Introduction
There are two schools of thought regarding consideration of if advertisements are to be considered as an offer. One of them argues that, advertisements in the form of circular, catalog or the like, which are for sale or purchase of goods at certain price, are mere invitation to the public to enter into a bargain & purchase rather than an offer to sell the acceptance of which will consummate a contract. They are understood as a requests to be considered, examined and negotiated. The reasoning behind this argument is that, typically an advertisement is too general to be considered as an offer. It does not contain notice of to whom it is directed and has no limitation on the number of persons who may accept by attempting to purchase the advertised item. The quantity rationale also substantiates that advertisement cannot be considered as offer, wherein it could be bound by an excessive number of contracts that in turn shall require delivery of goods in excess of the amount available, i.e., its inventory. Both advertisers and consumers typically understand that, a general advertisement is a form of publicity and solicitation and is not the penultimate step in the creation of a legal relationship.
A general advertisement differs from a specific advertisement. If a reasonable consumer understands that an advertiser is manifesting willingness to enter into a bargain, the advertisement is considered as an offer which consumer can accept. This occurs when the advertisement uses “language of commitment or some invitation to take action without further communication” and when the advertisement contains more than the usual detail. Lefkowitz v. Great Minneapolis Surplus Store Inc.[1] stipulated the test of whether “the offer is clear, definite and explicit and leaves nothing open for negotiation” and whether there is a commitment requirement in the sense that, if a performance is promised in positive terms in return for something requested. An example of general advertisement is case of invitation to bid that usually contains a disclaimer to the effect that, it does not create a power of acceptance. In simple terms, the authority “reserves the right to accept or reject any and all bids”. It is pertinent to note that, even in the absence of disclaimer, the bidder have no reasonable expectation that it will be awarded the contract, since the contracting authority has discretion in considering, evaluating and rejecting bids.[2]
What is material breach of an agreement ?
A seller is in “material breach” of a contract wherein the buyer gets the right to terminate a contract and cancel the future deliveries of products and services basis the past deliveries of products and services that have been sufficiently defective. In contract law, a material breach of contract refers to failure to perform the contract in a manner that strikes at the heart of the contract. This results in irreparably breaking the contact and thereby defeats the entire purpose of entering into contract. The following factors are relevant in determining whether a breach could be considered as material breach (a) Is the other party deprived of the heart of what it bargained for? (b) Can the other party be compensated for the loss ? (c) What will the breaching party lose or forfeit? (d) What are the chances that the breaching party will fix things ? (e) Did the breaching party act in bad faith ? (f) Is the non breaching party “ready, willing and able” to perform? and (g) What does the contract say?[3]
What is legal literature on material breach of advertising agreements in offline scenario?
If truthful information is not conveyed through advertisements, then the trust of consumers is lost while giving the advertisers’ competitors opportunity to disrupt business by asserting a false advertising claim. The following are the elements of a false advertising claim under the US Trademark Act (the “Lanham Act”) :
- A false statement of fact by the defendant in a commercial advertisement about its own or another’s product : A non-actionable puffery has to be differentiated from an express or implied claim, that can be subject of false advertising claim. The later has to communicate an objectively provable fact to the consumers or involve statements that directly represent the fact at issue that can be objectively measured.
- The statement actually deceived or has the tendency to deceive a substantial segment of its audience : It is essential to demonstrate that false or misleading claims are deceptive or likely to deceive consumers and are “material” to consumers’ purchasing decisions. Materiality depends on answering the question of whether false or misleading statement deceives, or is likely to deceives the consumers. One has to differentiate whether the offending claim is literally false or literally true but is misleading. The evidence of actual consumer misinterpretation is critical in the later part.
- The deception is material, in that it is likely to influence the purchasing decision
- The defendant caused its false statement to enter interstate commerce
- The plaintiff has been or is likely to be injured as a result of the false statement, either by direct diversion of sales from itself to defendant or by a lessening of the goodwill associated with its products.[4]
It is a standard practice that advertisers can substantiate their advertising claims prior to floating their advertisements and cannot later establish through post advertisement testing. Instances of express substantiation claims include “tests prove”, “doctors recommend” and “studies show” etc. There are multiple levels of advertising such substantiation. The first level is puffery which does not need any substantiation. The second level requires the advertiser to have a “reasonable basis” for any product claim that makes objective assertions about the item or service that is advertised.
