Consumer Advertising Law Blog

BFFs: NAD and FTC

It is Advertising Week in New York, and the time of year for the National Advertising Division's annual advertising law conference. The NAD, along with its sibling, the Electronic Retailing Self-Regulation Program (ERSP), provides a forum for self-regulation for advertisers, which is strongly supported by the FTC. The NAD provides a quick and relatively inexpensive process for a marketer to challenge the truthfulness of a competitor's marketing.

The NAD will review claims and recommend changes if they do not believe the claims are substantiated. Andrea Levine, Director of the NAD, and Leslie Fair, Senior Attorney with the FTC, spoke about the compliance expectations for an advertiser once the NAD has recommended changes to advertising. 

Levine detailed that the NAD expects to see recommended changes to websites made "within days."  Broadcast ads should be pulled and replaced rather than permitted to run their course.  Print ads should be pulled and replaced "as soon as possible" with a recognition that due to contractual obligations, this might not be immediate. In cases where labeling changes are recommended, "what is on the shelf can stay on the shelf," but the NAD expects swift efforts at redesign and will not permit large inventories of product labels to be run out. Levine was candid that in cases where investigations are the result of competitor challenges, there is significant follow up on compliance. In cases where the NAD opens an investigation based on its own monitoring of the market, due to resource constraints there is often less follow up to make sure a marketer is complying with recommendations. 

Cases where an advertiser does not cooperate will be referred to the FTC. Fair was clear that "every NAD referral is assigned to an FTC Staff lawyer to investigate."  Most of the referrals are of advertisers who chose not to participate in the self-regulatory process. Other referrals are from companies that haves participated but indicate they do not intend to comply with the NAD's suggestions or companies that are not complying, Levine said "we view a referral to the FTC as a failure of the system." When asked if a NAD referral will result in FTC enforcement action, Fair was quick to point out cases where the referral resulted in consents or judgments with significant consumer redress (such as the 7 Day Miracle Cleanse with a multi-million dollar settlement and a ban for life of participating in future infomercials). She also said in some narrow cases where there was not clear consumer harm but purely competitive harm, the FTC may determine not to follow-up, but this is a relatively "narrow category." At the conference, Fair announced a new FTC policy of being more transparent with what happens to referrals from the NAD and ERSP, to the extent permitted by confidentiality rules and regulations.  It will include public letters on its website that will be linked to by the NAD.

The bottom line is that before marketers should think carefully about snubbing the self-regulatory process if called by the NAD and choosing not to participate voluntarily or by determining not to follow NAD recommendations, as NAD's bigger more powerful friend, the FTC, likely will step in.

State Supreme Court says “No money for you!” to AG

The Nebraska Supreme Court dealt with a question of first impression regarding the scope of the FTC Holder Rule.  It looked at whether recovery under the Rule is limited to the amount consumers paid or allows also for the payment of attorneys’ fees.  Nebraska v. Consumer’s Choice Foods Inc., 276 Neb. 481 (Neb. 2008).

The FTC Holder Rule provides that when consumer credit contracts are assigned that a consumer debtor can assert claims against the assignee.  Similarly, the assignee can assert any defenses available to the assigning seller.  In this case, a company called Consumer’s Choice Foods Inc. (“CCF”) sold food service plans and appliances to consumers under installment contracts.  CCF assigned its interests in its contracts to a company called Jayco, the appellant in this case.

The Nebraska Attorney General sued both CCF and Jayco under state consumer protection statutes, alleging that CCF misrepresented the savings and efficiencies available under the food contract and misrepresented that its freezers were free.  The district court found that the law had been violated and that Jayco was liable for damages in the amount the debtors paid on the membership contracts, but that this was the cap on its liability.

In its appeal, the state argued that it should be able to recover attorneys’ fees under the state consumer protection statutes at issue.  The Nebraska Supreme Court disagreed, stating that in the cases from other jurisdictions that had found attorneys fees to be recoverable under the FTC Holder Rule “the claims were brought by consumers.  Here, the petition was filed by the State through the Attorney General, and it is the state which seeks attorneys fees for the time spent by its Attorney General.”  It is an interesting holding suggesting that private plaintiffs would be entitled to such costs but an AG is not.  It is unclear whether other courts will come to the same conclusion if presented with the issue, but given that many states seek to recover their investigation costs, this decision may provide some leverage to assignees in settlement discussions in state enforcement investigations.

Consumers Can Judge Green Claims for Themselves

As many of our posts on environmental marketing claims note, advertisers see value in positioning themselves and their products as environmentally conscious.  Green claims that are misleading or untruthful are commonly referred to as “greenwashing.”  Greenwashingindex.com, a website launched in January by the EnviroMedia marketing consultant firm, allows consumers to submit ads and rate them on a scale from 1 to 5, 1 being a non-misleading ad and 5 being an untruthful ad.  The site also allows users to post comments on the ads.

Greenwashing can come in many forms, from making broad environmental claims with inadequate substantiation to failing to disclose hidden trade offs—an environmental improvement in one place causing increased environmental harm in another.  As discussed previously on this blog, such claims may violate the FTC Act.  In addition, they have the potential to turn consumers off of environmentally conscious products.  If consumers learn to distrust green claims generally, truthful green advertisers will be hurt and their environmentally improved products will fail to succeed in the marketplace.  Greenwashingindex.com may also serve as a resource for enterprising plaintiffs’ lawyers who are too impatient to wait for the FTC’s revised Green Guides and subsequent enforcement actions to file tag-along suits.

Greenwashingindex.com was recently the subject of an article in Time.