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Paying for the Mistakes Of Others: Retailer Liability for False Advertising Claims
Topic: Commercial Speech
By Brian L. Heidelberger, a partner, and Robert H. Newman and Monique N. Bhargava, associates, in the intellectual property and advertising law department at the law firm Winston & Strawn LLP
Legal Backgrounder, November 20, 2009, 4 pages
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WLF Legal Backgrounder

Paying for the Mistake of Others: Retailer Liability for False Advertising Claims

By Brian L. Heidelberger, Monique N. Bhargava, and Robert H. Newman
November 20, 2009 (Vol. 24 No. 37)

It's not just consumers who shouldn't believe everything they are told.  In a growing trend, retailers have been legally pursued for republishing false or misleading advertising claims provided to them by the manufacturers of the products in their stores.  As such, retailers that rely solely on product manufacturers for advertising content may find themselves exposed to legal liability when those advertising claims are challenged as false or misleading.

Retailers can incorporate the advertising claims provided by product manufacturers in several ways, including in advertising in-store, on-line, or through various forms of traditional media including print, television or radio.  Actions against a retailer may be brought by various entities, including third party competitors, state and federal governments, as well as individual consumers.  The extent of a retailer's liability may depend on the types of claims incorporated into the retailer's advertising, the extent to which the retailer incorporates a product manufacturer's advertising claims, and the reasonableness of the retailer's reliance on the manufacturer's substantiation. 

Claims by Competitors -- Lanham Act 

The competitors of a product manufacturer whose products are sold by a retailer can assert claims for false advertising under Section 43(a) of the Lanham Act against all parties responsible for disseminating false or misleading statements regarding the goods or services and/or placing the advertised goods or services in commerce.1  In order to succeed on a false advertising claim under the Lanham Act, a plaintiff must prove: (1) a false statement of fact was made by the defendant in a commercial advertisement regarding the defendant's or another's product; (2) the statement actually deceived or has the tendency to deceive a substantial segment of its audience; (3) the deception is material, in that it is likely to influence the purchasing decision; (4) the defendant caused the false statement to enter interstate commerce; and (5) the plaintiff has been or is likely to be injured as a result of the false statement.2  It is well-settled that advertisers are responsible for all claims, express or implied, that are reasonably conveyed by their advertisement.3 

Because the Lanham Act does not require that a false or misleading statement be made willfully or with an intent to deceive, the fact that the advertiser relies on the representations of a third party will not likely shield the advertiser from liability.4  Few cases directly address the liability of retailers for republishing a manufacturer's false or misleading advertising claims.  Notwithstanding, trademark infringement and unfair competition cases brought under the Lanham Act provide guidance on how some courts may approach this question.  For example, in Gucci America, Inc. v. Action Activewear, Inc., the Southern District of New York found a retailer liable for unfair competition where the retailer unknowingly sold infringing goods.5  The court concluded that "wrongful intent is not a prerequisite to an action for unfair competition, and...good faith is no defense."6 

Those responsible for disseminating materially false statements can be found liable for false advertising under the Lanham Act regardless of the party responsible for originally developing the false claim.  For example, in Grant Airmass Corp. v. Gaymar Indus., Inc., the plaintiff stated a claim against both the advertiser and the research firm the advertiser hired to prepare an allegedly false product comparison study.7  The advertiser was liable for disseminating the false statements based on the information contained in the research report, and the research firm was liable as a contributory infringer because it supplied the advertiser with the false research report knowing that the advertiser would use it to create false advertising claims.8 

Additionally, courts have recognized that a company can be liable under the Lanham Act even if the company was not directly responsible for placing the infringing goods in commerce.9  For example, in Noone v. Banner Talent Assocs., Inc., the court rejected the defendant's argument that the Lanham Act was never intended to cover the activities of a booking agent for a band that used a name which allegedly infringed on the trademark rights of a third party.10  The court indicated that the Lanham Act clearly states that its prohibition on false representations extends to any person who knowingly causes a false representation to be placed in commerce.11  In this case, the booking agent was potentially liable because he caused the booking of the band through the use of the allegedly infringing name.12

The Lanham Act limits the remedies available for "innocent infringement" by printers, publishers and broadcasters who merely print or broadcast the advertisements or publish the newspaper, magazine, or similar media in which the advertisement is included.13  To succeed on an "innocent infringer" affirmative defense, the publisher or printer must neither have known nor have acted in reckless disregard to a high probability that the materials which it was publishing or printing were in fact infringing on a third party's rights under the Lanham Act.14  Nothing in the Lanham Act expressly provides protection for advertisers who incorporate a third party's representations and statements in their own advertising.  Although it may be possible to argue that retailers are merely acting as publishers when they reproduce the claims provided to them by third parties, such an argument does not appear to have yet been presented to courts.  Previous decisions such as Grant Airmass Corp. v. Gaymar Indus., Inc., have in fact imposed liability on retailers for similar acts.  Accordingly, it would follow that a retailer is likely to be held liable for republishing false or misleading advertising claims provided by the product manufacturer, particularly when the advertising claims at issue may be found to be so clearly false or misleading that a retailer's belief otherwise would be unreasonable.

