Companies routinely offer discounts or other incentives to increase sales.  Free offer advertising campaigns are a common and often good method to drive sales.  Advertisers utilizing free offers must do so carefully.  Free offers must not be deceptive, and the component of the offer designated as "free" must actually be free.  Stated differently, federal and state laws rely on the proposition that "free" means free, meaning that an advertiser may not directly and immediately recover the cost of the free offering from consumers.

FEDERAL LAW REGARDING "FREE OFFER" ADVERTISING

"Free offer" advertising is governed by, among other things, Section 5 of the Federal Trade Commission Act (the "FTC Act"), 15 U.S.C. § 45, and regulations promulgated by the FTC.  Section 5 of the FTC Act prohibits "[u]nfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce."  15 U.S.C. § 45(a)(1).  "Unfair" practices are those that "cause[] or [are] likely to cause substantial injury to consumers which [are] not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition."  15 U.S.C. § 45(n).

While the FTC Act does not provide for a private cause of action, the FTC has authority under the FTC Act to both propound regulations and initiate investigations or enforcement actions.  15 U.S.C. § 45.  Under its Section 5 authority, the FTC also issues guidelines or administrative interpretations that are intended to provide guidance about compliance with the law.   See e.g., "Guide Concerning Use of the Word 'Free' and Similar Representations," 16 C.F.R. § 251.1 ("FTC Free Offer Guide").

The FTC Guide on "Free Offer" Advertising: In 1971, the FTC adopted the FTC Free Offer Guide, 16 C.F.R. § 251.1, as a regulation interpretive of Section 5 of the FTC Act to provide counsel regarding the use of "free offer" advertising.  Section 251.1 includes a definition of the term "free" as used in the context of an offer for "free" merchandise or services.  In defining the term "free," the FTC places the advertiser in the shoes of the consumer.  The regulation provides, in relevant part:

"The public understands that . . . an offer of 'Free' merchandise or service is based upon a regular price for the merchandise or service which must be purchased by consumers in order to avail themselves of that which is represented to be 'Free.'  In other words, when the purchaser is told that an article is 'Free' to him if another article is purchased, the word 'Free' indicates that he is paying nothing for that article and no more than the regular price for the other.  Thus, a purchaser has a right to believe that the merchant will not directly and immediately recover, in whole or in part, the cost of the free merchandise or service by marking up the price of the article which must be purchased, by the substitution of inferior merchandise or service, or otherwise."

16 C.F.R. § 251.1(b)(1).  In other words, the FTC Free Offer Guide requires that "free offers" must not be deceptive, and the component of the offer designated as "free" must actually be free.  16 C.F.R. § 251.1.  The only latitude in this definition lies in what the consumer has "the right to believe," namely that the advertiser or merchant may not "directly and immediately" make a recovery of the cost of the free offering.  It follows that an advertiser or merchant may "indirectly" (in a less-than-immediate time frame) pursue a recovery of the cost.

Disclosure of Conditions or Obligations on "Free Offers": The FTC Free Offer Guide also provides guidance concerning disclosure of conditions or obligations on "free offers."  Even if terms, conditions, or obligations are attached to a free offer, a lawful offer may use the word free, as long as the advertiser makes certain disclosures.  16 C.F.R. § 251.1(c).  The FTC states:

"When making 'Free' or similar offers all the terms, conditions and obligations upon which receipt and retention of the 'Free' item are contingent should be set forth clearly and conspicuously at the outset of the offer so as to leave no reasonable probability that the terms of the offer might be misunderstood."

Id. (emphasis added.)  Stated differently, "clearly and conspicuously" means (for purposes of FTC Guide) that "all of the terms, conditions and obligations should appear in close conjunction with the offer of 'Free' merchandise or service."  Id.  "For example, disclosure of the terms of the offer set forth in a footnote of an advertisement to which reference is made by an asterisk or other symbol placed next to the offer, is not regarded as making disclosure at the outset," and would not be considered to be a "clear and conspicuous" disclosure under the FTC Free Offer Guide.  Id.

STATE LAW REGARDING "FREE OFFER" ADVERTISING

Though states have not provided the same level of detailed guidance in the FTC Free Offer Guide, several states have provided statutory or regulatory guidance concerning the use of "free offer" advertising.  See Cal. Bus. & Prof. Code § 17537.11(b) (2011); Conn. Agencies Regs. § 42-110b-10a(3) (2011); Fla. Stat. § 817.415 (2011); Idaho Admin. Code § 04.02.01.070 (2011); 815 Ill. Comp. Stat. 505/2P (2011); La. Admin. Code § 16:III.315 (2011); 940 Mass. Code Regs. § 6.05 (2011); 15 MO CSR § 60-7.060(7)(A) (2011); Mont. Admin. R. § 23.19.101(1)(o) (2011); Ohio Admin. Code 109:4-3-04 (2011); and Or. Admin. R. 137-020-0015(2)(e) (2011).  Consistent with federal guidance discussed above, these state statutes and regulations provide that "free offer" advertising must not be deceptive, and the components of the offer designated as "free" must actually be free.  Id.

Other states have enacted statutes and regulations specific to certain industries.  See e.g., Colo. Rev. Stat. § 12‑33-117 (2011) (regulating use of "free" by chiropractors); Mich. Admin. Code § 456.136 (2011) (regulating use of "free" in cemetery merchandise and interment and related services); Minn. R. § 2810.1300 (2011) (prohibiting the advertisement of subdivision lots for free "if purchaser is required to give any consideration whatsoever" and prohibiting lots from being offered and advertised "for closing costs only" when closing costs are substantially more than normal).

Both federal and state laws require that advertisers set forth clearly and conspicuously all conditions and obligations upon which receipt of "free" items are conditioned, to ensure that there is no reasonable probability that the terms of the offer might be misunderstood by consumers.  To comply with federal and state laws, the advertiser should disclose all conditions and obligations on "free offers."