FTC Tells the NAD: “Thanks for Nothing”

June 6, 2014

By John R. Fleder

The National Advertising Division ("NAD") of the Council of Better Business Bureaus has administered an industry sponsored, self-regulatory program for many years in which national advertisers can complain about their competitors’ advertising.   NAD reviews the advertising and issues public decisions regarding the challenged advertising.  The program relieves the parties involved of the costs of a lawsuit.   The Federal Trade Commission has encouraged advertisers to participate in the NAD process.  In that connection, the Commission has demonstrated that, when a company "loses" an NAD case but will not change its advertising practices, the FTC will be inclined to take enforcement action against that advertiser.

Although the NAD lacks legal remedial powers, when a company refuses to participate in the NAD process after an advertisement is challenged or when a company does not alter its practices as a result of an adverse NAD decision, the NAD will typically refer the matter to the Federal Trade Commission to consider an enforcement action against the advertiser.  The FTC has encouraged advertisers to participate in the NAD process.  In that connection, the agency has publicly stated that, when a company” loses” an NAD case but will not change its advertising practices, the FTC will be inclined to take enforcement action against that advertiser.  Historically, the FTC has frequently taken such an action after receiving a referral from the NAD.

Nevertheless, we have seen a number of instances over the past few years where the FTC has informed the NAD that the Commission has declined to take an enforcement action after an NAD referral.  That has typically happened when the alleged violator ceased the practices in question after the NAD referral was made to the FTC.  However, it is extremely rare for the FTC to disagree on the merits with an NAD decision. 

It was somewhat stunning to read the FTC’s May 13, 2014 letter to the NAD concerning a challenge by Pfizer Consumer Healthcare to advertisements being run by a competitor, Hisamitsu Pharmaceutical, Inc. regarding the Salonpas pain relief patch.  Hisamitsu refused to participate in the NAD process and the NAD issued a short decision simply forwarding the matter to the FTC.  Nevertheless, the FTC decided not to take an enforcement action against Hisamitsu. 

Given the company’s refusal to participate in the NAD process, the FTC’s decision to decline an enforcement action was noteworthy on that ground alone.  More interesting was the FTC’s other reasons for declining to bring an enforcement action.  The Commission openly disagreed with Pfizer, concluding that, based on the evidence presented, the FTC did not believe “that the overall net impression of Hisamitsu’s advertisement is misleading.”

One of the main reasons that many companies participate in the NAD process when one of their advertisement is challenged is their fear that, if they do not participate and/or if the NAD rules against their advertisements, they will almost surely be sued by the FTC.  This recent decision may alter the thinking of certain companies. 

Nevertheless, an adverse NAD decision poses real business concerns for many national advertisers, and an FTC enforcement action and class action lawsuits remain real dangers when a company decides to ignore an adverse NAD ruling.