Warning: These Ads May Be Dangerous To Your Company's Wealth

When Vibram, the “FiveFinger” shoe company, was hauled into federal court in Boston in late March, it became the latest prominent business swept up in the growing wave of consumer class actions based on false advertising claims. That wave does not yet appear to have reached its crest, and with recent revisions to the “green” labeling guidelines, it may be far from its peak. Ultimately, no matter what products or services your company sells—whether it is shoes, razors, baby formula, dietary supplements, juice, cat litter, wireless telephone service, cleaning supplies, or yogurt—advertising content can leave you awash in class action lawyers—and more importantly, can lead to tens of millions of dollars in exposure to damages for false or misleading advertising claims.

It’s not just the class action lawyers that in-house counsel need to worry about—competitors also sue over unfavorable product comparisons. If they win, they stand to recover substantial monetary damages, including the disgorgement of profits and attorneys’ fees under the Federal Lanham Act.

On the consumer side, often, a false advertising case will begin with one proposed class action. Defending that one suit could be costly enough, but it often gets worse as copycat lawsuits follow. The possibility of defending one case is replaced with the prospect of defending several suits filed in up to 50 different jurisdictions and involving as many as 50 different state consumer protection laws. As potential defense costs mount, a global class settlement worth millions is routinely seen as the best available business decision.

Government enforcement actions surrounding false advertising create additional risk because they often co-exist with and/or encourage tag-along consumer class actions, and can increase the costs of resolution significantly. The maker of the popular Airborne cold-prevention products faced just this problem when it agreed to pay $23.5 million to settle a consumer class action, but then had to add another $6.5 million to the pot in order to resolve the separate Federal Trade Commission action.

Although every advertiser is at some risk, there are some types of ads that seem to chum the water for false advertising claims.

Claims of Health or Nutrition Benefits

Accused of exaggerating the fitness benefits of some of its shoes, Reebok concurrently settled a consumer class action and a separate FTC action by agreeing, among other things, to provide $25 million in customer refunds, plus more than $3.5 million toward plaintiffs’ attorneys’ fees and costs.

It gets worse. When sued for claiming that the health benefits of certain yogurt products were “clinically” and “scientifically proven,” Dannon ultimately agreed to provide between $35 and $45 million in customer refunds, and to pay more than $7.5 million to class action counsel. Subsequently, Dannon had to pay an additional $21 million to 39 states whose attorneys general had collaborated with the FTC.

Competitor Comparisons