Journalism Chapter 20 Homework For many years the advertising industry has practiced and promoted the use of voluntary self-regulation as a means of regulating and controlling advertising

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CHAPTER 20

REGULATION OF ADVERTISING AND PROMOTION

Chapter Overview

The purpose of this chapter is to examine the regulatory environment in which advertising and promotion

operate including industry self-regulation and regulation by federal and state agencies. The chapter begins

by examining the various ways the advertising industry attempts to police itself through the use of self–

regulation by various parties including advertisers and agencies, trade associations, the business

community, and the media. Attention is also given to appraising the value and effectiveness of self–

regulation. The remainder of this chapter focuses on governmental regulation of advertising, particularly

Learning Objectives

2. To examine self-regulation of advertising and evaluate its effectiveness.

4. To examine rules and regulations that affect sales promotion, direct marketing, and marketing on

the Internet.

Chapter and Lecture Outline

I. INTRODUCTION

Advertisers operate in a complex environment of local, state, and federal rules and regulations.

Additionally, there are a number of advertising and business-sponsored associations, consumer groups

and organizations and media that attempt to police advertising through various self-regulatory programs

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Regulation and control over advertising come from internal or self-regulation by various groups within

the advertising industry and business community as well as from external federal and state regulatory

Professor Notes

II. SELF-REGULATION

For many years the advertising industry has practiced and promoted the use of voluntary self-regulation

as a means of regulating and controlling advertising. Most advertisers and their agencies as well as the

media recognize the importance of maintaining consumer trust and confidence in advertising. Self–

regulation has also been viewed as way of limiting government interference and control over advertising.

A. Self-regulation by Advertisers and Agencies—The self-regulatory process actually begins with

the interaction of the client and agency when creative ideas are considered and evaluated. Most

advertisers recognize that their ads are a reflection of the company and want to be sure that their

advertising claims are truthful, verifiable, and do not mislead or deceive consumers. Internal

B. Self-Regulation by Trade Associations—Many industries have developed self-regulatory

programs and guidelines or codes for advertising. This is particularly true in industries where

advertising is prone to controversy such as liquor and alcoholic beverages, drugs, and various

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C. Self-Regulation by Business—A number of self-regulatory mechanisms have been established by

the business community in an effort to control advertising practices. The largest and best known

of these is through the Better Business Bureau (BBB) which promotes fair advertising and

selling practices in all industries in local areas. The parent organization of the local BBB offices

is the Council of Better Business Bureaus which plays a major role in the monitoring and

control of advertising at a national level through its National Advertising Division (NAD) and

Children’s Advertising Unit.

1. NAD/NARB—The National Advertising Division (NAD) works closely with the National

Advertising Review Board (NARB) to sustain truth, accuracy and decency in national

2. Advertising associations – Various groups in the advertising industry have also been

proponents of self-regulation. These include the two major national organizations, the

D. Self-regulation by Media – Another very important self-regulatory mechanism in the advertising

industry is that of the media. Most media maintain some form of advertising review process and

may reject any ads they regard as objectionable. Newspapers and magazines have their own set of

advertising standards, requirements, and restrictions that will often vary depending on the size

and nature of the publication.

E. Appraising Self-regulation—The three major participants in the advertising process—the

advertisers, agencies and media– all work both individually and collectively to encourage truthful,

ethical, and responsible advertising. The advertising industry views self-regulation as an effective

mechanism for controlling advertising and prefers this form of regulation to government

intervention. Self-regulation has been effective and has probably led to the development of

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Professor Notes

III. FEDERAL REGULATION OF ADVERTISING

Governmental control and regulation of advertising comes from various federal, state and local laws and

regulations with enforcement being the responsibility of various government agencies. The most

important source of external regulation of advertising comes from the Federal Trade Commission (FTC).

A. Advertising and the First Amendment—Freedom of speech or expression, as defined by the First

Amendment, is the most basic federal law governing advertising in the United States. The courts

have extended First Amendment protection to commercial speech, which is speech that promotes

B. Background on Federal Regulation of Advertising—federal regulation of advertising originated in

1914 with the passage of the Federal Trade Commission Act, which created the FTC. This act

C. The Federal Trade Commission—The FTC is charged with the responsibility of protecting both

consumers and businesses from anticompetitive behavior and unfair and deceptive practices. The

major divisions of the FTC include the Bureaus of Competition, Economics and Consumer

Protection. The Bureau of Consumer Protection investigates and litigates cases involving acts or

practices alleged to be deceptive or unfair to consumers. The FTC has had the power to regulate

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D. The Concept of Unfairness—Under Section 5 of the FTC Act, the Federal Trade Commission has

the mandate to act against unfair and deceptive advertising practices. While the FTC has taken

E. Deceptive Advertising—Deceptive advertising can take a number of forms ranging from

intentional false or misleading claims by an advertiser to ads that may be true in a literal sense but

While unfair or deceptive acts or practices in advertising are the primary focus of the FTC, these

terms have never really been precisely defined. In 1983 the FTC put forth a new working

definition of deception which argued that the commission will find deception “if there is a

misrepresentation, omission or practice that is likely to mislead the consumer acting reasonably in

the circumstances to the consumer’s detriment.” There are three essential elements to this

definition or deception. The first element is that the misrepresentation, omission or practice must

be likely to mislead the consumer. The second element is that the act or practice must be

considered from the perspective of the reasonable consumer. The third key element is materiality

which means that the act influenced the consumer’s decision-making process in a detrimental

way. The FTC does have several programs for helping in the evaluation of an ad for deception.

