' ' . ~ STRATEGY SMALL BUSINESSES AND COMPARISON ADVERTISING STRATEGIES: IS IT WORTH THE RISK? Karen Russo France Paula Fitzgerald Bone West Virginia University James W. France Buchanan Ingersoll, P.C. ABSTRACT Research shows that comparison ads can be particularlyejfectivefor businesses with relatively small market shares. However, there are legal risks associated with such strategies. Therefore, in this article we overview constitutional law, common law, and statutory law as they relate to claims made about competitors in comparative advertising. We carefully exp/ore First Amendn1ent rights and then examine the various causes of action in deception suits and Section 43a of the Lanham Act. We conclude with suggestions for the small business owner using comparison advertising to gain market share. INTRODUCTION The small business owner must determine how to best communicate products and services to the buyer. Research suggests that firms with small market share benefit from using comparison advertising to improve customer attitudes and sales (Gnepa, 1993; Pechmann & Stewart, 1991; Shimp & Dyer, 1978). A direct comparison advertisement is one in which the advertiser directly names the competition and states the advantages of the product/service over that offered by the competition. Comparison ads are encouraged by government regulators, notably the FTC, because they provide an informative environment for the consumer and foster product/service improvement (Beck-Dudley & Williams, 1989; Muehling & Kangun, 1985; Petty, 1991; Wilkie & Farris, 1975). Unfortunately, advertisers can run into trouble with the judicial branch of the government when using comparison advertisements (Bixby & Lincoln, 1989). First Amendment rights regarding protected speech are being eroded in the commercial speech arena (Boedecker, Morgan, & Wright, 1995), thereby increasing the consequences of making an inaccurate advertising claim. Additionally, plaintiff companies are more likely to seek legal redress against competitors making false or misleading claims about the plaintiffs product or service (Beck-Dudley & Williams, 1989; Buchanan, 1985). The purpose of this article is to provide small business owners with information needed to make an informed decision regarding comparison advertising. We begin by overviewingthe literature on comparison ads, their execution and effectiveness. We then explore the legal environment regarding comparative advertising in which small business owners work. The conditions under which the 81 full force of First Amendment rights take effect, including issues on the nature of the speech (commercial or noncommercial)and the status of the subject of discussion (private or public), are discussed. We then review the various types of deception suits and provide a brief analysis of Section 43a of the Lanham Act as they relate to comparative advertising. Finally, we provide guidelines for small business owners interested in using comparison advertising. WHY SMALL BUSINESSES MAY WISH TO USE COMPARISON ADVERTISING Comparison advertising is one of the most researchedadvertisem:nt-execution styles in the areas of marketing and advertising (Pechmann & Stewart, 1991 ). While many different types of comparisonadvertisementsexist, we will focus on the direct comparison ad in which one or more competitors are actively named in the advertising copy. A recent example of such an advertising strategy is Hardee's ad comparing its fried chicken to KFC's. Two specific attributes of the chicken, piece size and taste, are tackled head-on in Hardee's print and broadcast advertisement;. Another example is seen in an ad for a local "park n' shuttle." The ad states, "Why pay ~38.50/week at the airport? Park at BRAND X' fo! just 24.99/week." Many researchers have concluded that comparison ads primarily benefit small market share holders (c.f., Gnepa, 1993; Shimp & Dyer, 1978). For small market share holders, comparison ads have been shown to positively affect attitudes (Donthu, 1992) and to have had an impact on sales and market shares (Hayes, 1994; Pechmann & Stewart, 1991). Recently, Donthu ( 1992) found that a moderately intense comparison ad had the strongest positive impact on attitudes while very intense comparison ads had the most positive effect on advertisement recall. In other words, comparison ads were found to be more effective than advertisements which made no comparison to competing brands. Comparison ads may create positive attitudes for one of several reasons. A small market share holder may benefit from being associated with market leaders because of favorable positioning effects (Muehling, Stem, & Raven, 1989). For instance, Coor's Cutter, a non-alcoholic brew, should benefit by comparing itself with Samuel Adams beer, a popular premium beer. Additionally, a direct comparison ad can cause the consumer to rethink a purchase--i.e.,the ad may "disrupt" purchase behavior so that the small market-share brand is considered by the buyer (Muehling, Stem, & Raven, 