Other Federal and State Regulation of Commercial Speech

The Lanham Act

In 1946, Congress passed the Lanham Act¹ (named after Representative Fritz C. Lanham) that substantially revised the Trademark Act of 1905.² The Lanham Act, also known as the Trademark Protection Act of 1946, provides a means for registration and protection of trademarks and remedies for the disparagement of products and services. Section 43(a) of the Act says that, “any person who believes that he or she is or is likely to be damaged by such [a disparaging] act” can sue for damages.³

With the 1988 passage of the Trademark Law Revision Act and subsequent revision in 1992,⁴ the second purpose of the Act, regulation of false and deceptive advertising, became much more explicit. In part, the revised Act not only protects trademarks but also now includes causes of action for “any false designation of origin, false or misleading description of fact, or false or misleading representation of fact.”⁵ The phrasing, “any person who believes that he or she is or is likely to be damaged by such act,” remains the same in the revised Act, but the statute defines any person as including “any State, instrumentality of a State or employee of a State or instrumentality of a State acting in his or her official capacity.”⁶

In 1993, the Third Circuit U.S. Court of Appeals, in a case involving lawsuits brought by consumers for ads promoting premium gasoline and rust inhibitors for automobiles, said the intent of Congress in approving the revised Act was not to provide a remedy for consumers. The court noted that the wording including “a consumer” was originally proposed to be included in the Act, but was dropped from the final draft.⁷

Exclusion of consumers from bringing suits under the Lanham Act underscores a substantial difference between the Act’s provisions and more traditional remedies for false advertising. Although the Lanham Act’s false advertising provisions do seek to protect consumers from the potential harms of marketplace confusion, the Act’s core function is much more aligned with its intellectual property roots—preserving a fair market for those endeavoring to engage in commerce.

Remedies for a Lanham Act plaintiff (e.g., a business competitor) are generally divided into three categories: (a) injunctive relief; (b) market (actual) financial damages; and (c) court-ordered corrective advertising. The first, injunctive relief, only requires that a plaintiff show consumer confusion and “likelihood of damage” resulting from defendant’s deceptive advertising. No actual proof of harm, such as documentation of lost sales or consumer confusion, is necessary for injunctive relief.

When a Lanham Act plaintiff seeks financial damages or asks the court to order corrective advertising, however, the burden of proof generally increases to require a showing that the defendant’s false or deceptive advertising materially affected the plaintiff’s bottom line or customer base in a negative way. Courts have generally required plaintiffs to offer compelling expert testimony and independent consumer research that provide a causal link between the competitor’s campaign and actual consumer confusion.

The interpretation of the Lanham Act’s false advertising provisions is by no means settled, however, as two more recent federal appellate court decisions illustrate. The first, Balance Dynamics Corp. v. Schmitt Industries, Inc.,⁸ addressed the “likelihood [of harm] versus actuality” distinction. Balance Dynamics filed a lawsuit against the defendant Schmitt for implying in direct correspondence with corporations in the machining industry that Balance Dynamics’ industrial products would soon run afoul of the federal Environmental Protection Agency’s ban on ozone-depleting substances. In its correspondence to corporations, Schmitt Industries suggested that, unlike its competitors, including Balance Dynamics, Schmitt Industries offered a line of quality, ozone-friendly replacements for that technology.

Balance Dynamics took exception to this communication and eventually filed suit in federal district court. The plaintiff claimed no actual damage as a result of Schmitt Industries’ allegedly deceptive campaign, but instead requested that it be compensated by the defendant for “damage control” efforts (i.e., funds to cover Balance Dynamics’ own corrective measures). The district court, determining that the plaintiff had not provided evidence of a single consumer who was confused by Schmitt Industries’ communications, ruled in favor of the defendant.⁹

The Sixth Circuit Court of Appeals vacated the decision and remanded to the district court for further proceedings. The appeals court noted that, based on its own analysis of Lanham Act false advertising claims, plaintiffs seeking “damage control” compensation do not need to show evidence of actual harm or consumer confusion. This relaxation of proof burden for Lanham Act plaintiffs should serve as a warning for any corporation or agency engaging in comparative advertising. Balance Dynamics is also worthy of note because the “advertising” in question was not advertising at all; rather, it was direct correspondence with actual and potential consumers of the two corporations’ products. Just as with the common law of commercial speech, courts seem to possess varying definitions of “advertising,” creating additional uncertainty for corporate communicators.

