NAD Advertising Policy Purposefully Differs from FTC Legal Standards for Substantiation

March 16, 2014

By Wes Siegner

Does meeting the FTC legal standard for claim substantiation protect claims from action by the National Advertising Division (“NAD”)?  If you think the answer should be “yes,” read on.

FTC consent decrees often leave open the possibility that unsubstantiated claims may be resumed based on new data.  NAD takes a different position on the resumption of discontinued claims, as is made clear in a recent press release concerning the product Procera. 

As a matter of general NAD policy, if the advertiser in an NAD case has agreed to discontinue a particular type of claim, it may not, absent “extraordinary circumstances,” introduce new data to support the same or materially similar claims to those previously reviewed and rejected in an NAD compliance review.  Under NAD procedures, such cases ordinarily are automatically referred to the FTC for review.  Whether new studies that meet the legal test for substantiation have been conducted is irrelevant to the NAD.

In the case of Procera, NAD had issued a decision in 2009 recommending that the advertiser discontinue certain claims.  When NAD recently found that the advertiser was again making similar claims, NAD contacted the advertiser, which agreed to discontinue all but one of the similar claims.  According to the advertiser, the claim at issue was substantiated by data from a study that was completed after NAD’s 2009 review.

As NAD makes clear at the end of the press release, “an advertiser in an NAD proceeding may not, absent extraordinary circumstances, submit new evidence after the fact as support for claims that were the subject of an earlier proceeding.” 

In a conversation with Lee Peeler, President and CEO of the Advertising Self-Regulatory Council (ASRC) and Executive Vice President of the Council of Better Business Bureaus, we received ASRC’s explanation for the difference between NAD’s policy and the FTC’s approach.  According to Mr. Peeler, both the NAD and FTC begin from a common starting point: the legal requirement that all objective claims in advertising be substantiated BEFORE they are made.  Failure to have preexisting substantiation violates the FTC Act and self- regulatory standards.  Once a violation of either the FTC Act or self-regulatory standards has been determined the processes and the consequences sometimes diverge. 

Under most but not all FTC orders you are permitted to resurrect claims for which the FTC has found a lack of substantiation provided the claims are substantiated based on newly acquired evidence.  Of course, given the consent decree, if the advertiser is wrong the consequences can be severe, ranging from fines for every ad found to be in violation to civil or even criminal contempt.  We say “most” here because some FTC orders do contain outright prohibitions of certain types of claims and in those instances no subsequently acquired evidence is considered.

According to Mr. Peeler, effective self-regulation is necessarily different from effective government regulation.  The NAD process is a voluntary system that advertisers participate in.  Once an advertiser makes a commitment to discontinue certain claims, it is critical to the success of the system that the advertiser honor those commitments. The system operates on the good faith of the participants: there are no fines, penalties or sanctions other than referral.

Mr. Peeler views the NAD Procedures position on after acquired evidence as critical to the self-regulatory system.  “Otherwise”, Mr. Peeler said, “the self-regulatory system would become an ‘endless loop’ with no finality and no consequences for continuing to make the same claim over and over again as long as some new evidence was  introduced in each proceeding.  The speed and finality that have made the system so successful would be undermined. ”  Therefore, to discourage recidivism and conserve resources, NAD has adopted a policy of automatically referring to FTC any claims that NAD has already reviewed and that have been discontinued, even if the advertiser argues that new studies l support the claims. 

This policy is set forth in NAD’s published procedures, although the implications of the policy may not be clear to advertisers.  The NAD procedure at issue is ASRC Policies and Procedures § 3.8, “Closing a Case”:

When a case has been concluded with the publication of a NAD/CARU decision or, when a panel has turned over a decision to the Chair, and when the Chair has executed the procedures in Section 3.6 of these “Procedures,” the case will be closed and, absent extraordinary circumstances, no further materially similar complaints on the claim(s) in question shall be accepted by NAD/CARU, except as provided for in Section 4.1.

As stated more clearly in the Procera press release, the phrase “no further materially similar complaints on the claim(s) in question shall be accepted by NAD/CARU” in these written procedures means that NAD will refer such claims to the FTC.

Of course, advertisers are free to conduct new studies to support claims that NAD has rejected, and absent an FTC order or FDA rule prohibiting them, advertisers may legally make claims that are substantiated, even if NAD has found that, prior to the new studies, the same claim was not substantiated.  However, advertisers need to be aware that the repetition of NAD-rejected claims is likely to result in a referral to the FTC as a result of NAD’s policy for handling such claims.

The best approach is always to make sure you have substantiation for your claims BEFORE you make them.  If you are already subject to an FTC order or an NAD decision, it is best to consult with counsel and independent experts in the relevant scientific field before making covered claims.  For more on the FTC’s approach to claim substantiation go here.