1989). Finally, Pechmann and Stewart ( 1991) found that direct comparison ads attract more attention since they are perceived to be novel and often contain the name of a well-known brand. This greater attention, in tum, increases persuasion. While increasing the persuasiveness of advertisements is a noble goal, small businesses need to use techniques which actually impact sales. After analyzing field data, Pechmann and Stewart (1991) concluded that consumers were more likely to choose the advertised brand over the competing brands when the advertised brand used direct comparative advertisements. According io Advertising Age (Advertjsjng Age, 1980; Advertising Age, 1982) direct comparison ads are responsible for market share gains made by Burger King, Pepsi-Cola, Suave Shampoos, and Schick electric shavers. More recently, Mrs. Winner's Chicken & Biscuits and Hardee's have been successful using this technique (Hayes, 1994). 82 : "~ ., Jartran experienced $70 million-plus sales increase from 1979-1980 after running direct comparison advertisementssuggestingthat Jartran trucks had better gas mileage, were newer, and were less expensive to rent than U-Haul's trucks (Beck-Dudley & Williams, 1989). The Jartran advertisements are of particular interest since the ads were deemed deceptive by the U.S. courts. Jartran was required to pay $40 million in damages and $2.5 million in attorney fees to U-Haul due to the deception. Such cases are likely to become more common since firms are more inclined to institute litigation as a means of vindicating their reputation or economic interests when false or misleading statements have been made about their products (Buchanan & Goldman, 1989). Thus, we now examine the regulatory environment in which small businesses operate. REGULATORY ENVIRONMENT FOR COMPARISON ADVERTISEMENTS Despite the advantagesofusing comparison advertising, such a strategy may open the door to litigation brought by the competitor. For instance, in July 1986, Blue Cross/Blue Shield launched what it called a deliberately "aggressive and provocative" comparative advertising campaign designed to "introduce and increase the attractivenessof its products" at the expense of U.S. Healthcare'sproducts,a competing HMO (US. Healthcare Inc. v, Blue Cross of Greater Philadelphia, 1990). The campaign consisted of several print, television, and radio advertisements, and a direct mail brochure. Many of the ads claimed that with an HMO, the subscriber selects a primary care physician who, in turn, must give permission before the HMO will cover examination by a specialist. The print ads and the brochure stated the following: You should also know that through a series of financial incentives, an HMO encourages this doctor to handle as many patients as possible without referring to a specialist. When an HMO doctor does make a specialist referral, it could take money directly out of his pocket. Make too many referrals, and he could find himself in trouble with HMO (U.S. Healthcare Inc. v. Blue Cross of Greater Philadelphia,1990.) Two Blue Cross/Blue Shield advertisements featured a senior citizen under the banner heading "Your money or your life," juxtaposed with Blue Cross/Blue Shield's description of "The high cost of HMO Medicare." U.S. Healthcare responded immediately to the attacks by filing suit against Blue Cross/Blue Shield. In addition, U.S. Healthcare embarked on its own aggressive comparative ad campaign -- to which Blue Cross/Blue Shield countersued. Plaintiffs in these suits have traditionally sought relief under common law doctrines such as injurious falsehood (e.g., Bose Corn. v. Consumers Union of United States. Inc., 1981; 1982; 1984; Cumberland Farms. Inc. v. Evere!!, 1991) and defamation(e.g., Dun & Bradstreet Inc. v. Greenmoss Builders. Inc .. 1985; U.S. Healthcare. Inc. v Blue Cross of Greater Philadelphi[l,1990). More recently, however, plaintiffs are turning to state or federal statutory provisions such as Section 43(a) of the Lanham Act (e.g. Castro! Inc. v. Pennzoil Co., 1993; Coors Brewing Company v. Anheuser-Busch Companies. Inc.,1992; Johnson & Johnson• Merck v. Smithkline Beecham, 1992), and similar state statutes to seek liability for those who 83 make false or misleading claims about their products or services. However, before discussing these legal remedies, it is useful to understand the constitutional right to freedom of speech and how this right is likely to be applied to comparison ads. The First Amendment--FreedomofSpeech vs. Deceptive Claims Regarding Competitors The Supreme Court has recognized that in order to further First Amendment rights to engage in truthful expression, it may be necessary to allow defendants to escape liability for certain false statements. Both common law and statutory law are at odds with this principle since both provide for payment of damages when false claims are made. Thus, we must examine when First Amendment rights are enforced fully in the U.S. court system. In the 1964 landmarkcase,New York Times y. Sumyan, the