The uncertainty surrounding Lanham Act unfair competition litigation increased in subsequent cases. In Pizza Hut v. Papa John’s International, Inc.,¹⁰ decided by the Fifth Circuit Court of Appeals, the pendulum seemingly swung back toward an approach that was more defendant-friendly. After Papa John’s began to make a dent in Pizza Hut’s market share with its “Better Ingredients. Better Pizza” slogan and a series of comparative advertisements touting the superiority and freshness of Papa John’s dough and tomato sauce, Pizza Hut filed a Lanham Act lawsuit in federal district court. Although offering no actual proof of the claim, Pizza Hut successfully argued that the combination of Papa John’s new slogan and comparative advertising related to the production of the corporations’ pizza crusts and sauce constituted false or deceptive statements of fact likely to confuse consumers. The court ordered Papa John’s to immediately cease using its “Better Ingredients. Better Pizza,” slogan which the corporation had spent millions of dollars printing on its boxes and other promotional materials, as well as awarding Pizza Hut a settlement of almost a half million dollars.¹¹

The case was reversed on appeal in the Fifth Circuit. The court determined that Papa John’s slogan, taken by itself, was not a quantifiable material statement of fact (i.e., puffery) and was therefore not actionable under Lanham Act provisions. In combination with the dough and sauce advertisements, however, the appeals court agreed with the lower court that “Better Ingredients. Better Pizza” acquired a new meaning that was indeed deceptive. The appeals court deviated from the lower court, however, in determining that Pizza Hut did need to present evidence that consumers’ pizza-buying decisions had been and likely would continue to be affected by the deceptive campaign and slogan. On this ground, the court overturned the lower court’s decision. This case left some legal observers scratching their heads because the court seemingly suggested that it cannot be assumed that consumers make their food-consumption decisions based on taste and quality.

The future of Lanham Act unfair competition jurisprudence remains unsettled. As Pizza Hut and Balance Dynamics illustrate, federal district and circuit courts continue to wrestle with fault standards for the various Lanham Act remedies, and, at a more elemental level, have not completely disposed of the question of what constitutes an “advertisement” under the Act’s provisions. This latter uncertainty mirrors the California Supreme Court’s determination in Kasky v. Nike¹² (discussed in Chapter 3) that Nike’s non-advertising public relations efforts could be characterized as regulable commercial speech.

Regulation of Commercial Speech and the Federal Fair Housing Act

The Federal Fair Housing Act of 1968¹³ makes it illegal to discriminate in the sale or rental of housing. Section 804(c) of the Act also “prohibits the making, printing, and publishing of advertisements [or other commercial speech] which state a preference, limitation or discrimination on the basis of race, color, religion, sex, handicap, familial status or national origin.”¹⁴ The prohibition applies to publishers, such as newspapers and directories, as well as to people and entities who place real estate advertisements.

Practices that have run afoul of provisions of this statute, or of the regulations promulgated by the Department of Housing and Urban Development (HUD), the federal agency charged with enforcing fair housing laws, include (a) exclusively employing white models in photographs or illustrations accompanying advertisements depicting potential clients in marketing campaigns for housing developments; (b) showing only adult couples in brochures describing rental property; or (c) specifying preferences for gender (“males preferred”) or religion (“a Christian community”) in advertising copy. Classified advertisements by individuals seeking roommates are exceptions.

Advertising and public relations professionals should be alert to possible trouble when using terms such as exclusive or private, mature or adult, no children or couples preferred (or only), and only kosher meals served or close to (named denominational) church in commercial speech related to the sale or rental of housing properties. Exceptions are recognized for commercial speech related to housing that is specifically designed for the elderly or the physically challenged or is restricted to members of a religious sect, although such speech cannot discriminate by race or other characteristics unrelated to the specific exemption.

HUD’s expansive interpretation of the Federal Fair Housing Act’s regulation of discriminatory commercial speech has been ratified by the courts. In Ragin v. The New York Times,¹⁵ a second circuit federal court of appeals in New York disagreed with the trial court and upheld the viability of a discrimination claim based on the failure to use minorities as models in housing advertisements. The plaintiffs had claimed the ads indicated a preference for whites as purchasers or renters in certain neighborhoods and rental complexes. Finding that such evidence might cause a jury to conclude that The New York Times had violated the Fair Housing Act’s provisions, the court remanded the case for further consideration. The Supreme Court of the United States elected not to hear the newspaper’s appeal.

