The Joys of False Advertising

According to the latest report, the City of Los Angeles is taking action against some major retailers who, they contend, are cheating their customers.  Four separate lawsuits name J.C. Penney, Sears, Kohl’s and Macy’s as firms who falsely advertise original prices of their merchandise to be higher than actual, so customers will mistakenly believe they’re getting bigger bargains.   As an example, they accuse J.C. Penney of offering a maternity bathing suit top for $31.99, “down from an original price of $46,” where in fact it was never priced higher than the currently quoted price of $31.99.

Those of you devoted to the concept of truth in advertising will no doubt support the city’s actions.  It certainly seems commendable when a governmental body can use its regulatory authority in this way to right wrongs   However, before you begin writing letters of commendation praising the action, you’d better take a closer look at exactly what’s in the works.  The process is the filing of actions against the named retailers under a California Government Code authorizing a city to levy administrative fines for code violations.  Under this code they may speedily seek administrative remedies in an informal manner where most rules of evidence do not apply.  As to the righting of wrongs, the law permits civil penalties up to $2,500 for each violation, with all amounts collected going to the city.  There are no provisions requiring customers who may actually have been defrauded to ever receive anything. 

Let me provide you with a bit of background on the sort of deceptive advertising these firms are accused of.  This type of duplicitous pricing represents a standard operational technique of firms in the trade for as long as retailing has existed.  Anyone with familiarity in marketing is aware this practice is a normal feature of the sales business.  My first exposure to it dates back to a Li’l Abner comic strip in the mid-1940s, by that incomparable cartoonist Al Capp, where his character Mammy Yokum declared: “Anythin’ fo’ half-price is a bargain, irregardless o’ what ya pay fo’ it.”

On a scale of seriousness, the sort of deception alleged by Los Angeles is among the least offensive possible.  Far more injurious to victims can be ads omitting or skimming over important information.  For example, TV advertisements for prescription drugs which technically fulfill a regulatory requirement by displaying side-effects, but  in extremely small font in the end of the ad, or where a “speed-talker” incoherently rattles them off.  Until just recently this practice was prevalent in the United States.  Another common abuse in advertising is the misleading health claims.  The words low fat, sugar-free and diet are seen every day and are associated with labels we see regularly promoting a healthy lifestyle.  Yet, this is often not the case, where many well known companies systematically engage in making misleading claims they know can be harmful to the user.

Another common deceptive practice we’ve all witnessed is one of misleading illustrations.  One common method is the serving suggestion picture on a food product box, showing additional ingredients not included in the package.  Even though the law requires a disclaimer if such non-included items appear, it’s understood in the industry most customers with fail to notice or understand the caption while assuming they’ll receive what they see in the picture.  On a par with the false illustrations is another practice known as “angel dusting.”  This is a process where an ingredient considered to be beneficial in a reasonable quantity is added, but only in minute amounts having no consumer benefit at all.  In this way, the vendor can list it as an ingredient to mislead the consumer.  One typical example of this practice is a cereal advertised to contain a certain number of essential vitamins and minerals, whereas the amounts added provide no nutritional benefit.

In the world of professional marketing, it can get even more misleading.  One of the tricks certain firms employ is known as acceptance by default.  This refers to an agreement or contract where no response by the customer may be interpreted as a positive response to favor the business.  One example of this practice is where the customer must explicitly “opt-out” of a particular service or feature, or be charged for it.  Yet another example is where a subscription automatically renews unless the customer takes some specific action to prevent the renewal.  However, when it comes to egregious behavior, we find it in the manipulation of terms.  As we’re all aware, many terms convey imprecise meanings.  For many years tobacco companies used terms such as “low tar,” “ultra-light” or “mild” to give the impression their product contained less detrimental effects on health than they knew to be otherwise.  Another misleading term relating to food is “organic,” which may not have a clear legal definition, but can often double or triple its sales price over the same food not so identified.  And finally, you may recall, as recently as 2015, the Kellogg company advertised their Kashi product as “all natural,” when in reality it contained a variety of synthetic and artificial ingredients.

But getting back to Los Angeles’ accusations against the four retailers, you may now wonder, in light of the almost insignificant offenses they’re charged with, why they were selected as targets for such formidable proceedings.  In light of the economic circumstances now bedeviling so many municipalities in this country, It becomes obvious.  The recent recession took a hard toll on the city, which required it to cut 5,300 positions, or nearly 15 percent of its workforce.  It now estimates a $216 million revenue shortfall, and has cut back heavily or postponed many services such as street repairs and other infrastructure items.  The city simply cannot cut it way out of its budget woes; it must find ways to increase revenue if it’s to survive as a viable entity.   And so it’s necessary to pursue any avenue where there’s a buck to be found.  Inasmuch as the cost to the city of instituting these claims can be done on the cheap, and as it’s presumed these major firms possess deep pockets, they’re certainly logical targets.  If history can be used as a guide, the likelihood is all four of these department stores will probably decide it’s cheaper to come to terms and fork over enough money just to get the city off their backs.  Whether or not they’ll actually alter their advertising technique is questionable.  It’s my guess, as part of the cash settlement, they’ll enter into a “gentlemen’s agreement” with city officials so they may continue to operate in exactly the same way as before.

I’ll conclude with this final thought: It’s unfair to single out Los Angeles for special criticism in this case.  Under similar economic circumstances, virtually any city in the United States would resort to much the same sort of action if its survival depended upon it.  And as for the firms participating in such deceptive marketing practices, they can’t be severely faulted.  After all, these are the standard advertising practices regularly taught to college students in their business courses.  It’s as American as apple pie.

Al Jacobs, a professional investor for nearly a half-century, distributes a monthly newsletter in which he shares his financial knowledge and experience. You may view it on www.roadwaytoprosperity.com/ <http://www.roadwaytoprosperity.com/> .