FTC Policy Shift May Mean Pursuit of Media Companies for Deceptive Advertising

Historically, broadcasters have not been held liable for the mere distribution of another company’s deceptive advertisements. A few years ago, the Federal Trade Commission (FTC) threatened broadcast and newspaper industries with action over diet-pill ads. To date, however, the commission has never taken action against a media company for the distribution of an allegedly deceptive advertisement of another entity’s product or service.

The FTC, however, recently released a letter concluding an investigation, but not determining whether or not a violation had occurred, concerning Premiere Radio Networks, Inc.’s (Premiere) advertisement-production services in connection with the marketing of a purported height-enhancing pill. In this letter, the FTC took the position that being “an active participant in preparing the deceptive advertisement” (i.e., advertising production in addition to distribution) can lead to a violation of Section 5 of the FTC Act, which gives the commission broad authority to prohibit “unfair or deceptive acts or practices.”

The FTC in its letter classified Premiere as a “hybrid entity” because, in addition to radio program production, the company produces commercial advertising for nationwide dissemination. According to the letter, when a “hybrid entity” engages in the latter services, FTC regulations related to advertising agencies become applicable. Under the FTC Act, an ad agency may be held liable if it was an active participant in the preparation of a deceptive advertisement and it “knew or should have known that the advertisement was false or lacked substantiation.” The “creation” of the challenged “advertising theme” is “not necessary to a finding of active participation in advertising preparation.” Instead, an ad agency has a duty to substantiate the claims it makes.

This action by the FTC, which appears to be an effort to broaden its enforcement authority, raises concerns for broadcasters that participate in the production of voice and video advertising materials by, for example, providing studio facilities, talent or marketing advice. In providing these or similar services, a broadcaster may, in the eyes of FTC investigators, transition from a simple distributor of an advertisement to an “active participant” in the preparation of the advertisement. In the process, the broadcaster could become the type of “hybrid entity” the commission has written about, and, thus, draw the type of attention the FTC traditionally only has given to ad agencies.

Classifying broadcasters (and other media distributors) as “hybrid entities” for purposes of FTC liability creates new concerns. Existing statutes against deceptive advertising generally do not hold the media liable, or alternatively, they require a very high level of proof before liability attaches. For example, while the FTC Act empowers the FTC to impose criminal fines for false advertising, it specifically exempts any broadcast licensee or publisher that provides the agency with information about the advertiser’s identity. Similarly, many states’ unfair practices and deceptive advertising statutes have “safe harbor” provisions that exempt the media so long as the broadcaster or publisher did not actually know that the advertisement was false.

In addition, the FTC’s new classification policy could expose broadcasters to tort liability, which threatens to undo decades of largely successful litigation by media companies. Consumers allegedly injured by products and services have repeatedly sued the media outlets that distributed advertising for those products and services. In almost every case, the court has found the claims to be baseless and dismissed them as a matter of law, which makes a full trial unnecessary. The FTC’s new classification, however, may expose broadcasters to the risk of liability to the users of products and services for which they broadcast advertisements.

This is an evolving area of policy and regulation. Media companies will want to pay close attention for further signs of the FTC’s policy shift.