Internet Advertising and the Law (1999)

Contents

Introduction

Advertising is an essential element of a market economy. It allows suppliers to disseminate information about their products and promote them to potential customers. This information is used by consumers to make informed choices about the products they wish to purchase. Suppliers need customers as much as customers need suppliers, but when it comes to advertising the relationship between the two parties is not equal. The customer depends on the information presented in advertisements to make an “informed” choice, but it is the supplier who determines the content, accuracy, style and placement of that advertising material.

Governments throughout the world aim to redress this imbalance by providing protection to their citizens through laws and regulations which control the use of advertising. In Australia for example, the Commonwealth Trade Practices Act and the Fair Trading Acts of the various states provide guidelines for acceptable conduct in advertising and enable consumers to take action for compensation when these guidelines are breached. Importantly, consumer groups and rival traders can also bring actions under these acts. In addition to consumer protection, these Acts enable the Australian Competition and Consumer Commission (ACCC), and its state equivalents, to ensure fair competition in the marketplace.

While there has been global advertising through international magazines for many years, most advertising campaigns concentrate on a specific country, or parts of a country, and are regulated by the laws of that country. In recent years however, satellite television and services like CNN have opened up the global market to large television advertisers. Also, the introduction of the Internet, with its ability to disseminate information to a global market quickly and cheaply, offers unique advertising opportunities, raising new issues for advertisers, consumers and regulators to consider.

This paper deals with the use of the Internet and World Wide Web to promote and advertise goods and services, and is not concerned with the promotion of Web sites per se through various on-line means like banner advertising.

Global Marketplace

The Internet is a new marketing medium and governments are only beginning to develop laws which will regulate the way it is used both nationally and internationally. The legal issues associated with Internet advertising however, will be largely the same as those concerned with traditional forms of advertising in other media such as print and television.

While the laws regulating advertising in many countries have fundamental similarities, there can also be significant differences. For example, comparative advertising, which is legal in the US and Australia, is prohibited in Germany, and some countries like France have strict language requirements. In Australia there are laws which prohibit racist and religious vilification, while many other Pacific Rim countries, whatever their cultural sensitivities to these issues, provide little or no legal protection.

Access to a global marketplace brings benefits to consumers through increased competition and choice. The international nature of global transactions however can raise problems for consumers. In recent years, the Australian Competition and Consumer Commission (ACCC) has found itself dealing with increased complaints by Australian consumers about products they have purchased from other countries, there have also been complaints from overseas about products purchased from Australia.

The potential for cross-border transaction problems are compounded by the fact that the laws in different jurisdictions, be they states or countries, often differ. When a cross-border action is commenced in a jurisdiction, the courts of that jurisdiction do not automatically apply their own law.

“Respect for the laws of other jurisdictions has led courts to develop choice of law rules to determine which State or country’s law should apply.”
Law Reform Commission Discussion Paper, “Choice of Law Rules”

Deciding which law covers a dispute can be very complex, depending as it often does on finding a balance between many competing factors. In summarising the issues involved, the Law Reform Discussion Paper indicates that in some cases there is either a prima facie link with one of the countries involved, or the parties have made an explicit or implied choice of which law should cover their transaction. In other cases however, when the issue is not so clear, the courts have to decide which system of law the transaction has the closest and most real connection or association with.

As a result, laws from the country of the supplier or the country of the purchaser have been applied to disputes arising from cross-border transactions, regardless of where the case is heard. For example, when hearing the case of Mendelson-Zeller Co. Inc. v. T. & C. Providores, which involved the purchase of fruit from a company in California by a company in New South Wales, the Supreme Court of New South Wales held that the proper law was that of the state of California. In another famous case, The Assunzione (1954), the competing factors seemed to be evenly divided between French and Italian law, but the court chose Italian law on the basis that the contract called for payment in Italian currency.

Having decided under which law a case should be heard, there is a second problem of which courts may hear the case. This is known as the problem of jurisdiction, since it is possible for a dispute to be governed by the laws of one country, but no court in that country has the jurisdiction to hear the case. Even when the parties from different countries in a cross-border dispute agree on the choice of law and the jurisdiction, it may be difficult to get the party from outside that jurisdiction to appear or abide by the findings of the court. In the future, this situation is likely to be quite common with cases arising from Internet transactions, as these will often be consumer disputes involving relatively small amounts of money.

Advertising and the Internet

“When a marketeer places advertising or a sales promotion on a server in Chicago, Boston or New York that advertising or promotional offer may be accessed throughout the world. From a legal perspective, the question is whether countries other than the United States can exert jurisdiction over advertising or promotional material that is deemed unlawful by that foreign country.”
Lewis Rose and John Feldman, “Internet Marketing”

Rose and Feldman are partners in the US law firm Arent, Fox, Kinter, Plotkin and Kahn, based in Washington DC. Lewis Rose also maintains the Arent Fox Advertising Law Internet Site. Leaving aside the US centric nature of the above quote, the central question it raises applies to suppliers of goods and services from all countries (and states with separate legal jurisdictions within countries) who wish to advertise their products on the Internet.

In the United States, government agencies like the Federal Trade Commission (FTC) have been actively looking at Internet advertising and its misuse for a number of years. The FTC took its first action in March 1996, when it charged nine companies with making false and unsubstantiated advertising claims in their Internet marketing. At the time, Jodie Bernstein, Director of the FTC’s Bureau of Consumer Protection, described the Internet as a new frontier for advertising and marketing.