Claims by Regulators and/or Consumers -- State and Federal Unfair Competition Laws

The Federal Trade Commission ("FTC") as well as state regulators have become increasingly aggressive in their pursuit of retailers for the dissemination of false or misleading advertising claims in violation of Section 5 of the Federal Trade Commission Act ("FTC Act") and similar state laws.  The FTC Act authorized the FTC to bring actions against entities for unfair business practices, including the dissemination of false and misleading claims.15 In addition, states also have unfair competition laws and "little FTC acts," which generally prohibit unfair business practices, including false and misleading advertising, under which claims can be brought by regulators or consumers.

Retailers likely can be liable for manufacturers' false and misleading claims under the FTC Act.16  Under the FTC's requirements, retailers should have a reasonable basis for all express and implied advertising claims before disseminating such claims.17  The FTC has indicated that an advertiser's "failure to possess and rely upon a reasonable basis for objective claims constitutes an unfair and deceptive act or practice in violation of [the FTC Act]."18 

The FTC has indicated that sellers, as well as third parties such as advertising agencies, website designers, and catalog marketers, may be liable for "making or disseminating deceptive representations if they participate in the preparation or distribution of the advertising."19  The FTC recommends that catalog marketers ask for material to back up claims, rather than simply relying on the manufacturer's representations regarding the veracity of their claims.20  Retailers are likely to be subject to the same standards as catalog makers to the extent they merely republish advertising claims provided to them by product manufacturers.  If a manufacturer cannot provide substantiation or such substantiation is questionable, this may give a retailer cause to avoid republishing the manufacturer's advertising claim in the retailer's advertising.  Notwithstanding, to the extent a retailer is creating its own advertising claims based on factual information provided by a product manufacturer, the retailer could be held to the higher standards applied by the FTC to advertising agencies where the FTC will look to the extent of the agency's participation in the preparation of an advertisement and whether the agency knew or should have known that the advertisement included false or misleading claims.21  It is possible that a retailer would even be held to the highest standard of the advertiser given that the retailer is creating the advertising claim itself for its own benefit.

These policies are reflected in the FTC's settlements with QVC and Quigley which resolved allegations that the companies made unsubstantiated claims regarding the ability of Quigley's Cold-Eeze product to prevent colds. Quigley was charged as the manufacturer, and QVC as the retailer, of Cold-Eeze.22  In finding QVC liable, the FTC reasoned that despite the fact that QVC was not the principal source of the deceptive claims, it played a key role in the distribution of the deceptive claims and benefited directly from the deceptive ads.  Consequently, "the FTC believed it was important to hold QVC as well as Quigley responsible for these claims."23

Similarly, in 2005, Wal-Mart and Walgreens drug stores agreed to pay a total of $650,000 in a settlement with the Napa, Solano, and San Diego, California county district attorneys over claims that the retailers helped promote deceptive advertising claims by placing a product with deceptive claims on their shelves.24  The product, which sends electric currents into a user's body, used packaging which claimed that consumers could "push a button and get 700 sit-ups with no pain, no work and no exercise."  The district attorneys' offices said that the prosecution was intended to send a message to all retailers that simply relying on the representations of product distributors will not cut off a retailer's liability.

It would seem, then, that retailers may be exposed to liability for just republishing the advertising claims provided to them by product manufacturers without first requesting and reviewing the manufacturer's substantiation and possessing a reasonable basis for the inclusion of the claims in the retailer's advertising.  Retailers should be particularly sensitive to advertising claims which contain representations regarding health or safety, claims directed towards children, or other claims which sound too good to be true, as such claims are subject to a heightened level of scrutiny by state and federal regulators. 

How Retailers Can Protect Themselves

One way retailers can protect themselves from the risks outlined above is by ensuring that any agreements to sell third party products or services contain representations and warranties with respect to the accuracy of all claims provided by product manufacturers.  The agreements should also include indemnification provisions for any breach of the stated representations and warranties or any violation of the rights of a third party.  However, while this helps to reduce some of the risk to retailers, some small business product manufacturers may not have the resources to fulfill their indemnification obligations in the event of a lawsuit.  In such case, it would also be helpful for retailers to require product manufacturers to obtain and add the retailer to insurance policies so that they can ensure compliance with terms of the indemnifications; however, this may not always be feasible from a business perspective.  In addition, while contractual provisions may provide a retailer protection from monetary damages in a lawsuit, they are not likely to insulate a retailer from regulatory actions. 