U.S. Supreme Court did not allow damages to the plaintiff even though claims made in the defendant's political advertisement were literally false. The case revolved around a one-page "editorial" advertisement entitled "Heed Their Rising Voices" which solicited financial support for a Black student movement and furthered the campaign for Black Americans' right to vote. The advertisementstated that truckloads of police ringed the Alabama State College Campus after a peaceful demonstration on the State Capitol steps and that "they" (the police) had arrested Dr. Martin Luther King seven times. In actuality, the police had not ringed the campus, nor had police been deployed as a response to the peaceful demonstration. Additionally, Dr. King had been arrested only four times, not seven. Even given the falsity of these statements, the Supreme Court ruled that this speech was fully protected by the First Amendmentand that false statements are protected by the First Amendment as long as there is no actual malice ~ York Times v Sullivan 1964). Actual malice occurs when one makes statements known to the speaker to be false or makes the statement with reckless disregard to the statement's truthfulness. The rationale behind this landmark decision is that freedom of speech is paramount to the democratic form of government in the United States in which issues of public concern must be debated. According to the Supreme Court, all speech, even inaccurate speech, can contribute to the discussion of important public issues by sparking greater interest and greater participation in such debates. Enforcing monetary damages for such speech could decrease debate and reduce the number of viewpoints expressed. If blatantly false statements may be protected by the First Amendment, why then are inaccurate claims made in comparative advertisements subject to liability? First, while the Constitution protects speech, the Supreme Court has "long recognized that not all speech is of equal First Amendment importance" (Dun & Bradstreet y, Greenmoss Builders, 1985). For example, speech involving commercial speech receives less First Amendment protection than noncommercial speech, while speech involvingpublicjigures receives heightened protection. Each of these criteria is considered independently. For instance, even if the speech is determined to be commercial, but involves public figures, the full effect of First Amendment defenses are available and the plaintiff must prove actual malice. We discuss each of these criterion and their rationale below. 84 '' Commercial versus Noncommercial Speech One of the most prominent examples of reduced protection for certain kinds of speech concerns commercial speech. The Supreme Court has noted that commercial speech occupies a "subordinate position in the scale of First Amendment values" (Dun & Bradstreet v. Greenmoss Builder:;, 1985, 158) and has held that commercial speech merits an intermediate level of First Amendment protection (Virginia State Bd. of Pharmacy v. Virginia Citizens Consumer Council. Inc., 1976). The Supreme Court has defined commercial speech in a variety of ways. Sometimes the Court has defined commercial speech as expression that is solely in the economic interest of the speaker and his or her audience (Central Hudson Gas & Electric Corooration v Public Service Commission, I 980), or as expression that does no more than propose a commercial transaction(VirginiaState Bd. Of Pharmacyv. Virginia Citizens Consumer Council. Inc., 1976 quoting Pittsburgh Press Co. v. Human RelationsCommissio[I, I 973). More recently, the Third Circuit defined commercial speech as an "expression related to the economic interests of the speaker and its audience, generally in the form of a commercial advertisement for the sale of goods and services" (U.S. Healthcarev. Blue Cross of Greater Philadelphi!!, I 990 citing Bolger v. Young Drug Products Coro., I983, 66-67). In 1983, the Supreme Court declared three factors to be considered in determining if speech is commercial: "(I) is the speech an advertisement; (2) does the speech refer to a specific product or service; and (3) does the speaker have an economic motivation for the speech" (Bolger v Young Drugs Product Coro., 1983). Why should commercial speech receive less protection? First, commercial speech is made solely for the monetary interest of the speaker or to promote the speaker's own goals (Central Hudson Gas & Electric Coro v. Public Service Commission, 1980). This differs significantly from political speech which, perhaps, has more noble goals. Second, advertisementsand other forms of commercial speech are durable. Additionally, commercial speakers are knowledgeable regarding their products/services and the market in which they operate; therefore, commercial speakers should be able to evaluate the truthfulness of their claims (e.g., Central Hudson Gas & Elec. Com. v. Public Service Commission, 1980; Virnjnia State Bd. of Pharmacy v. Virginia Cjtizens Consumer Council. Inc., 1976). Note that in the