The FTC’s enforcement authority spans both administrative and judicial processes. Under Section 5(a) of the FTC Act, the FTC can address “unfair or deceptive acts or practices” (15 U.S.C. § 45(a)(1)) and “unfair methods of competition” (15 U.S.C. § 45(a)). Administrative proceedings allow the FTC to issue complaints and conduct adjudicative hearings, where decisions can be appealed to the full Commission and ultimately reviewed by federal courts (15 U.S.C. § 45(c)). Judicial enforcement, under Section 13(b) of the FTC Act, enables the FTC to seek preliminary and permanent injunctions against unlawful practices directly in federal courts (15 U.S.C. § 53(b)). Additionally, the FTC can use rulemaking authority under Section 6(g) of the FTC Act (15 U.S.C. § 46) and Section 18 of the FTC Act (15 U.S.C. § 57a) to define specific unfair or deceptive acts, allowing for civil penalties and consumer redress for violations. These comprehensive powers ensure the FTC can effectively monitor and regulate business practices to protect consumers and maintain competitive markets.
When the FTC believes that an offer in an advertisement that gives a free product or a free service is not properly free, the FTC could file a complaint for false advertising. Deceptive advertising subjects the advertiser to punishment that could be monetary or injunctive and will always be in the favor of the FTC.
The Free Guide:
The “Free Guide” is based upon the notion that all “Free” offers or claims about special bargains must be made with extreme care so as to avoid any possibility that consumers will be misled or deceived. Representative of the language frequently used in such offers are “Free”, “Buy 1-Get 1 Free”, “2-for-1 Sale”, “50% off with purchase of Two”, “1¢ Sale”, etc. (Related representations that raise many of the same questions include “__ Cents-Off”, “Half-Price Sale”, “ 1⁄2 Off”, etc.).
The rules set forth in the “Free Guide” can be enforced by FTC attorneys, by state attorneys general that enforce similar state rules and via consumer class action.
Meaning of “Free”
The public understands that, except in the case of introductory offers in connection with the sale of a product or service, an offer of “Free” merchandise or service is based upon a regular price for the merchandise or service which must be purchased by consumers in order to avail themselves of that which is represented to be “Free”.
In other words, when the purchaser is told that an article is “Free” to him/her if another article is purchased, the word “Free” indicates that he is paying nothing for that article and no more than the regular price for the other. Thus, a purchaser has a right to believe that the merchant will not directly and immediately recover, in whole or in part, the cost of the free merchandise or service by marking up the price of the article which must be purchased, by the substitution of inferior merchandise or service, or otherwise.
The term regular when used with the term price, means the price, in the same quantity, quality and with the same service, at which the seller or advertiser of the product or service has openly and actively sold the product or service in the geographic market or trade area in which he is making a “Free” or similar offer in the most recent and regular course of business, for a reasonably substantial period of time, i.e., a 30-day period.
For consumer products or services which fluctuate in price, the “regular” price shall be the lowest price at which any substantial sales were made during the aforesaid 30-day period. Except in the case of introductory offers, if no substantial sales were made, in fact, at the “regular” price, a “Free” or similar offer would not be proper.
Disclosure of Conditions
When making “Free” or similar offers all the terms, conditions and obligations upon which receipt and retention of the “Free” item are contingent should be set forth clearly and conspicuously at the outset of the offer so as to leave no reasonable probability that the terms of the offer might be misunderstood.
Stated differently, all of the terms, conditions and obligations should appear in close conjunction with the offer of “Free” merchandise or service.
For example, disclosure of the terms of the offer set forth in a footnote of an advertisement to which reference is made by an asterisk or other symbol placed next to the offer, is not regarded as making disclosure at the outset.
However, mere notice of the existence of a “Free” offer on the main display panel of a label or package is not precluded provided that (i) the notice does not constitute an offer or identify the item being offered “Free”, (ii) the notice informs the customer of the location, elsewhere on the package or label, where the disclosures required by this section may be found, (iii) no purchase or other such material affirmative act is required in order to discover the terms and conditions of the offer, and (iv) the notice and the offer are not otherwise deceptive.
Supplier’s Responsibilities
If a supplier knows, or should know, that a “Free” offer it is promoting is not being passed on by a reseller, or otherwise is being used by a reseller as an instrumentality for deception, it is improper for the supplier to continue to offer the product as promoted to such reseller. The supplier should take appropriate steps to bring an end to the deception, including the withdrawal of the “Free” offer.
