Politics Aside, Advertising Gains Guidance on Deception and Substantiation in the 1980s

As we continue to celebrate the 50th anniversary of the National Advertising Division (NAD) we are looking forward while taking stock of past decades, with a special focus on decisions and developments that continue to impact advertising law and NAD cases today. 

This month we highlight two pivotal moments from the 1980s that helped shape NAD’s jurisprudence. These moments serve as a good reminder that although the Federal Trade Commission (FTC) is an independent regulatory agency, with five Commissioners serving staggered seven-year terms with no more than three Commissioners from one political party, it can be impacted by politics.  

Deception

On April 14, 1983, the FTC issued the Policy Statement on Deception in a letter to Rep. John Dingell, Chairman of the House Energy and Commerce Committee, appended to the Commission’s decision in Cliffdale Associates, Inc. The Deception Statement has stood for nearly four decades and provides that the following elements undergird all FTC advertising deception cases:

• There must be a representation, omission, or practice that is likely to mislead the consumer. 
• The advertising is viewed from the perspective of a consumer acting reasonably in the circumstances. If the representation or practice affects or is directed primarily to a particular group, the Commission examines reasonableness from the perspective of that group. 
• The representation, omission, or practice must be a “material” one, that is, one that is likely to affect the consumer’s conduct or decision regarding the product or service.     

It may surprise some that what has become the seminal statement about deception was controversial when it was issued. 

To understand the controversy, we must step back a bit further in time. By all accounts, the FTC of the 1970s was activist, in part because most of the Commissioners were Democrats appointed by President Carter, but also because during the late 1960s and early 1970s the FTC was responding to criticism by Ralph Nader and the American Bar Association that the FTC had failed to aggressively protect consumers, criticism that also led, in part, to the founding of NAD.  

During his 1981 confirmation hearing to be FTC Chairman, Jim Miller, an economist appointed by President Reagan, noted that he would be guided by a robust benefit-cost test before initiating investigations or other actions. Miller expressed his personal view that Congress should define deception to require evidence of consumer injury. His remarks suggested that he viewed the FTC of the 1970s as undisciplined. 

The FTC’s oversight committee rebuked Miller and in 1982, Chairman Dingell requested that the FTC submit an analysis of its deception jurisdiction. From this request, the Deception Statement was born, styled as a letter to Chairman Dingell. Commissioner (and former Chairman) Mike Pertschuk and Commissioner Pat Bailey issued dissents. They were concerned that the Deception Statement would lead to uncertainty, that replacing the “tendency and capacity to mislead” standard with the “likely to mislead reasonable consumers” standard would be less protective of consumers and would curtail the FTC’s ability to bring cases. 

In retrospect, the concerns raised in the dissents were largely unfounded.   

When examining advertising, NAD does so through the prism of principles outlined in the Deception Statement. Although NAD considers materiality, especially when initiating challenges through its monitoring program, NAD does not evaluate financial harm to consumers or competition. Rather, its decisions are limited to recommendations about the advertising and do not provide for any financial relief. Because most NAD cases result from competitors challenging each other’s advertising, materiality is essentially built in at the front end. Competitors are unlikely to challenge advertising claims that are not material to consumers.  

Advertising Substantiation

Another key 1980’s moment was on November 23, 1984, the FTC issued a Policy Statement regarding Advertising Substantiation, appended to the Thompson Medical decision. This time, the FTC sought public comment before issuing the Statement. 

The Ad Substantiation Statement was largely built on the Pfizer factors but incorporated the requirement that advertisers must have a reasonable basis for their advertising claims before they are disseminated, a standard not explicitly referred to in the Pfizer decision. 

The Statement notes that objective advertising claims are understood by consumers as a representation, explicitly or implicitly, that an advertiser has substantiation for its product claims and that failing to have a reasonable basis for an advertising claim constitutes an unfair and deceptive act or practice in violation of Section 5 of the FTC Act. In addition to setting out the requirement that advertisers must have substantiation for claims before they are disseminated, the Statement addressed when the FTC can consider evidence gathered after the claim was made, specifically when deciding whether there is a public interest in continuing an investigation assessing the sufficiency of pre-claim substantiation materials and determining the scope of an appropriate remedy.

The Statement also publicly announced the end of the previous practice of publicly conducting industry-wide inquiries into substantially similar issues in a targeted industry.

Finally, the Statement acknowledged the close working relationship with self-regulatory groups (implicitly recognizing NAD and the Children’s Advertising Review Unit) and other governmental agencies. The Statement highlighted the FTC’s independence by making clear that it would not defer to NAD’s findings. The Statement specifically notes, “an imprimatur from a self-regulatory group will not automatically shield a company from Commission prosecution and an unfavorable determination will not mean the Commission will automatically take issue or find liability.” 

Not every change in Administration brings with it a divided FTC, but occasionally it does. The FTC is a resilient institution, with the activist FTC from the 1970s followed by the scaled-back law enforcement and rulemaking that we saw in the 1980s, with a more laissez faire FTC. 

While the political environment changed significantly from the 1970s to the 1980s, and the FTC continued to refine its role as a consumer protection agency, the respectful relationship between NAD and the FTC endured.