In September 2009, the marketing giants Bayer, Dannon and Dell settled false advertising lawsuits that cost them millions of dollars and forced them to change their marketing and advertising claims. (see box)
The reason for such a flurry of litigation: the crippling recession, which is causing US marketers to be more aggressive in their advertising claims, and a much more pro-active approach towards consumer protection by the new Obama administration, in contrast to the more laissez-faire approach under his predecessor.
It's a collision of forces that has resulted in a spate of multimillion-dollar false advertising lawsuits and will likely lead to more.
"The reason we're seeing companies being more aggressive in their advertising is definitely because of the recession," Tim Blood, a partner with the San Diego law firm Coughlin Stoia Geller Rudman & Robbins, the main litigator in the case against Dannon, and which is now targeting General Mills and its Yoplait Yoplus+ yoghurt for false claims, says.
"What happens is that the marketing side of a company wants to say all kinds of things about the product, but the legal and regulatory side puts the foot on the brake. But then, when times get tough, the legal and regulatory side gets pressured, and they often soften it up. So you end up having ad campaigns that are more aggressive than they should be."
Blood believes food advertisers have been much more aggressive in the US than in Europe.
"With Europe's laws coming into effect now, particularly those of the European Food Safety Authority, the US is more aggressive in comparison," he says.
According to Stephen Gardner, the director of litigation for the Center for Science in the Public Interest, a public advocacy group that sued the German drug manufacturer Bayer, and was co-counsel in the suit against Airborne: "It's been a bit like the Wild West in advertising and marketing over the past few years, with advertisers not motivated by morals or ethics. But under Obama there is definitely a lot more litigation in the areas we care about - food, supplements and nutrition in general.
"I have seen a clear up-tick in actions at the Federal Trade Commission and a very clear intent to move away from the 'do nothing' policies that have pervaded the FTC for the past decade."
He adds: "Without question, the Bush administration got out of the enforcement business. The Food and Drug Administration even tried to stop private lawsuits. So, not only was it not doing its job, it was trying to prevent private lawyers from doing theirs."
Motivated in part by the doctrinal belief that less government is better, Gardner says, it was these same theories that led to not regulating the financial industry. "Overall, the Bush folks were too tight with their buddies in the food, and every other, industry," he says. "The Bush administration marked an era of the Federal Government just backing off the average citizen in favour of trying to protect big business, including the food companies."
In the future, US advertisers will have to be much more careful with the claims they make, or else face the potentially highly damaging and expensive legal consequences. In addition to the General Mills Yoplait case, another class action lawsuit against General Mills' Cheerios brand, and its claim that it helps lower cholesterol, is pending. And Coca-Cola is fighting a similar suit over marketing the health benefits of its Glaceau Vitaminwater.
The implications for ad agencies are obvious, Neal Klausner, an intellectual property litigation partner with the law firm Davis & Gilbert, which represents ad agencies, says. "My advice to agencies is to obtain an agency-client agreement, with a clear indemnification provision that protects the agency in the event it is sued over inaccurate claims concerning the effectiveness or quality of a product."
Typically, he says, agencies take responsibility for obtaining the intellectual property rights whether it's a celebrity's consent to being used in the ad or the rights to the music. "If it's a statement about the quality of the product, then, generally, the agency relies upon the advertiser to substantiate the accuracy of that claim. It therefore is good practice for the agency to get an indemnification provision in the contract in case it is sued because of something said about the quality of the product in an ad."
Klausner points out that agencies, even if not a party to the lawsuit, can be subpoenaed to provide information related to the case. "It can be very expensive for an agency to compile documents and make witnesses available for a deposition," he says. And he recommends agencies get additional protection in their agency-client agreement so that if they receive a subpoena, clients will reimburse them for costs.
"This is much more on agencies' radars now. While an agency may not want to push too aggressively for such protection at the start of a relationship, when they see the potential costs and the willingness of the government and class action lawyers to pursue these types of claims, it makes sense and it's a fair provision to ask for," he says.
Blood adds that, to avoid lawsuits, companies need to step back and, despite the economic pressures, listen to their in-house lawyers more carefully.
"They should make sure they're not becoming overly aggressive with their claims merely because of soft economic times," he says. "And if they don't, recognise it's going to come with a price."
Meanwhile, Gardner says the lawsuits will continue. "One area I'd like us to explore is health and beauty marketing by the major cosmetic companies, which has been a minefield of incredible lies for decades. It is the truly unregulated area - marketing to women."
Advertisers and their agencies certainly can't say they haven't been warned.
COSTLY LAWSUITS THAT HIT THE POCKETS OF CONSUMER GIANTS
In September 2009, the number two computer manufacturer, Dell, agreed to pay $4 million to settle a deceptive business practices lawsuit filed by the New York Attorney-General's office. It was also required to change its advertising, sales and financing practices. Dell was charged with consumer deception and engaging in "bait and switch" advertising regarding finance terms, warranties and rebates. The NYAG accused the computer company of engaging in "fraud, false advertising, deceptive business practices and abusive debt collection practices".
Dannon (which trades as Danone in Europe) settled a false advertising lawsuit in September 2009 over its Activia and DanActive yoghurts. The company, accused of promoting health benefits that didn't exist, set up a $35 million fund to reimburse consumers. Dannon admitted no wrongdoing. The decision to settle was based on Dannon's desire "to avoid the distraction and expense of litigation", a spokesman said. It agreed to change the labelling and advertising of Activia and DanActive by increasing the visibility of the names of the "probiotic" cultures in the yoghurts. Dannon also agreed to remove the word "immunity" from its DanActive products.
Last year, the makers of Airborne - a multivitamin and herbal supplement, whose labels and ads falsely claimed that the product cures and prevents colds - agreed to refund consumers as part of a $23.3 million class action settlement agreement. Airborne, created by a teacher and her husband, promised to: "Boost your immune system to help your body combat germs." The company's folksy "created by a school teacher!" slogan and insistence that the product be stocked with real cold, cough and flu medicines instead of with dietary supplements, had helped turn the brand into an overnight success.
In September 2009, the US public advocacy group Center for Science in the Public Interest sued the German drug company Bayer over claims that the selenium in its One A Day Men's multivitamin might reduce the risk of prostate cancer. The claims, made on the drug-maker's website, advertising and product label, were false because selenium - a trace mineral - "may actually cause harm to consumers", CSPI said in its lawsuit. The US Food and Drug Administration then stated it was: "Highly unlikely that selenium supplements reduce the risk of prostate cancer." That forced Bayer to alter much of its marketing, but it still refused to recall packages bearing the false claims or alter some marketing claims.