Resellers; Participation in Supplier’s Offers
Prior to advertising a “Free” promotion, a supplier should offer the product as promoted to all competing resellers as provided for in the FTC’s “Guides for Advertising Allowances and Other Merchandising Payments and Services.”
In advertising the “Free” promotion, the supplier should identify those areas in which the offer is not available if the advertising is likely to be seen in such areas, and should clearly state that it is available only through participating resellers, indicating the extent of participation by the use of such terms as “some”, “all”, “a majority”, or “a few”, as the case may be.
Introductory Offers
No “Free” offer should be made in connection with the introduction of a new product or service offered for sale at a specified price unless the offeror expects, in good faith, to discontinue the offer after a limited time and to commence selling the product or service promoted, separately, at the same price at which it was promoted with the “Free” offer.
In such offers, no representation may be made that the price is for one item and that the other is “Free” unless the offeror expects, in good faith, to discontinue the offer after a limited time and to commence selling the product or service promoted, separately, at the same price at which it was promoted with a “Free” offer.
Negotiated Sales
If a product or service usually is sold at a price arrived at through bargaining, rather than at a regular price, it is improper to represent that another product or service is being offered “Free” with the sale. The same representation is also improper where there may be a regular price, but where other material factors such as quantity, quality, or size are arrived at through bargaining.
Frequency of Offers
So that a “Free” offer will be special and meaningful, a single size of a product or a single kind of service should not be advertised with a “Free” offer in a trade area for more than 6 months in any 12-month period. At least 30 days should elapse before another such offer is promoted in the same trade area.
No more than three such offers should be made in the same area in any 12-month period. In such period, the offeror’s sale in that area of the product in the size promoted with a “Free” offer should not exceed 50 percent of the total volume of his sales of the product, in the same size, in the area.
Similar Terms
Offers of “Free” merchandise or services which may be deceptive for failure to meet the provisions of the Free Guide may not be corrected by the substitution of such similar words and terms as “gift,” “given without charge,” “bonus,” or other words or terms which tend to convey the impression to the consuming public that an article of merchandise or service is “Free”.
Lessons from Cases:
The FTC made a false advertising complaint against Intuit in March 2022. It claimed that TurboTax tricked consumers into thinking they could file their taxes free of charge, when they, in fact, had to pay anywhere from $59.99 to $119.99 and the “free” offer was only for those who filed simple tax returns (which was only one-third of all tax filers).
In mid-2023, an administrative law judge found that TurboTax’s advertising was false and misleading, and a new decision by the Federal Trade Commission confirms the administrative law judge’s view. In the decision, TurboTax is prohibited from advertising any goods or services for “free” unless it conspicuously discloses the percentage of consumers who qualify. TurboTax has appealed the decision to the U.S. Court of Appeals for the Fifth Circuit.
The Commission’s decision included a great summary of the basics of the FTC’s view of advertising law:
- In determining whether an advertisement is deceptive, the Commission considers (1) what claims are conveyed in the ad; (2) whether those claims are false or misleading; and (3) whether the claims are material.
- The determination of what claim is conveyed focuses on the overall net impression of the advertisement for the reasonable consumer-viewer, rather than the literal truth or falsity of the words in the advertisement.
- A representation is considered material if it “involves information that is important to consumers and, hence, likely to affect their choice of, or conduct regarding, a product.
- An ad is deceptive if it is likely to mislead a significant minority of reasonable consumers.
- Disclaimers or qualifications in any particular ad are “not adequate to avoid liability unless they are sufficiently prominent and unambiguous to change the apparent meaning of the claims and to leave an accurate impression.”
- “If a claim conveys more than one meaning, only one of which is misleading, a seller is liable for the misleading interpretation even if non-misleading interpretations are possible.”
- When claims are reasonably clear from the face of the advertisement, the finder of fact can rely “on its own reasoned analysis” to determine what claims, including implied ones, are conveyed and consumer perception studies are not necessary.
- If ads induce consumers to visit an advertiser’s webpage through false advertising, disclosures on the webpage do not absolve the company of liability for the ads, and using false claims to engage consumers and induce them to further interact with the company is prohibited.
- Section 5 of the FTC Act requires proof that a claim is likely to deceive, not proof of actual deception, and the FTC is not required to show, through consumer complaints or otherwise, that any one consumer was actually deceived.
