United States: Second Chances: Will There Be Big News At The NAD Conference About Post-Decision Substantiation?

Last Updated: September 17 2018
Article by August T. Horvath

Doesn't everyone deserve a second chance? It's a deep philosophical question. And one that the National Advertising Division of the Council of Better Business Bureaus (NAD) has been pondering. In a couple of weeks, we may find out what it has concluded.

On September 11, NAD shared with those registered for its annual conference, taking place in New York September 24 and 25, the news that NAD Director Laura Brett will be announcing "the new rules ... on reopening cases based on an advertiser's submission of new evidence." This is potential major news for participants in NAD's self-regulatory forum for challenging the substantiation of competitors' advertising claims.

The Prior Substantiation Doctrine

A little background will help in understanding the significance of this news. At the end of a NAD advertising challenge, when it finds advertising claims inadequately substantiated, NAD recommends discontinuation or modification of the claims. NAD has an oft-repeated maxim that the substantiation for advertising claims must have existed at or before the time they were made, a principle known in advertising law as the "prior substantiation doctrine." For this reason, NAD refuses to consider evidence of advertising claim substantiation that was generated after the NAD challenge was initiated. So, if you wait until someone challenges your advertisement at NAD and then do the research to prove up your claim, NAD will disregard it.

In the same vein, when advertising claims have been found unsubstantiated and a decision issued recommending their discontinuation, NAD historically has refused to reopen a case if the advertiser later proves up its claims and wishes to resume making the advertisement. From NAD's perspective, discontinuation is recommended forever, or at least indefinitely. If you start making the claim again, the original challenger can lodge a compliance challenge with NAD at any time. If NAD finds that the advertising claim is still being made, it will find a compliance violation and refer the case to the Federal Trade Commission without accepting any new substantiation evidence. NAD's Procedures allow for the reconsideration of decisions only under "exceptional circumstances," which have rarely, if ever, been found.

This policy has been upsetting for some NAD advertiser-respondents, and it seems out of step with the practice of the Federal Trade Commission, which is the ultimate wellspring of NAD precedent and also the recipient of the advertiser's NAD file when an impasse with NAD is reached. The standard injunctive provision in almost any FTC consent order, or any litigated injunction, in an advertising substantiation case is:

It is ordered that Respondent [and its affiliates] ... in connection with the advertising, promotion, offering for sale, or sale of [product or service], must not make any representation, expressly or by implication, that [unsubstantiated claim], unless the representation is non-misleading, including that, at the time such representation is made, Respondent possesses and relies upon competent and reliable scientific evidence that is sufficient in quality and quantity based on standards generally accepted in the relevant scientific fields, when considered in light of the entire body of relevant evidence, to substantiate that the representation is true.

In this context, the important thing about the standard FTC order provision is that its "unless" clause permits the respondent to resume the advertised claim in the future, so long as adequate substantiation exists at the time the claim is made. This does not erase the fact that the advertiser violated the FTC act in the past by making the claim without adequate substantiation, but in the future, it may substantiate the claim to the level that it has learned (the hard way) the FTC requires, and resume making it. Generally, respondents in FTC matters are required to submit follow-up reports on their compliance, and to retain copies of new advertising making the challenged claims and all substantiation for it, for five years after the decision, so that the FTC can review the backup for any renewed use of the claims.

Reconsidering NAD's Position

NAD decisions don't come with an "unless you do further, adequate testing" clause as FTC orders do. In the landmark 2015 review of NAD, Self-Regulation of Advertising in the United States: An Assessment of the National Advertising Division, in which I participated as part of a Working Group of the ABA Section of Antitrust Law, the report noted that there was consensus within the Working Group that NAD "should have a process for the consideration of new evidence" after the conclusion of a matter (see pp. 35-38 at the link above). The Group recommended that NAD allow advertisers to petition for a re-opening of their matters when "evidence could reasonably lead to the modification or reversal of the underlying NAD decision."

NAD instituted several procedural changes recommended by the ABA Working Group in the months following issuance of the report, but not this one. The concern voiced by NAD leadership has been that a recalcitrant advertiser could petition for meritless re-openings of a case as a way to stall in complying with a decision, and the requested re-openings, meritorious or not, would drain NAD resources. NAD has consistently acknowledged, however, that this issue has been a legitimate concern for advertisers who thought they had adequate substantiation for their advertising claims but experienced an adverse decision from NAD, and in good faith sought to improve their evidence – a true "second chance." From a policy perspective, NAD wants to promote such activity. Further, if a matter is referred to the FTC following a failure of compliance, the FTC may not limit its investigation to the evidence that was before NAD at the time of the challenge, but may consider all substantiation currently existing for the claim currently being made.

My guess is that NAD's announcement on September 24 will be of a procedure that gives respondents a chance to re-open matters where there is new substantiation evidence, perhaps along the lines suggested by the ABA Working Group. It's unlikely that NAD would prime the pump for conference attendees to expect a major announcement of "new rules" and then announce little or no change to the existing procedures.

We'll be sure to follow up after the conference and let you know what the news is. If you can't wait, or want to hear it straight from the source, it isn't too late to sign up for the conference. If you are new to the NAD conference, there is a discount for first-time attendees. And if you're coming, look for me and my colleagues, Neil Austin, Dave Kluft and Natasha Reed, and say hello!

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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