New York Times v. Sullivan (1964) case, the speech at issue was an advertisement, but the courts determined that even though the defendants paid for the media space, the speech was not commercial since the subject matter dealt with a burning social issue of the time--civil rights. Thus, the fact that media space was paid for by the advertiser does not necessarily deem speech to be commercial. Today, it appears that the definition of commercial speech is expanding, and with this expansion, firms' First Amendment rights are contracting (Boedecker, Morgan, & Wright, 1995). For example, in the U.S. Healthcare v. Blue Cross of Greater Philadelphia (1990), the two parties argued that they were providing information about health care--an issue of public 85 concern. The court, however found that "although some of the advertisements touch on matter.; of public concern, their central thrust is commercial. Thus the parities have acted primarily to generate revenue by influencing customers, not to resolve 'the issues involved'." (~ Hudson Gas and Electric Coro. v. Public Service Commission, 1980, 939). In another case, the courts classified informationpamphletsdescribingappropriateuse of condoms to help slow the spread of illness as commercial speech even though the pamphlet was developed as a public service !Bolger y Youngs Drug Product Corp., 1983). Given the above, the prudent small business owner should assume that any comparative advertisement will be viewed as commercial speech, even ifthe speech deals with an important public issue such as healthcare, environmental concerns, crime prevention, or other "prominent" issue. Status of the Plaintiff: Prjyate General-Puroose and Limited-Purnose Public Figures First Amendment protection also depends on whether the plaintiff is deemed to be a public or private figure. The Court has recognized two types of public figures. General-purpo!i! public figures are individuals "who by reason of the notoriety of their achievements or the vigor and success with which they seek the public's attention" have put themselves in the public eye (Gertz v, Robert Welch. Inc,, 1974, 342). The second type, limited-purpose public figures, are individuals who have "voluntarily inject[ed] [themselves] or [have been] drawn into a particular public controversy and thereby become public figure[s] for a limited range of issues" (Gertz v Robert Welch. Inc,. 1974, 342). Both types of public figures must prove actual malice. Speech regarding public figures is subject to full First Amendment protection since actions of public figures should be subject to debate. This allows open criticism of govemmert officials which is critical to maintaining the American style of government. Additionally, public figures have placed themselves in a position of public scrutiny and thereby invite attention and comment. Finally, public figures "usually enjoy greater access to the channels of effective communication and hence have a more realistic opportunity to counteract false statements than private individuals normally enjoy" (Gertz v. Robert Welch. Inc., 1974, 344). Determining whether a plaintiffis a private or public figure is guided by the Gertz v, Robert Welch. Inc. (1974) case. In~. lible was brought against a magazine publisher for describing the plaintiff (Elmer Gertz, a prominent attorney) as a "Communist-fronter," "Leninist," and participant in various "Marxist" and "Red" activities. The Supreme Court held that a newspaper or broadcaster publishing defamatory falsehoods about a private individual (i.e., one who is neither a public official nor a public figure) may not claim a constitutional privilege against liability, for injury inflicted, simply because an issue of public concern is addressed. The Court held that the status of the defamed person also must be considered. Unfortunately, the fact-specific nature about the public figure inquiry makes it difficultto generalize about which parties will be deemed public figures(Langvardt, 1993). For instance, the Supreme Court has determined the classification of public figures includes persons such as political candidates.retired military generals, and well-known former football coaches (e.g., Harte-Hanks Communications Inc, y, Connaughton, 1989; Associated Press y, ~. 1967; Curtis Publishing Co, v, Butts, 1967). However, a prominent private attorney, 86 .. .. -· ,. • l ... a wealthysocialite,an alleged spy, and a recipient of government research grants were found to be private figures (e.g., Gertz v. Welch lnc.,1974; Time. Inc. v. Firestone, 1976). Cases brought by commercial plaintiffs further complicate the private versus public figure determination. The Supreme Court has not engaged in a substantive public/private figure analysis in a suit involving a commercial plaintiff, however, the lower courts have had to decide cases brought by commercial plaintiffs (e.g., Bose Com. v. Consumer Union of United States Inc .. 