Retailer vs Manufacturer Liability For Product Claims

If you are a retailer, you may think you can rely on the manufacturer for substantiation of all advertising claims. In reality, the calculation is not so simple when it comes to the retailer vs manufacturer. In some cases, the retailer may also have liability for unsubstantiated claims. On January 30, 2020, Kyle-Beth Hilfer will speak at ACI’s 3^rd Annual Legal, Regulatory and Compliance Forum on Advertising Claims Substantiation. Her panel will explore “Differentiating Substantiation Requirements for Manufacturers and Retailers.”

The seminal case in this area is Porter & Dietsch, Inc. v. Federal Trade Commission (7^th Cir. 1979). Retailer Pay’n Save sold diet pills with claims that users could lose weight without restricting calories. Even though the retailer had no part in preparing the ad, the FTC found it liable for under Section 5 of the FTC Act. The FTC argued successfully that the retailer had not made any inquiry to determine whether the claims were true or had a reasonable basis. The case stands for the proposition that all parties directly or indirectly involved in disseminating advertising claims may have responsibility to ensure the claims can be proven.

In contrast, a case last year (Outlaw Laboratory v Shenoor Enterprise (N.D. Texas 2019)) discussed a scenario that would perhaps give a retailer shelter from liability. A manufacturer sued a group of convenience stores selling diet pills with “natural” claims that competed with the manufacturer’s own products. While the case was dismissed for failure to allege the falsity of the defendant’s claims, the court noted that the retailer is not liable for the mere display and sale of products. The Texas court was concerned about turning retailers into “guarantors of manufacturer that falsely label their products.” The court stressed that there has to be some factual basis for thinking that the defendant was responsible for a false advertising claim.

How do you reconcile the Porter and Outlaw cases in deciphering retailer vs manufacturer liability? If the advertising claim only appears on the product label, it is unlikely that a retailer would have liability for an unsubstantiated claim. If, however, the retailer adopts the claim as its own in its own materials, then the risk for the retailer increases. The Outlaw court, therefore, distinguished the case of an online retailer who republished a false claim in its own materials.

Indeed, a string of cases have held various third parties liable for false advertising because the parties adopted advertising claims from the manufacturer. These parties include retailers, ad agencies, affiliate marketers, influencers, infomercial producers, catalog companies, call centers, and more. In 2014, the FTC sent warning letters to major retailers, asserting concerns about concussion protection claims and suggesting the retails investigate with the claims were substantiated. The FTC warned the retailers of potential liability if they continued  the sale of products that did not have “competent and reliable scientific evidence.”  Conversely, in 2015, the FTC absolved Quickie Manufacturing Corporation of responsibility for third party retailer unsupported “made in USA” claims, praising Quickie’s remediation plan.

Most recently, in March 2019, the NAD stressed that retailers bear responsibility for advertising claims that they make on their own displays and in-store materials. Rite-Aid had made a series of “#1 Recommended” claims on in-store materials. When the NAD investigated the claims, Rite-Aid discontinued the claims permanently. Thus, the NAD did not issue a finding on their validity. The case report did, however, explain that if the advertising “reasonably suggests that the claims are those of the retailer or are endorsed by the retailer,” the retailer bears responsibility for ensuring the claims can be proven. Retailers have a “duty to investigate and be aware of the evidence’s veracity and not just rely upon a vendor’s mere assertion of accuracy.”

So what is a retailer to do if it relies on a manufacturer to substantiate its claims? In at least one case, a retailer was left with responsibility for products that failed. In Extreme Sports Divas v Polartec (W.D. Wis. 2017), the designer and retailer ESD relied on Polartec’s fabric to be waterproof. It hired a third party to purchase the fabric and construct the coats. When ESD’s jackets made of the fabric failed to keep them dry, ESD’s customers complained bitterly. ESD was left with excess stock that it could not sell and unhappy customers. ESD failed, however, to prevail in its suit against Polartec. The court found that that ESD “had an opportunity to allocate economic risk by contract” and could have secured an appropriate warranty from the manufacturer. In addition, ESD’s testing after the fact did not prove that Polartec’s claims were false. The presumption was that something had gone wrong with the third party’s manufacturing process, and Polartec was not to blame.

All the above cases suggest certain best practices in sorting through retailer vs manufacturer liability.

Retailer Best Practices:

• Retailers should perform due diligence on new vendors. How established are they?
• Retailers should always seek evidence of substantiation for claims from the manufacturer.
• If the claims about product performance seem egregious, that may be a warning sign. In particular, longevity, health, safety, and efficacy claims should be red-flags that bear investigation.
• If retailers are creating their own campaigns based on manufacturer advertising materials, they should take care to vet those campaigns with legal counsel. Space constrained advertising can often enhance the risk profile.
• Use contractual provisions to allocate risk. In particular, a manufacturer should give broad warranties and indemnities relating to claims on packaging and labeling and retailer adoption of such claims.
• Retailers should ensure their insurance adequately covers them for recalls, rejections, and other potential liabilities.
• If creating a private label product, retailers should take care not to overstep in the product and claim development process. If relying on a manufacturer who is using a third party material supplier , the retailer should ensure that it has contractual protection on those third party’s claims to avoid the sinkhole in which ESD found itself.
• If the manufacturer establishes a pop-up shop within a retailer space, the retailer should similarly take care to protect itself contractually. Consumers are likely to be even more confused as to the source of advertising claims in these situations.

Manufacturer Best Practices: 

• In the ideation stage of new product development, consider the sales channels and talk cooperatively with retailers about desired specifications.
• Investigate the claims of material suppliers. Ensure substantiation is available.
• Prepare testing of objective claims and be prepared to defend that testing. Investigate whether retailers or certain markets have enhanced testing requirements.
• Do not forget to clear your product name as a potential advertising claim. A trademark may be available for use and registration, but that does not mean it should be used if it makes unsubstantiated advertising claims.
• Consider the risks of launching a product in a test market versus a national launch and the level of substantiation needed for both types of launches.
• Limit indemnifications to only cover use of product descriptions and claims in a specified manner. Ask retailers to provide cross indemnities on their advertising materials.
• Inquire about the kind of advertising materials the retailer will create. Demand pre-clearance of any changes to marketing materials, particularly for space-constrained advertising.
• Implement a monitoring program to provide insight into how retailers are promoting your products.
• Implement a remediation program if retailers overstep with claims that are not supported.

Do you have questions about differentiating retailer vs. manufacturer  liability? Do you want to learn more about setting up an internal program to reduce your risk associated with third party advertising claims? Contact Kyle-Beth Hilfer for a consult.