Report finds self-regulation works, but popularity may lead to change
A working group associated with the American Bar Association recently released a seminal report on the state of advertising industry self-regulation. In the following interview, John E. Villafranco, leader of the initiative, discusses the genesis of the project and the conclusions and recommendations of the working group.
MCC: On April 15, a working group associated with the ABA released a report* evaluating the National Advertising Di- vision (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
ing 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 pro- cess for the working group to identify consensus on key issues and then pro- pose change, or failing that, to identify majority and minority opinions that led to further discussion. The group in- cluded 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
referral to the Federal Trade Commis- sion. 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.
paragraphs. Today, they are full-blown decisions that include the parties’ posi- tions 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 limit- ing the length of decisions by scaling back descriptions of the underlying facts, and placing more focus on the conclusions of law. We discussed the ef- ficacy in having cases close administra- tively – without a substantive determi- nation – based on a party’s agreement to discontinue an ad. We also consid- ered what purpose is served, other than
from industry stakeholders to improve
the self-regulatory process. Members
MCC: The group ex-
to encourage plaintiffs’ attorneys, by
stating within the decision that such
of the ABA Section of Antitrust Law’s
Consumer Protection and Advertis- ing Disputes and Litigation Commit- tee 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 proce- dures. The report tracks the NAD pro- cess: 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 fund-
John E. Villafranco
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. firstname.lastname@example.org
amined the role of NAD monitoring. Can you talk about your conclusions?
Villafranco: When the NAD was founded
in 1971, its principal purpose was to moni- tor national advertising. It wasn’t well known, and there were very few challenger proceed- ings. Forty-four years
later, the NAD faces a full docket of competitor-initiated cases. Our work- ing 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 truthful- ness 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 recom- mendation was that the self-monitoring mechanism should remain in place.
MCC: The NAD’s monitoring function appears to be reliant on industry coop- eration. 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 modi- fied, 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:
Villafranco: The NAD was created in response to a crisis of confidence relating to national advertising. Sec- tion 5 of the FTC Act charges the
agency with ensuring that advertising be truthful and not otherwise mislead- ing. 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 envi- ronment, and it uses the stick of FTC referral to incite parties to participate in good faith and abide by its deci- sions. The FTC has been pleased that the industry stepped up in this manner and has held up the advertising indus- try’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 ac- tions are a major concern. Early on, NAD decisions consisted of a few
discontinuation was “necessary and
proper” or similar editorializing.
Also adding fuel to the class action fire are NAD rules prohibiting par- ties from settling or even voluntarily dismissing a challenge once the case is initiated. The group felt that continu- ing a case that the parties have mutual- ly 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 attor- ney with another case that requires the NAD’s input to reach a resolution.
MCC: What factors contribute to wide- spread 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 con- sidered 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 produc- tion – 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 inves- tigation. The intent is to help ensure
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Facebook with its $22 billion
CFIUS could not be exported to them
Continued from page 8
with documented matrices, while earlier-stage companies work more in six-month incre- ments and reevaluate along
the way. Some are 100 percent determined to go public, while others see a better route in making a deal in which Google or Facebook buy their technology. Obviously, this
all depends on knowing the difference between deciding what you wish for and having a viable deal on the table.
MCC: You have written about the need for innovators to be adaptive in order to stay rel- evant. Tell us what that means.
Fogarty: Coming back to the innovation cycle, if you’re lucky enough to find suc- cess, then ideally the process repeats itself with a search for new ideas that keep your company relevant. The easy example is Google. Between Gmail, Chromecast and
mobile devices, they have put out a new adaptive technology every year, and it’s amazing how much of it is free. On
their products, that’s enough
disruptive technology to keep them consistently relevant. It’s come to the point where we don’t even realize we’re seeing the name Google constantly; it’s that ingrained. And you can observe similar devel- opments at a company like Apple, which in addition to signature laptops, iPads and iPhones branched into the music and book spaces with equal success.
MCC: Do you see a lot of poten- tial interest from public compa- nies in the emerging tech sector? How does this play out?
Fogarty: Yes. In fact, a few of our tech companies have been acquired by a public company. Most often, the public company just wants to
add in the proven technology and a potential revenue base and not the entrepreneurs or other staff. Alternatively, some companies opt to maintain and operate both companies separately (from an external perspective), thus keeping the legacy management in place. A notable recent example is
acquisition of WhatsApp,
which essentially is a text- messaging service that runs on the Internet and avoids the need to draw against a cell phone usage plan. Both models work, but only when
managements’ styles and goals allow it.
MCC: In closing, tell us something about your personal approach to working with tech start-ups.
Fogarty: My goal is not to be thought of as an accountant but rather as the dad who plays soccer with his kids. I want a client to say “that’s Marc, and he helps me out,” because what we’re really try- ing to do with our tech clients is be one of them – which goes beyond the traditional accounting firm model. At tech events, most people wear jeans and t-shirts while the accountants and lawyers show up in business attire. Yes, we’re here for the audit and tax work, but at the end of the day, we’re really here
to be your sounding board and advisor.
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researched or well supported. In addition, in some instanc- es, companies simply make mistakes, a not uncommon situation even for the most informed, given the complex- ity of the U.S. export control laws. From a CFIUS perspec- tive, the export classification and licensing of products, technology and services is directly relevant to a national security assessment. First, the CFIUS regulations specifi- cally request details of export classifications and licensing related to the target. Second, in some circumstances, if a foreign purchaser or investor acquires a U.S. business that is subject to the International Traffic in Arms Regulations, licenses that were in the tar- get business’s asset base may not be able to transfer. Third, a misclassification of prod- ucts, technology or services could result in the transfer
of these items to parties or countries with which the
U.S. government has serious concerns. Fourth, a purchaser may not have been approved as an end user on an export license, but that same pur- chaser could buy the entire asset and, thereby, obtain the items or technologies that
under U.S. export laws. The
purchase, therefore, circum- vents the export denials and potentially adversely affects
U.S. national security in- terests. A CFIUS filing will bring these issues to light.
8. “This is just an asset deal.”
For a variety of reasons, including efforts to minimize the potential for successor liability, corporate transactions sometimes are structured as asset purchases. In such cases, parties may think that the transactions are not within the jurisdiction of CFIUS because a foreign person is not acquir- ing a U.S. business. Take, for example, the acquisition of a building adjacent to a sensitive military facility in the United States. Deals often involve more than just the building, including leases for current tenants. Those additional aspects of the transaction cause the “asset” to look and feel more like a “business.”
In addition, those assets may have characteristics important for CFIUS review – such as access or proximity to sensi- tive U.S. facilities. In those cases, deciding not to make a CFIUS filing on the basis that the transaction is an asset deal would not be prudent.
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that an NAD attorney who initially decides that a mat- ter 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 chal- lenger seek to reopen its case if its competitor doesn’t comply with the NAD’s recommendations?
Villafranco: The report cites two examples that nicely il- lustrate 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 advertis- ing consistent with the NAD’s decision, the NAD can open
a compliance investigation to assess the advertiser’s compli- ance efforts and intentions. The advertiser may respond with the steps it took toward compli- ance. 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 ad- vertiser 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 adver-
tiser 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 end- less 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 pro- ceeding with the same attorney who handled the underlying case for the sole purpose of test- ing or assessing the strength of the new evidence. We were very pleased to hear this recommen- dation 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.