Whether it's a "big" company or a small or family-owned business like the one you're thinking of starting, there's one thing in common: The goal is to make money. Once you've decided on the form of your small business and have financing, your immediate concern is to make the business successful. How do you do that?
Marketing your small business is how you'll get your products and services known to the public and create sales. But, at least from a legal standpoint, entrepreneurs like you should know that marketing is much more than clever ads and "bargain sales." Know how to keep your marketing from running afoul of various federal and state laws.
The Federal Trade Commission (FTC) is the federal agency primarily in charge of enforcing advertising laws. These laws are meant to protect consumers. Advertising is controlled by the Federal Trade Commission Act (FTCA). Under the FTCA, companies advertising products or services for sale must make sure:
- Ads are truthful and not deceptive, that is, they don't contain statements likely to mislead the ordinary, reasonable consumer and or leave out information important to the consumer's decision to buy or use your product or service
- There is evidence to substantiate or "backup" the claims made in the ads, such as actual survey results or independent, objective scientific evidence
- The ads are "fair." Under the FTCA, an ad is "unfair" if it's likely harm or injure a consumer and the injury isn't outweighed by the benefits to the consumer. So, for example, if you advertise that your mouthwash kills germs that cause colds, but you don't tell consumers that their teeth will turn green if they use it, your ad is probably "unfair" under the FTCA
The penalties can be severe if your advertisements violate the FTCA. They include:
- A "cease and desist" order, which requires you to stop running the deceptive ad, to have evidence to back-up your claims in future ads, and pay a fine of $11,000 per day and per ad for future violations of the FTCA
- Civil penalties, which may come to thousands of dollars (or more), and may include forcing you to refund your customers' money
- Corrective advertising that makes certain the public knows about the errors in your prior bad advertising
In addition to the FTCA, ads are also controlled by state and local governments, so be certain to check the laws in your area before beginning an ad campaign. If you have any questions about these laws, talk an experienced business law attorney.
Federal antitrust laws, and particularly the Sherman Act, make "price-fixing" illegal. "Price fixing" is some type of an agreement between you and a competitor that raises, reduces, or keeps even the prices of your goods or services offered to the public. The antitrust laws generally require a business to set and determine its own prices. Why? Often when competitors agree on a price, the price is usually higher than it would be without the agreement.
There are a few types of price-fixing that any small business owner should know about:
- Vertical pricing is when parties at different levels of the distribution chain agree to set, maintain, stabilize, raise or depress prices. For example, a manufacturer who sets the highest price a wholesaler may charge dealers for the manufacture's goods, and a wholesaler who sets the price for dealers' sales to consumers, are both engaging in an illegal vertical price fixing scheme
- Horizontal pricing is any arrangement between two or more competitors that interferes with the free market's impact on the price of goods, such as an agreement to set maximum or minimum prices
- Price discrimination is illegal if a seller sells you goods at a different price than what he charges one of your competitors, and the difference reduces competition. The idea here is to keep small businesses competitive in the market and to prevent large companies from gaining price advantages that could be used to drive small companies out of business
The penalties for violating the antitrust laws can be severe, and include not only substantial civil fines, but also criminal penalties of up to $100 million for a corporation and $1 million for an individual, along with up to 10 years in prison.
In addition to possible price-fixing issues, there are some things you need to consider about "deceptive prices" under the FTCA:
- If you offer your goods or services at price lower than your usual price, make sure the usual price is a bona fide price that was in place for a reasonable length of time. So, for example, if you normally sell widgets at a profit for $5.00, you can't raise the price to $8.50, and then three days later, advertise them for $5.00 in effort to "trick" the public into thinking they're getting a $3.00 deal
- If you offer your goods or services at price below the prices being charged in your area for the same or similar goods or services, make sure the higher price is in fact the prevailing price of the goods or services in the area
- If you offer your goods or services as "buy one get one free" or with some similar discount or savings, you can't raise the original price of the item, or lower the quality or quantity of the item. So, if you normally sell widgets for $5.00, you can't raise the price to $7.50 and advertise a "buy one get one free" sale
Questions for Your Attorney
- I think my supplier is charging my competitor less than he charges me for the same goods. What should I do?
- I think my competitor's advertisements are false and misleading. What should I do?
- I have dozens of e-mail messages from satisfied customers stating that my product does exactly what I said it would do. Can I use these messages if the FTC wants evidence that supports the claims in my ads?