1. Affirmative disclosure—the FTC may require advertisers to include types of information in

their ads so consumers will be aware of all the consequences, conditions, and limitations

2. Advertising substantiation—this FTC advertising substantiation program requires

advertisers to have documentation to support the claims in their ads and to prove they are

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F. The FTC’s Handling of Deceptive Advertising Cases—Allegations that a firm is engaging in

unfair or deceptive advertising come to the attention of the FTC from a variety of sources

including complaints from competitors, from consumers, from other governmental agencies, or

from the commission’s own monitoring and investigations. Once the FTC decides that a

complaint is justified and warrants further action, it notifies the offender, who then has 30 days to

respond to the complaint. The FTC complaint procedure will then depend on the response and

actions taken by the advertiser.

1. Consent and cease and desist orders—An advertiser charged with deceptive advertising can

agree to a settlement with the FTC by signing a consent order which is an agreement to stop

the practice or advertising in question. This agreement is for settlement purposes only and

2. Corrective advertising—A problem may exist even if an advertiser ceases using a false or

deceptive advertisement since consumers may still retain some or all of the deceptive claim in

memory. To address this problem of residual effects of prior deceptive advertising, the FTC

developed a program in the 1970s known as corrective advertising. Under this program, an

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G. Current Status of Federal Regulation by the FTC—By the end of the 1970s the FTC became a

very powerful and active regulator of advertising in the United States. However, during the 1980s

the FTC became less active and cut back its regulatory efforts, due in large part to the laissez–

faire attitude of the Reagan administration toward the regulation of business in general. In 1988–

89 an 18-member panel chosen by the American Bar Association undertook a study of the FTC as

a 20-year follow-up to the 1969 report used by President Nixon to overhaul the commission. The

new report expressed strong concern over the FTC’s lack of sufficient resources and staff to

H. Additional Federal Regulatory Agencies

1. The Federal Communications Commission—the FCC has jurisdiction over the radio,

television, telephone and telegraph industries. Its authority over the airways gives it the

power to control advertising content and to restrict what products and services can be

2. The Food and Drug Administration—now under the jurisdiction of the Department of Health

and Human Services, the FDA has authority over the labeling, packaging, branding,

ingredient listing, and advertising of packaged foods and drug products. The FDA has limited

authority over nutritional claims made in food advertising and can set rules for promoting

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3. The U.S. Postal Service—the U.S. mail is a major advertising medium, as a large number of

4. Bureau of Alcohol, Tobacco, and Firearms—the BATF is an agency within the Treasury

Department that enforces laws, develops regulations, is responsible for tax collection in the

liquor industry, and regulates and controls the advertising of alcoholic beverages.

I. The Lanham Act—While most advertisers have relied on self-regulatory mechanisms and the

FTC to deal with the problem of deceptive or misleading advertising by their competitors, many

Professor Notes

IV. STATE REGULATION

In addition to the various federal rules and regulations, advertisers must also concern themselves with

numerous state and local controls over advertising. State regulation of advertising was based for many

years on the Printers’ Ink Model Statutes. Many states have since modified the original statutes and

adopted laws similar to those of the Federal Trade Commission Act that serve as a basis for false and

misleading advertising.

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It remains to be seen how the NAAG will proceed and fare in its efforts to regulate national advertising.

However, it has become evident that states will become involved in the policing of national, as well as

V. REGULATION OF OTHER PROMOTIONAL AREAS

A. Sales Promotion—Both consumer- and trade-oriented promotions are subject to various

regulations. The FTC regulates many areas of sales promotion through the Marketing Practices

Division of the Bureau of Consumer Protection. Many promotional practices are policed by the

state attorney general offices and local regulatory agencies. Various aspects of trade promotion

such as allowances are regulated by the Robinson-Patman Act. Specific sales promotion tools that

are subject to regulations include:

1. Contests and sweepstakes—marketers must be careful to ensure that their contest or

sweepstakes is not classified as a lottery, which is considered a form of gambling. A second

2. Premiums—marketers must make a fair representation of the value of a premium offer.

3. Trade Allowances—marketers using various types of trade allowances must be careful not to

violate any stipulations of the Robinson-Patman Act, which prohibits any form of price

B. Direct Marketing—The Federal Trade Commission enforces laws in a number of areas that relate

to direct marketing including mail-order offers, the use of 900 telephone numbers, and direct-

response television advertising. In addition to the FTC, the United States Postal Service enforces

laws dealing with the use of the mail to deliver advertising and promotional messages or receive

payments and orders that have been delivered by other means such as print or broadcast

advertising.