1981; 1982; 1984; National Life Ins Co. v Phillips Publishing Inc, 1992). The lower courts have found that the standards established in~ to be ill-suited to corporate plaintiff cases (Langvardt, 1993). Although Gertz's general purpose public figure classification would seemingly encompass corporations whose names are immediately recognizable (e.g., IBM, McDonald's),it is unclear whether a given corporation possesses the notoriety necessary to warrant public figure status. The corporation's size may not be a helpful predictor since the public may be equally or more familiar with relatively small corporations than many larger corporations whose names and business are generally unknown (Langvardt, 1993). In the recent U.S. Healthcare v. Blue Cross of Greater Philadelphia (1990) case, the court found neither of the parties involved to be limited-purpose public figures. In making this determination, the court looked at three factors. First, they determined whether the entities had media access; then they determined whether the parties had voluntarily placed themselves in a public forum; and, finally, they determined whether the content of the speech was self- motivatedor was of public concern While both parties had media access and had voluntarily opened themselves to criticism, neither was deemed a limited-purpose public figure since the issue was motivated by economic rather than public interest. Given the above discussion, it is clear that a corporate plaintiff will argue that it is a private figure so that the actual malice standards do not have to be met for the plaintiff to receive compensation. Common and Statutory Law Resolutions to Deceptive Claims in ComoarativeAdvertising Common law doctrines and general statutory provisions come into play once the speech is considered to be commercial and the plaintiff is deemed a private figure. The focus of each cause of action is the imposition of liability for the consequences caused by false or misleading expressions. Most often, direct comparison advertisements are not permitted to invoke the First Amendment protection as in New York Times v. Sullivan ( 1964). Indeed, "Far more often, however, ads generate litigation over pejorative comments about products and services, comments which may damage corporate profits and reputations" (Milton, Wall, Herbert, Rubins, & Strickland, 1994). Several causes of action may be alleged in such cases, including: injurious falsehood, defamation, and violations of §43(a) of the Lanham Act. Each of these causes of action is discussed below along with whether and to what extent the First Amendment protection developed in New York Times v. Sullivan (1964) have applied. Injurious Falsehood Injurious falsehood is the publication, with fault, of a false statement about a company's business, business practices, product, service, property, or property rights, which 87 results in harm, measured by proven special damages to the company's economic interest (Keeton, Dobbs, Keeton, & Owen, 1984 ). Thus, when an advertisement makes false statements that directly disparage or demean the quality of that company's products or services, causing financial damage to the company, a specific form of injurious falsehood, known as product liability or trade libel, may be invoked (Keeton, et al., 1984). The common law establishes the following elements for injurious falsehood liability: (1) publication ofa harmful false statement disparaging the quality of another's product or property; (2) intentto harm another's interest, awareness of the likelihood of such harm, or reasonable basis for such awareness; (3) knowledge or reckless disregard of falsity ("actual malice"); and (4) proofofspecial damages. Under common law, a firm may compare its own goods or services to those of a competitor provided that it does not include any false statements of fact (Hogue, 1993). This privilege is qualified however, and does not apply to statements made with malice or bad faith.' The heightened standard of proof required under the First Amendment fully applies (see New York Tjmes v. Sullivan, 1964). This heightened standard of proof requires that the plaintiff prove "actual malice" by clear and convincing evidence that the disparaging statement was false and that it was made with either knowledge of its falsehood, or with reckless disregard of its truth or falsity (New York Times v. Sullivan, 1964 ). The leading case applying First Amendment defenses in a noncommercial product disparagement case is Bose Corooration v. Consumers Union (1984) in which an article appearing in Consumer Reports magazine described the plaintiffs stereo speakers in disparaging terms. Specifically, the article asserted that "individual instruments heard through the Bose system seemed to grow to gigantic proportions and tended to wander about the room ... With orchestral music, such effects seemed inconsequential. But we think they might become annoying when listening to soloists" (Bose Corooratjon v. Consumers Unjon, 1984, 488). The First Circuit, reviewing the district court's decision focused on the plaintiffs failure to prove actual malice. The Supreme Court, in upholding the circuit court's opinion, made it evident that when a disparaging statement is made in the context of noncommercial speech (such as a newspaper article or review), all First Amendment defenses apply. This is not so, however, when the speech is classified as commercial. The Supreme Court has repeatedly held that while truthful commercial speech is entitled to some First Amendment protection, the First Amendment will not prevent the restraint -- or even complete prohibition -- of false or misleading commercial speech (e.g., Bolgery. Youngs Drugs Products Coro,. 