Ad Cops After Four Decades: Report finds self-regulation works, but popularity may lead to change

Monday, June 1, 2015 - 11:06

MCC interviews John E. Villafranco, a partner in the Advertising and Marketing practice of Kelley Drye & Warren LLP. Mr. Villafranco has been involved in NAD cases since the early 1990s and has prosecuted or defended cases in virtually every applicable industry. He can be reached at jvillafranco@kelleydrye.com.

MCC: On April 15, a working group associated with the ABA released a report* evaluating the National Advertising Division (NAD) and the state of advertising self-regulation in the U.S. You led the group in these efforts. Please tell us why and how the project got off the ground.

Villafranco: The report originated with a request by Lee Peeler, president of the Advertising Self-Regulatory Council (ASRC), who regularly seeks input from industry stakeholders to improve the self-regulatory process. Members of the ABA Section of Antitrust Law's Consumer Protection and Advertising Disputes and Litigation Committee who regularly practice before the NAD, myself included, saw value in an assessment that would result in practical recommendations to the ASRC.

I solicited support on the project through the ABA committees, and we assembled 60 volunteers representing a cross-section of stakeholders within law firms, consumer products companies, and trade associations.

MCC: Let's talk about some of the group's observations. Which of them stands out the most from your perspective?

Villafranco: The group's work can be described as "wonky" in that we focused on how to improve individual procedures. The report tracks the NAD process: initiating a challenge, presenting the case, the decision and press release, and the appeals process and post-NAD review.

The unanimous takeaway is that the NAD process works well, is valued by advertisers, and should be promoted to the maximum extent possible. The primary critique is the time to reach a final disposition in a case. NAD has seven attorneys handling all cases, their dockets are full, and cases stretch for months. We recommended that the ASRC strengthen the NAD funding mechanism and explore additional funding sources, such as cy pres awards arising out of consumer class actions. We also recommended increasing transparency around the NAD funding process.

Procedurally, it was an involved process for the working group to identify consensus on key issues and then propose change, or failing that, to identify majority and minority opinions that led to further discussion. The group included individuals who, in some cases, had sharply differing interests and who have been adverse to each other at the NAD for decades. It was gratifying to see the high level of enthusiasm and commitment to a project that required thousands of person hours over seven months.

MCC: The group examined the role of NAD monitoring. Can you talk about your conclusions?

Villafranco: When the NAD was founded in 1971, its principal purpose was to monitor national advertising. It wasn't well known, and there were very few challenger proceedings. Forty-four years later, the NAD faces a full docket of competitor-initiated cases. Our working group discussed extensively whether the NAD should remain in the business of bringing cases on its own. There was a significant, albeit minority, view that the NAD should direct its manpower to competitor challenges only. Because the NAD is now well known, it arguably can fulfill its mission of promoting truthfulness and accuracy in advertising through competitor challenges. The majority opinion favored a continuation of the NAD's historic and important role in bringing its own cases. The final recommendation was that the self-monitoring mechanism should remain in place.

MCC: The NAD's monitoring function appears to be reliant on industry cooperation. What makes self-regulation an attractive option?

Villafranco: Participation at the NAD is voluntary. In a worst­ case scenario, the NAD determines that your advertising does not satisfy applicable standards and should be discontinued or modified, which the advertiser can follow or disregard. There are no binding orders or sanctions for noncompliance.

A decision not to participate, however, leads to an undesirable result: referral to the Federal Trade Commission. If the FTC determines that a law has been violated, the resulting consent order (or order by an administrative law judge) can bind a company for up to 20 years or more. It also can impose burdensome reporting requirements and injunctive provisions, violation of which could lead to enforcement proceedings and costly civil penalties. Given the high stakes, the participation rate in NAD cases – both monitoring and competitor-initiated challenges – is over 90 percent.

MCC: Describe the interrelationship between the FTC and the NAD.

Villafranco: The NAD was created in response to a crisis of confidence relating to national advertising. Section 5 of the FTC Act charges the agency with ensuring that advertising be truthful and not otherwise misleading. With limited resources hobbling its ability to carry out that mandate, the agency increasingly has come to rely on the NAD to help police the industry. The FTC even made veiled threats that if industry didn't act on its own to enforce compliance with FTC standards and law, the agency would be forced to ramp up enforcement.