FTC Returns Over $973,000 to Consumers Scammed by NutraClick LLC
The Federal Trade Commission (FTC) has begun distributing payments totaling more than $973,000 to 17,064 consumers who were misled by NutraClick LLC’s deceptive practice. These consumers were automatically enrolled in unwanted membership programs for supplements and beauty products, resulting in unexpected monthly charges.
Background of the Case
NutraClick LLC came under FTC scrutiny for deceptive practices related to its “free” trial offers. The company lured consumers with samples of supplements and beauty products but then enrolled them in recurring membership programs without their consent. To avoid these charges, consumers were misled about the necessary cancellation procedures.
In 2016, NutraClick agreed to a settlement with the FTC, which mandated that the company clearly disclose the terms of its recurring membership programs. Despite this settlement, NutraClick continued its deceptive practices, leading to a new FTC complaint in September 2020. The company was accused of violating federal law and the 2016 settlement by continuing to mislead consumers about the cancellation terms for free trial memberships. As a result, NutraClick agreed to pay $1.04 million for consumer refunds and was banned from engaging in such marketing practices.
Refund Distribution
Starting today, the FTC is sending out checks to affected consumers. Recipients are advised to cash these checks within 90 days. If there are any questions regarding the payments, consumers can contact the refund administrator, Analytics, at 844-735-1139 or visit the FTC’s frequently asked questions page about refunds.
Challenges and Legislative Appeal
The FTC’s efforts to return money to consumers have faced significant challenges. Although the Commission secured over $472 million in refunds in 2021 and over $462 million in 2022 from various cases, a 2021 Supreme Court ruling stripped the FTC of its authority under Section 13(b) to seek monetary relief in federal court. This ruling has made it more difficult for the FTC to secure refunds for consumers harmed by deceptive practices.
The Road Ahead
The FTC has been advocating for legislative changes to restore its ability to obtain monetary relief for consumers. This ongoing effort aims to ensure that consumers can continue to receive refunds for deceptive and unfair business practices.
For more detailed information, consumers can access the FTC’s interactive refund dashboards, which provide a state-by-state breakdown of refunds issued in various cases.
Key Takeaways for Consumers
- Stay Vigilant: Be cautious with free trial offers and always read the terms and conditions carefully.
- Act Promptly: Cash any refund checks received from the FTC within the specified timeframe.
- Stay Informed: Keep up-to-date with FTC announcements and understand your rights as a consumer.
The FTC’s actions against NutraClick LLC highlight the importance of consumer protection and the ongoing efforts to combat deceptive marketing practices.
FTC Takes Action Against HomeAdvisor for Deceptive Practices, Orders $7.2 Million in Refunds
The Federal Trade Commission (FTC) has issued a proposed consent order requiring Denver-based HomeAdvisor, Inc. (affiliated with Angi, formerly Angie’s List) to pay up to $7.2 million in response to deceptive and misleading tactics used in selling home improvement project leads to service providers. This action targets small businesses in the gig economy that were misled about the quality of leads they purchased and the terms of their subscriptions.
Key Details of the FTC Order
The proposed order mandates that HomeAdvisor establish funds to make payments to affected service providers:
- Up to $30 to service providers misled about the quality of leads.
- Up to $59.99 to service providers who were wrongly told that the first month of their “mHelpDesk” subscription was free.
Additionally, the order bars HomeAdvisor from engaging in similar deceptive conduct in the future. This move follows a March 2022 FTC charge against HomeAdvisor for its misleading practices.
FTC’s Stance and Broader Implications
Samuel Levine, Director of the FTC’s Bureau of Consumer Protection, emphasized the significance of the order, stating that it requires HomeAdvisor to refund millions to home service providers and prohibits the company from continuing to mislead about the quality of its leads. Levine highlighted the FTC’s ongoing commitment to protecting consumers, workers, and small businesses from dishonest commercial practices, even as the economy evolves.
Background and Legal Proceedings
The FTC’s action stems from ongoing violations by HomeAdvisor, which operates under various names, including Angi Leads and HomeAdvisor Powered by Angi. The company faced allegations of violating Section 5(a) of the FTC Act due to deceptive advertising and billing practices. Although HomeAdvisor neither admitted nor denied the allegations, it agreed to the terms of the proposed order for settlement purposes.
The order’s acceptance by the FTC initiates a 30-day public comment period before final approval. If accepted, the order will be published on the FTC’s website and will become enforceable, holding HomeAdvisor accountable for any future violations.
Do you have questions about advertising law for your business? Verna Law, P.C. can help you with reviewing the content of your advertisements. Contact us at anthony@vernalaw.com or call us at 914-908-6757.
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