Wall Street Journal Quotes KMT Managing Partner David O. Klein
Small Businesses Often Tripped Up by Rules, Suits
Craig Dubitsky, founder and CEO of Hello Products, which was sued by Procter & Gamble. Daniella
Weeks after Craig Dubitsky’s new company delivered its first shipment of “pink grapefruit” and “mojito mint” toothpaste to about 8,000 stores across the U.S., a letter arrived at his small Montclair, N.J., business, Hello Products LLC.
The sender: Procter & Gamble Co.
The consumer products giant and maker of Crest toothpaste wanted Hello to retract its claim—on its labels, in a print ad and on its website—that its toothpaste was “99% Natural.” “It really puts the fear of God into you,” says Mr. Dubitsky, a 48-year-old entrepreneur.
Though he stood by the claim, Mr. Dubitsky said he offered to remove it on the next batch of toothpaste labels, to be printed within a few months. That wasn’t good enough. In January, P&G sued Hello, charging it with false advertising as a direct competitor under federal law.
Claims about a product’s benefits are almost always the jumping off point for marketing and advertising, but overstating the situation—intentionally or unintentionally—can open a manufacturer up to allegations of false advertising. Rivals can claim violations of federal law, while consumers may launch class-action lawsuits under state consumer-protection laws. Small businesses, without a team dedicated to legal and regulatory issues, can easily land on the wrong side of the rules, at least in the eyes of a rival.
Under truth-in-advertising rules, ads must be “truthful and nondeceptive” with evidence to back up their claims, according to Federal Trade Commission guidelines for small advertisers. Penalties can range from cease-and-desist orders, to fines of $16,000 a day, per infraction, according to the government agency. Since 2010, for instance, the FTC has brought charges against 65 advertisers for deceptive health ads alone.
In March, a Supreme Court ruling widened the range of businesses that can sue other companies for false advertising under the federal Lanham Act, by allowing businesses that aren’t direct competitors to pursue claims.
Mr. Dubitsky says he believes P&G used federal advertising laws to bully a small competitor—a trend he says he believes is also on the rise. “They were saying that we couldn’t call it natural because there were chemicals involved. You know another ‘chemical’ process? Photosynthesis,” he says. “All this stuff is a gray area,” he says about such advertising claims.
A spokesman for P&G declined to comment although it confirmed the details of the dispute. In its March statement, P&G accused Hello of violating advertising laws because its toothpaste “contains ingredients that are extensively and chemically processed,” including Fluoride, and wasn’t as “natural” as it claimed.
On top of legal fees, which Mr. Dubitsky said came to “six figures,” his company was also left with roughly 100,000 tubes of toothpaste that couldn’t be sold. Mr. Dubitsky wouldn’t disclose the company’s annual revenue, saying only that it’s “well over” $1 million. The company currently has seven employees.
After the P&G injunction, Hello changed its packaging from “99% Natural” to “Naturally Friendly.” As for the old tubes, Hello handed them out on the streets of Manhattan—getting some marketing mileage out of the problematic packages.
Many of the companies that get tangled up in false-advertising claims “are small companies that aren’t intentionally doing something wrong, but simply don’t know where to draw the line,” says Lee Peeler, a former deputy director of Federal Trade Commission’s consumer protection bureau and the president of the Advertising Self-Regulatory Council, a division of the Council of Better Business Bureaus that monitors the advertising market. Of the 150 cases of false advertising investigated each year by the council, some 95% are resolved by advertisers after being notified of a problem—such as unsubstantiated claims, misleading prices or uncredited endorsements, Mr. Peeler says.
He adds, “The Internet has really changed things for small companies, because they can now make their own ads and get them in front of consumers fast.”
“The Internet makes it easier to make mistakes,” says David Klein, a managing partner at Klein Moynihan Turco LLP in New York who represents small advertisers. “In order to keep up with the big players, they feel like they have to exaggerate and they can get in trouble,” he says, adding that he is seeing more small firms getting caught up in false-advertising cases in recent years.
False-advertising lawsuits resulted in more than 60 court decisions in 2010, up from fewer than 10 in 1990, according to preliminary data gathered in a study by the University of North Carolina and the University of Notre Dame. “We have every reason to believe the numbers have kept going up” during the period from 2010 through 2014, says Deborah Gerhardt, a University of North Carolina School of Law professor who is coauthoring the study, to be released later this year.
Some recent cases—such as federal regulators ruling against health claims by Pom Wonderful LLC’s juice (which the company is appealing)—have raised the profile of claims of misleading marketing, and may inspire similar lawsuits. Many food companies are backing away from claims of “natural” in the face of lawsuits.
Last week, Vibram USA Inc., the maker of FiveFingers running shoes, settled a class-action lawsuit, filed in U.S. District Court in Massachusetts in March 2012, over ads claiming its five-toed shoes strengthened muscles and prevented injuries. The Concord, Mass., company offered to pay a total of $3.75 million to customers, who paid about $100 for the shoes, and agreed to stop making the claims.
“For us it was a decision based on legal costs,” said Vibram USA CEO Mike Gionfriddo, adding that the legal fees to date are already higher than the cost of the settlement. He said the company removed the health claims in 2012, when the complaint was filed: “We didn’t want to mislead our customers.”