The NAD was born in this environment, and it uses the stick of FTC referral to incite parties to participate in good faith and abide by its decisions. The FTC has been pleased that the industry stepped up in this manner and has held up the advertising industry's self-­regulatory system as a model for self-regulation.

MCC: Does the report address certain industry concerns that the NAD process is too transparent and may be fueling consumer class actions?

Villafranco: Yes. Consumer class actions are a major concern. Early on, NAD decisions consisted of a few paragraphs. Today, they are full-blown decisions that include the parties’ positions in their entirety. There's great concern that the decisions serve as road maps for plaintiffs' attorneys, either in constructing a case or, short of that, generating demand letters that threaten an action unless the company is willing to pay money or take other steps.

The working group considered how to mitigate the potential for "follow-on" consumer class actions, including limiting the length of decisions by scaling back descriptions of the underlying facts, and placing more focus on the conclusions of law. We discussed the efficacy in having cases close administratively – without a substantive determination – based on a party's agreement to discontinue an ad. We also considered what purpose is served, other than to encourage plaintiffs' attorneys, by stating within the decision that such discontinuation was "necessary and proper" or similar editorializing.

Also adding fuel to the class action fire are NAD rules prohibiting parties from settling or even voluntarily dismissing a challenge once the case is initiated. The group felt that continuing a case that the parties have mutually decided to end does little more than provide grist for a plaintiff's class action lawyer. Given the limited resources, it would be better to task the NAD attorney with another case that requires the NAD's input to reach a resolution.

MCC: What factors contribute to widespread industry confidence in the NAD process? Are its decisions admissible in court or at the FTC?

Villafranco: NAD decisions are highly respected, which is due in large part to the quality of the adjudicators. It's the industry's loss that the decisions are not admissible in court, where they're considered hearsay (except for a handful of cases that helped inform a court ruling on a preliminary injunction). Nor are NAD decisions binding on the FTC.

At the NAD, there is no discovery – no depositions, no document production – so the method of analysis used to reach a decision is different than it would be in FTC litigation. For this reason, while the FTC may consider a relevant NAD ruling, the decision is not controlling. With that said, it's rare to find an FTC decision that conflicts with the NAD.

On the topic of neutrality, the group put forth a practical recommendation that the NAD attorney who identifies and initiates the case should not be the same attorney who conducts the investigation. The intent is to help ensure that an NAD attorney who initially decides that a matter is worth pursuing does not prejudge the conclusion in any subsequent investigation.

MCC: Does the report make any recommendations regarding the finality of NAD decisions? For example, can a successful challenger seek to reopen its case if its competitor doesn't comply with the NAD's recommendations?

Villafranco: The report cites two examples that nicely illustrate the scope of this issue. In the compliance context, if a challenger reports that the advertiser did not comply at all or did not modify its advertising consistent with the NAD's decision, the NAD can open a compliance investigation to assess the advertiser’s compliance efforts and intentions. The advertiser may respond with the steps it took toward compliance. If the NAD is satisfied that the advertiser is making a good faith effort, it may close the matter. On the other hand, if the advertiser says "this is all we're doing," the NAD may refer the matter to the FTC.

In another scenario, an advertiser may find new evidence to support a claim after a case is closed. In the example we used in the report, the NAD cites "methodological deficiencies" in rejecting test data submitted by an advertiser, and rules against the advertiser. The advertiser then corrects the alleged deficiencies, reruns the test, gets the same result, and wants to run the advertising. Current NAD rules disallow submission of new evidence because the prior proceeding is considered res judicata. The concern is that reopening cases creates an endless loop in which advertisers come back again and again with new evidence.

We found that this concern is overinflated, if not wholly unfounded (having never been tested). The report recommends a solution modeled after an FTC rule, that would allow an advertiser to initiate a new proceeding with the same attorney who handled the underlying case for the sole purpose of testing or assessing the strength of the new evidence. We were very pleased to hear this recommendation has been well received.

* To read the complete report, entitled “Self-Regulation of Advertising in the United States: An Assessment of the National Advertising Division,” visit http://www.kelleydrye.com/news/press_releases/2345.