Chapter 20 – Regulation of Advertising and Promotion

Another area of direct marketing facing increased regulation is telemarketing. With the passage of

the Telephone Consumer Protection Act of 1991, marketers who use telephones to contact

consumers must follow a complex set of rules developed by the Federal Communications

Commission. Under these rules telemarketers are required to maintain an in-house list of

residential telephone subscribers who do not want to be called and consumers who continue to

receive unsolicited calls can sue for damages. This law also bans unsolicited “junk fax” ads.

In 2003 Congress approved the FTC’s proposal for a national “do–not–call” registry under which

consumers can sign up to be put on a list that will bar them from receiving calls from

telemarketers. The do-not-call registry has withstood several legal challenges by the direct

marketing industry and in 2005 the FTC, FCC and individual states began enforcing it.

Companies can be fined $11,000 for each call that violates the FTC provisions. The National Do

Not Call Registry contained nearly192 million phone numbers as of the end of 2009.

C. Marketing on the Internet—Two major areas of concern with regard to marketing on the Internet

are privacy issues and online marketing to children. Several restrictions have been proposed

including:

• Disclosing fully and prominently both the marketer’s identity and the use for which

information is being gathered in every communication.

1. Recently the major privacy issue regarding the Internet that has emerged involves

undisclosed profiling whereby Web marketers can profile a user on the basis of name,

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2. One of the biggest concerns regarding the Internet is how to restrict marketers whose

activities or websites are targeted at children. Concerns over online marketing to children led

3. Concerns over privacy have increased with the explosion in the popularity of social media

sites such as Facebook, MySpace, Twitter and others. The FTC has brought complaints

against both Facebook and Twitter and both have had to make changes to their privacy

4. Another Internet related area receiving regulatory attention is spamming which is the

sending of unsolicited multiple commercial electronic messages. A number of states have

enacted anti-spamming legislation and a federal antispam bill (CAN-SPAM) act went into

effect on January 1, 2004.

Teaching Suggestions

Regulatory factors are a major concern in the integrated marketing communications decision-making

process and consideration and attention must be given to the various laws, rules and regulations that can

constrain and restrict advertising and other forms of promotion. While students may have some

knowledge of the area of advertising regulation, it is unlikely that they will understand the extent to which

advertisers must deal with regulatory concerns from various governmental agencies or self-regulation by

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Several of the landmark cases supporting protection of advertising as a form of commercial speech under

the First Amendment are noted and should be discussed. A very important recent case is Kasky v. Nike

which is discussed in the chapter. The U.S. Supreme Court refused to hear this landmark case involving

corrective advertising are necessary. Attention should also be given to discussing the Lanham Act, which

has become a very significant development in the area of advertising regulation. Competitors are now

suing one another under this act rather than just complaining to the NAD/NARB or the FTC. An excellent

article on the Lanham Act and its implications for advertising is “Us vs. Them: The Minefield of

Comparative Ads,” by Bruce Buchanan and Doron Goldman, Harvard Business Review, May/June 1989,

discusses the possibility of a Do Not Mail registry, as consumers are becoming tired of solicitation by

direct marketers and are taking steps to block unwanted media entry into their lives. A very good article,

“Play By The New Rule” by Elisabeth A. Sullivan was published in the November 30, 2009 issue of

Marketing News an provides an update on regulations affecting various areas of advertising and

promotion.

Answers To Discussion Questions

1. The chapter opener discusses how the Federal Communications Commission is considering more

stringent regulation of product placements in television shows Evaluate the arguments for and

against this policy by the FCC. (L03)

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Unlike some countries, the use of product placements in television shows and movies is not

prohibited in the United States. While the use of undisclosed commercial messages in broadcasting

has been regulated by the FCC since 1934, broadcasters do not have to disclose product placements

watching a standard television commercial, when exposed to a product placement in a show. They

are also concerned over the way many of the product placements are now being integrated into

television shows which makes it difficult for viewers to distinguish a commercial message from the

actual program. They also note that seeing a brand used in the context of a TV show and used by a

popular character may have an impact on consumers, particularly children, and thus increase the

commercials during playback. Proponents of product placement also note that the Federal Trade

Commission has declined to regulate their use arguing that they have no basis for doing so since they

rarely make objective material claims about a product or service when used within a program. The

FTC also argues that it would be difficult to develop a “one-size –fits–all” rule or guidelines that

could effectively regulate product placements. It is likely that the use of product placements in their

current form will continue unless there is more consumer backlash against them or the practice

becomes too intrusive.

2. Discuss the need for regulation of advertising and other IMC tools Do you advocate more or less

regulation of advertising and other forms of promotion by governmental agencies such as the Federal

Trade Commission and the Food and Drug Administration? (L01, 03)