Retailers are less likely to be held responsible for claims made by third parties when they simply reference a manufacturer or its products without including advertising claims or direct consumers to a manufacturer's independent website for more information about the manufacturer's products or services.  Arguably, if the retailer is not involved in the creation of the advertisements or the claims and is not disseminating claims within its own advertising the retailer may not be liable for false or misleading advertising claims made independently by the manufacturer.

To the extent a retailer does incorporate a manufacturer's claims in its advertising, the retailer can also reduce its risk of liability by requiring the manufacturer to provide substantiation for any advertising claims which the manufacturer creates and by assessing the sufficiency of the substantiation.  For larger retailers who sell products from a wide variety of product manufacturers, this may be a heavy burden given that thousands of claims may have to reviewed before placing products on shelves.  However, where retailers are involved with products which involve claims subject to a heightened level of scrutiny, such as products targeting children or claims which contain health or safety representations, reducing the risk of liability by asking for substantiation may outweigh the burden of review. 

Conclusion

Claims provided by product manufacturers may land a retailer into trouble if the retailer does not recognize the legal dangers involved in blindly disseminating such claims.  The law imposes substantial responsibility on retailers with regard to advertising statements created by product manufacturers, therefore retailers must act prudently to reduce their exposure to the risks of legal action.  To minimize risks, retailers can allocate responsibility to and require indemnification from the product manufacturers who provide the advertising claims, can refuse to incorporate the manufacturer's advertising claims and instead refer consumers directly to the manufacturer for information, or retailers can independently review third party claims for compliance with federal, state and local laws and regulations. 

Brian L. Heidelberger is a partner in the intellectual property and advertising law department at Winston & Strawn LLP who focuses his practice on advertising, marketing, promotions, e-commerce, sports, and entertainment law matters.  Robert H. Newman and Monique N. Bhargava are associates in the intellectual property and advertising law group.  The information contained in this article is not intended as, nor should it serve as a substitute for, legal advice. 

Notes:
1. 1 Joseph Zamore, Business Torts sec. 7.04[4][a] (2009); see also 5 J. Thomas McCarthy, McCarthy on Trademarks sec. 27:52 (4th ed. 2009). 

2. See Hot Wax, Inc. v. Turtle Wax, Inc., 191 F.3d 813, 819 (7th Cir. 1999); see also B. Sanfield, Inc. v. Finlay Fine Jewelry Corp., 168 F.3d 967, 971 (7th Cir. 1999).

3. See Sears, Roebuck & Co., 95 F.T.C. 406, 511 (1980), aff'd 676 F.2d 385 (9th Cir. 1982).

4. See Frostie Co. v. Dr. Pepper Co., 341 F.2d 363, 364 (5th Cir. 1965) (indicating that "an intent to infringe or an intent to mislead the public is not a necessary ingredient to a [trademark infringement action]"). 

5. 759 F. Supp. 1060 (S.D.N.Y. 1991). 

6. Id. at 1065.

7. 645 F. Supp. 1507 (S.D.N.Y. 1986). 

8. Id. at 1512.

9. See, e.g., Noone v. Banner Talent Assocs., Inc., 398 F. Supp. 260 (S.D.N.Y.1975). 

10. Id.

11. Id. at 262.

12. Id.

13. 15 U.S.C. sec. 1114(b)(2) (limiting relief to an injunction against future printing, except when such relief would cause the printer delay in the delivery of an issue or the transmission of a broadcast).

14. 5 J. Thomas McCarthy, McCarthy on Trademarks sec. 25:29 (4th ed. 2009). See e.g. World Wrestling Federation v. Posters, Inc., Case No. 99 C 1807, 2000 WL 1409831 (N.D. Ill. Sep. 36, 2000).

15. 15 U.S.C. sec. 45 et seq.

16. However, it should be noted that Ms. Shelia Anthony, former Commissioner of the FTC, has stated that the FTC "generally will not hold [retailers] liable if they reasonably rely on the manufacturers' substantiation" (emphasis added). 

17. See FTC Policy Statement Regarding Advertising Substantiation available at, http://www.ftc.gov/bcp/guides/ad3subst.htm.

18. Id.

19. See Advertising and Marketing on the Internet: Rules of the Road (September 2000), available at http://www.ftc.gov/bcp/edu/pubs/business/ecommerce/bus28.shtm.    

20. Id.

21. Id.

22. See Quigley Corp., C-3926 (Feb. 11, 2000); QVC, Inc., File No. 982-3252 (Nov. 23, 1999).

23. Id.

24. See Napa County District Attorney press release, available at http://www.co.napa.ca.us/GOV/Departments/DeptPage.asp?DID=22400&LID=207.