1983; Central Hudson Gas & Electric Coro v, Public Seryjce Comm'n of New York. 1980). Until recently, all cases in which the Supreme Court addressed the protection due to commercial speech involved government regulation of advertising or other forms of commercial speech rather than product disparagement. The question of whether the New York Times actual malice standard of proofapplies to disparagirg statements made in product advertisements or whether such commercial speech is entitled to less First Amendment protection was finally addressed by the Third Circuit in U.S. Healthcare. 88 Inc. v. Blue Cross of Greater Philadelphia(l 990). The Third Circuit concluded that the actual malice standard does not apply to false commercial speech such as that contained in comparative advertisementsof competing companies. In other words, a company asserting any false statement may be held liable, regardless of whether the company believed the statement to be true. While actual malice has traditionally been required in injurious falsehood suits, cases involving commercial speech are clearly different. However, cases addressing this issue in other jurisdictions suggest that the answer is far from well-settled. In National Life Insurance Co. v. Phillips Publishing. Inc. (1992), the Maryland District Court distingui!hed and implicitly criticized the Third Circuit's decision in U.S. Healthcar~ holding that the actual malice standard was applicable in this case involving defamatory statements made in the defendant'smarketingmaterials.Although the National Life Insurance court found that the statements in question were not "commercial speech," the court held that even ifthe statements were commercial speech, the actual malice standard set forth in~ would still apply. In the National Life Insurance court's view, the appropriatestandanl depends upon the particular "reputation interest" of each plaintiff rather than an automatic application of a negligence standard for all false commercial speech. If the status of the plaintiff, rather than the nature of the speech, proves to be the key First Amendment inquiry, then the outcome of future injurious falsehood cases involving advertising may depend on whether the plaintiff is found to be a public figure. Defamation Defamation is said to have occurred when the false statements reflect not only on a competitor's product or service, but actually affect the reputation of the company's officers or employees. The common law defines defamatim as the publication of a false and defamatory statement about the plaintiff! A statement is regarded to be defamatory if it "tends to so harm the reputationofanother as to lower him in the estimation of the community or to deter third persons from associating or dealing with him.4 It is this focus on reputation which separates defamation from injurious falsehood.' Prior to 1964, plaintiffs defamation suits were virtually unconstrained by the defendant's First Amendmentright to free speech. The United States Supreme Court's holding in New York Times Co. v. Sullivan in 1964 redefined defamation's constitutional contours by attempting to strike a balance between the plaintiffs reputational interest and the defendant's competing interest in free speech. The plaintiff in New York Times was an Alabama police commissionerwho claimed that false statements made in a political advertisement in the New York Times defamed him. The Supreme Court concluded that the advertisement was political speech, rather than a commercial advertisement, because of its commentary on the civil rights struggle, a major public issue of the time. The Supreme Court focused on the potential constitutional deficiency of defamation's strict liability standard, which the Court thought likely to chill the exercise ofFirst Amendment freedoms (Langvardt, 1993). Because the Court believed that "erroneous statement is inevi1able in free debate" Q:lew York Times v. Sullivan, 1964, 271) it devised a rule that would provide the essential "breathing space" necessary for free expression to flourish: 89 The constitutional guarantees require, we think, a federal rule that prohibits a public official from recovering damages for a defamatory falsehood relating to his official conduct unless he proves that the statement was made with 'actual malice' -- that is, with knowledge that it was false or with reckless disregard of whether it was false or not