When an advertisement claim is required to be supported by testing or scientific research or indicates any specific level of support, either explicitly or implicitly, then such claims, also referred to as “establishment claims” require the advertiser to show the same level of substantiation as presented in the advertisement.
For a false or misleading statement of fact to be actionable, it must appear in commercial advertising or promotion. For a misleading statement to constitute “commercial advertising or promotion” under the Lanham Act, it must fulfill the following criteria:
- It must be commercial speech.
- By a defendant who is in commercial competition with plaintiff
- For the purpose of influencing consumers to buy defendants’ goodsor services; and
- Disseminated sufficiently within the relevant industry.
In such a scenario, the main issue is whether a statement made by a competitor is significantly disseminated to constitute advertising or promotion will depend in large part on the size of the relevant market and whether the offending statement reached a sufficient percentage of that market. If there are isolated false or misleading statements, then businesses may seek relief under defamation and tortious interference laws.
The other tool used by advertisers is disclosures and disclaimers that are used to correct potential misperceptions by consumers. If an advertisement contains a definition or disclaimer which purports to change the apparent meaning of the claims and render them literally truthful, but which is so unconspicuously located or in such fine print that readers tend to overlook it. In such a case, the disclaimer will not remedy the misleading nature of claims. The meaning of advertisement to the target audience and the effectiveness of a disclaimer can only be ascertained by surveys.[5]
What is an advertising agreement ?
Advertising is “any action that is intended to draw the intention of the public or a segment thereof to merchandise, a service, a personal organization or to a line of conduct”. [6] It is “a means or method of attracting public attention.”[7]In the context of internet advertising, the number of potential consumers plays an important role because advertisers opt for advertising on websites that have a high number of visitors. This acts as important criterion for advertisers in determining whether it is an economical option to pay for the space on a specific website. The advent of cookies, i.e., computer programs that store information about the users so that it can be collected by the company, pop up ads can be triggered as per the profiles that are developed about a specific internet user. Cookies also play a role in enabling advertisers decide on when and where an ad should be placed. In addition they help in tracking the visitors of a website and can also provide a demography for targeting.
Ideally, an advertiser chooses a particular site and targets it via entering into advertisement agreement with the host site that will display its advertisement. The other way of showing ads is via pop up ads that appear once the user attempts to access a particular website of choice. It is advisable for the advertiser to obtain permission from the host website and thereby obtain its authorization. The second step after choosing a particular website is to decide the type of advertisement that needs to be displayed. Interstitial and rich media advertisements are those that “appear to users once they have clicked on a link.” While interstitial advertisements consist of entire web page, rich media advertisements contain movies, sounds and interactive features. Once of the distinctive features of these advertisements is that, they allow objects to follow the user’s cursor around the browser. The advertisement closes for the user to reach a desired link.
There are different ways in which pop up advertisements appear. They can either pop up “over” or “under” the intended link. These types of advertisements often distract the users from their original destination. They are displayed on top of web page. A pop under advertisement appears behind the web page instead of on top of it. Pop under advertisements are found when the user closes a web page.
From a legal perspective, the following non exhaustive list of incidents might trigger liability, namely (a) advertisements of rivals being superimposed over or between the views of the user, when it visits one website; (b) copyright liability of unauthorized advertisements; (c) alteration of work when pop under advertisement appears; (d) appearance of pop up advertisements on a designated website without the permission of the site; (e) planting and superimposing new advertisements over existing webpages without the consent of the website operator thereby distorting the underlying material sponsored by the host website.
What are the legal issues on material breach of advertising agreement ?