Regulation of Commercial Speech by Other Federal Laws and Agencies

Simply listing the federal statutes and regulations governing commercial speech, in addition to those involving the FTC, the FDA and the SEC (discussed in the preceding chapter), could take up much of the rest of this book. For example, there are more than 800 federal statutes affecting commercial speech about everything from atomic energy to Woodsy Owl, including burial of veterans, currency usage in advertising, eavesdropping devices, foods from avocados to watermelons, use of insignias of the Girl Scouts and the Olympics, railroads, the Swiss Federation coat of arms and water hyacinths (transportation thereof). In addition, more than 4,000 federal regulations cover these subjects in more detail, as well as specify procedural and technical requirements for satisfying these regulations. Prudent advertising and public relations professionals would be wise to review the list of these laws and regulations to determine which pertain to their commercial speech efforts.

Nonetheless, there are a number of subjects covered by federal statutes and regulations that deserve brief special mention because of the problems they might cause for significant numbers of those engaged in commercial speech. These include commercial speech about employment, banking, billboards and alcoholic beverages.

Employment Issues

Various civil rights statutes make discrimination by race, age and other characteristics illegal in employment practices. These same strictures often apply to commercial speech publicizing these subjects. The Civil Rights Act of 1964¹⁶ forbids employment notices that appear to discriminate by race or sex and gives those harmed by such advertising the right to file civil suits seeking money damages both against those who place the notices and, in some cases, against those who publish them.

For example, in Hailes v. United Air Lines,¹⁷ a federal appeals court upheld a claim that an employment notice seeking women for flight attendant positions had reasonably been interpreted by a man as discouraging his application for such a position. In Pittsburgh Press v. Pittsburgh Commission on Human Relations¹⁸ (discussed in Chapter 2), the Supreme Court of the United States found that the newspaper’s help-wanted advertisements, segregated by male and female headings, were not protected by the First Amendment. Congress enacted similar restrictions against discrimination by age in the Age Discrimination in Employment Act of 1967¹⁹ and against physical and mental disabilities in the Americans with Disabilities Act of 1990.²⁰

Complaints about discrimination involving these characteristics are often generated by use of such terms in commercial speech employment notices as young, recent college graduate or able-bodied. Advertising and public relations professionals should also be alert to terms like junior assistant, first-time or beginner in describing the position level that is the subject of the commercial speech.

Even potentially more dangerous for those engaged in commercial speech about employment opportunities are the sections of federal laws banning activities indicating “any preference … based on race,” including advertising and other publicity. Until Ragin (discussed earlier), most authorities had agreed with the logic of the court in Housing Opportunities Made Equal v. Cincinnati Enquirer, Inc.²¹ that civil rights claims should be limited to statements constituting a “campaign of discrimination,” or indicating a “preference, limitation, or discrimination based on race, color … or national origin . …”²² The expansive interpretation by the federal court in Ragin, holding that the use of models lacking racial diversity could constitute discrimination, should be a warning signal for advertising and public relations professionals to take a second look at common practices or thoughtless actions that could be considered discriminatory, particularly when viewed through the eyes of groups that historically have experienced the effects of discrimination.

Financial Issues

Advertising and public relations related to the banking industry are closely regulated by a variety of federal agencies. Both the Federal Reserve System and the Federal Deposit Insurance Corporation set policies for the operation of member banks and financial institutions, including regulations involving commercial speech. Similarly, the Federal Home Loan Bank Board regulates the commercial speech of federal thrift institutions, while the National Credit Union Administration oversees federal credit unions.

Each federal agency’s concerns with commercial speech arise primarily with enforcement of various provisions of the federal “Truth In Lending Act,”²³ which regulates commercial speech involving offers of consumer credit. Both regulatory agencies and the courts have broadly defined commercial speech under the Act, including, for example, media advertising, direct mail solicitations and messages accompanying loan applications or checking account statements. The Act forbids commercial speech designed to encourage offers of credit that are not of a “usual and customary” nature, such as offers of low interest that actually are unavailable to the average consumer.²⁴