The Federal Court has found poultry producer Baiada misled people by claiming its chickens were "free to roam".

The Australian Competition and Consumer Commission (ACCC) took legal action against the owner of Steggles over its use of the term in advertising campaigns.

It was argued while the birds are housed in large sheds, they can only move in a space equivalent in size to a sheet of A4 paper.

A federal judge has agreed the company and peak industry body Chicken Meat Federation have misled consumers by using the term "free to roam".

The industry has already stopped using the term in advertising.