a. Copyright Infringement
Of all the legal issues, one of the questions that requires such consideration is whether a copyright owner who is the subject of unauthorized pop up advertising can claim copyright infringement. To provide a short synopsis, every creative work that is fixed in any tangible medium of expression is protected by copyright. An instance of copyright infringement occurs when one who has access to copyrighted work creates a substantially similar work and uses it in a way that violates the copyright owner’s five exclusive rights of reproduction, distribution, adaptation, performance and public display. Thus, an unauthorized advertisement is recognized when it has taken from the ad whose space it now occupies and has materially altered the derivative work as well, in case of pop ups on the copyrighted work. If one assists in the act the copyright infringement, then they may face derivative liability under either under contributory infringement or under vicarious liability. It shall be the role of courts to determine whether infringed upon work is protected under copyright law. Internet advertising has resulted in the expansion of the traditional access and taking theories in order to accommodate new issues that crop up. It is possible for an unauthorized advertisement to violate copyright by altering the look of the page and cover up the text. It is also possible to infringe the website’s trademark by confusing consumers as to the source of the advertisements. There have been arrangements wherein an entity has a fee relationship with the advertisers who pay it to deliver pop up advertisements, and a free relationship with consumers who install the software on their devices and have no relationships with the companies on whose websites where the pop up advertisements appear. If a pop up advertisement appears on the user’s computer screen at the same time as the holder’s web page, it could be interpreted that, it was a mere transitory occurrence and can be construed as merely another window on the user’s computer desktop that could be closed at anytime. It is possible for users to keep several programs open simultaneously in the windows program. In such a situation, it shall not be considered as an instance of copyright infringement. The caveat to such a situation would be when corporations display images with the intent to gain potential consumers and if done maliciously with an intent to deprive the copyright owner of the profit. There is a grey area on the issue of whether a modification that must be permanent or whether a substantial modification that alters the work would be considered as infringing on copyright rights even if it is not permanent. If there is a substantial modification that alters the right to display, whether permanent or not, ideally it should be a case of copyright infringement of the copyright owner’s exclusive right by changing the characteristic and features of their work.
The other issue that has not been solved is in case wherein there are multiple advertisements that cause a user to never reach his or her destination site as a result of internet congestion. [8]
b. Sequential Liability
As per AAAA, advertisers and its agencies are “sequentially liable” for the media payments. In simple terms, this means that, a medium could ask the agency for the payment if the agency has been paid by the advertiser. The medium would be limited to seeking payment directly from the advertiser if the agency has not been paid. In the absence of this legal theory of “sequential liability”, the media would be placed at an advantageous position and the agencies’ interests may be at a disadvantage in respect of the receiving future payments. If sequential liability is rejected by the media, then one should consider asking for payment from the client in advance and in full before commitments becomes non cancellable. Alternatively, advertisers can be made as party to the contract, with agencies being able to perform its services as media consultants.
The other competing legal theory that comes into play is that of “dual liability”, otherwise known as “joint and several liability”. In simple words, this means that, both the client and agency would continue to remain liable for making payments to the media, in two situations, namely (i) if client has already paid the agency or (ii) if the agency has not been paid for purchased media services.
For media contracts, the agency shall be solely liable for payments to the medium to the extent the proceeds have been cleared from the advertiser to the agency for advertising that is run in accordance with the contract. If there are sums that is owed but is not cleared to the agency, then the advertiser named in the contract will be solely liable.
For client agreements, it is important to define the role of the agency and reduce its exposure in the event of default. Thus, it is prudent to include a clause in the client agreement stating that, the agency would be functioning as an agent for a disclosed principal for media and production purchases. [9]
Conclusion
In the online world, there is a thin line between targeted ads and non targeted ads. This is dependent on numerous factors that are controlled by the advertiser ranging from information that is used to personalize the ad to transparency level. This is also dependent on the factors related to the consumer, namely, the level of trust that the consumer has on the advertiser, the perceived usefulness of the ad, if there is a feeling of intrusiveness and privacy concerns. These play a critical role in weighing the strength of an agreement, especially an advertising agreement.
[1] 86 N.W.2d 689, 691 (Minn. 1957).
[2] https://repository.uchastings.edu/cgi/viewcontent.cgi?article=3638&context=hastings_law_journal
[3] https://www.nolo.com/legal-encyclopedia/breach-of-contract-material-breach-32655.html
[4] Southland Sod Farms v. Stover Seed Co., 108 F.3d 1134, 1139 (9th Cir. 1997); see also U.S. Healthcare, Inc. v. Blue Cross of Greater Philadelphia, 898 F.2d 914, 922–23 (3d Cir. 1990).
[5] https://www.acc.com/sites/default/files/resources/upload/Kilpatrick-Navigating-US-Legal-Issues-Advert.-Campaign.pdf
[6] GEORGE E. ROSDEN & PETER E. ROSDEN, THE LAW OF ADVERTISING § 17.02(2), at 17-36 (1995).
[7] Edwards v. Lubbock County, 33 S.W.2d 482,484 (Tex. Civ. App. 1930).
[8] https://scholarlycommons.law.hofstra.edu/cgi/viewcontent.cgi?article=2582&context=hlr
[9] https://www.aaaa.org/index.php?checkfileaccess=/wp-content/uploads/2018/01/5896-Sequential-Liability-update.pdf&access_pid=67876