“The Internet will not achieve its commercial potential if this new frontier becomes the Wild West of fraudulent schemes. These FTC cases target deception in on-line marketing, and our focus on this area makes clear that the laws prohibiting fraud also apply to the information superhighway.”

Jodie Bernstein, Federal Trade Commission

In taking these cases the FTC was primarily concerned with the potential for American citizens in all states to be defrauded by American companies via the Internet. There have been a number of other case in the US which involve cross-border transactions between states. For example, in 1996 Granite Gates, a commercial sports betting service based in Nevada, advertised on the World Wide Web. The Granite Web advertisements maintained the service it was offering was legal, but in the State of Minnesota sports betting is illegal. In the resulting case, the courts ruled that since the Granite advertisements were accessible by Minnesota residents, the State of Minnesota had jurisdiction to take consumer protection action against Granite Gates even though the company was based in another state.

There have also been US cases involving cross-border advertising from other countries. Virgin Atlantic Airways, which is based in the United Kingdom, advertised over the Internet an advanced purchase fare of $499 for travel between Newark and London. Even though the Virgin Web site advised customers to check with local travel agents to see if any taxes or charges applied, the US Department of Transport fined the British company $14,000 for failing to disclose clearly that a tax of $38.91 applied to each ticket.

“Whether or not the advertising met legal standards in Great Britain, and regardless of where Virgin Atlantic Airways’ Internet server was located, the US government successfully asserted jurisdiction over advertising that could be downloaded to a personal computer in the United States.”
Lewis Rose and John Feldman, “Internet Marketing”

A different, and perhaps more contemporary, view of the attitude of US courts to Internet advertising, with an Australian perspective, is offered by Steve White from the Melbourne law firm White SW Computer Law.

“One of the latest US decisions with respect to legal jurisdiction and the Internet, Cybersell Inc v. Cybersell Inc, suggests that if your Web site acts only as a means of advertising or as a source of information, the US Courts will not be able to assert jurisdiction. If, however, you sell goods and/or services over the Internet, it is possible that a US resident or business could issue legal proceedings in the US against you or your business. To reduce the risk of such litigation, you should consider having a requirement that the potential customer submits to the laws of Australia governing the agreement before the transaction has been completed.”

Steve White, “Web Site Development Agreements”

I am not aware of any actions taken by individual consumers in relation to Internet advertising, but there is considerable potential for false or misleading advertising, particularly by small operators with little or no corporate presence in the real world. The issue is of considerable concern to governments and consumer organisation in many countries, including the largest Internet market, the United States, and Australia.

Conclusion

The Internet is a new marketing frontier where the rules and regulations are rapidly evolving. In this environment, Internet advertisers need to be aware of the laws of their home country, as well as those which relate to other large market countries and international trade. In the article, “Internet Marketing”, US advertising lawyers Rose and Feldman, advise caution and suggest clients do all they can to ensure that proposed advertising material is acceptable in key countries. They also strongly advise the prominent display of disclaimers on Web sites, and where appropriate the site should clearly state the countries to which an offer can only apply.

As the market for Internet advertising grows so, unfortunately, will the number of advertisers who are neither honest or responsible, attracted by a medium which is able to reach a global market quickly and cheaply. As a result, the demands for consumer protection in relation to Internet advertising, particularly when it involves cross-border transactions will increase. These demands will only be adequately addressed by a mix of national laws and international agreements, combined with effective systems of self regulation on an industry-by-industry basis.

“The real problems are yet to emerge, as the bulk of consumers and merchants are currently kept out of the on-line marketplace by security concerns and payment difficulties. Once a secure, efficient and international model of digital payment is established it will be too late to step in and consider how best to impose regulation. Now is the time to recognise the promise and potential of electronic commerce and ensure it works for all Australian businesses, rather than leaving us behind, bound by the shackles of a paper based commercial system.”
Melissa De Zwart, “Electronic Commerce: Promises, Potential and Proposals”, University of NSW Law Journal.

References

  • Commonwealth of Australia Trade Practices Act at http://www.austlii.edu.au/au/legis/cth/consol_act/tpa1974149
  • The Australian Competition and Consumer Commission, “The global enforcement challenge – The enforcement of consumer protection laws in a global marketplace – Discussion Paper”, 1997.
  • The Law Reform Commission, “Choice of Law Rules”, discussion paper no. 44, (1990), p. 1.
  • Rose, L., & Feldman, J., “Internet Marketing: Practical Suggestions for International Advertising and Promotions”.
  • White, S., “Web Site Development Agreements”, Going Digital- Legal Issues for Electronic Commerce, Multimedia and the Internet, Fitzgerald A et al (eds), Prospect Media, St Leonards, 1998, p. 134.
  • De Zwart, M., “Electronic Commerce: Promises, Potential and Proposals”. University of NSW Law Journal 21(2), 1997.
  • Arent Fox Advertising Law Internet Site at http://www.advertisinglaw.com
  • Leonard, P., Leong, V., amp; Scott, B., “Advertising and Marketing on the Internet: Law and Regulation”. Internet Law Bulletin, 1(4), 1998.

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