1 © 2008 Venable LLP Can You Substantiate That? Alerting Marketers to Increasing FTC Scrutiny MARCH 11, 2012 Jeffery D. Knowles Roger A. Colaizzi

2 Types of Advertising Claims Express Claims –The claim is specifically stated. Implied Claims –The claim is not specifically stated, but the message is conveyed to the consumer –May be literally true but impliedly false. Establishment Claims –Tests prove claim “Lab tests prove...” “Studies show...” 70% © 2012 Venable LLP Jeffery D. Knowles Roger A. Colaizzi

3 Types of Advertising Claims Comparative Claims –Comparative performance Better, stronger, faster –Comparative superiority The best #1 –Comparative preference “9 out of 10 doctors prefer...” Disparagement Claims –Product X is obsolete –Throwing a product in the trash on the air © 2012 Venable LLP Jeffery D. Knowles Roger A. Colaizzi

4 The Meaning of Advertising Claims To be deceptive the claim must be likely to mislead reasonable consumers. Advertising claims must be material “Net impression” –Advertisements are evaluated as a whole to determine how reasonable consumers are likely to respond. –Thus, in advertising the Commission will examine “the entire mosaic, rather than each tile separately.” – © 2012 Venable LLP Jeffery D. Knowles Roger A. Colaizzi

5 Government Challenges Federal Trade Commission –The Federal Trade Commission is the nation’s consumer protection agency –Authority derives from Section 5 of the FTC Act “Unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce, are hereby declared unlawful.” –The FTC’s Bureau of Consumer Protection works for the consumer to prevent fraud, deception, and unfair business practices in the marketplace © 2012 Venable LLP Jeffery D. Knowles Roger A. Colaizzi

6 Government Challenges States attorneys general –The Attorney General’s Office in each state generally has a consumer fraud and protection division, or its equivalent, that prosecutes businesses and individuals engaged in fraudulent, misleading, deceptive or illegal trade practices © 2012 Venable LLP Jeffery D. Knowles Roger A. Colaizzi

7 Marketplace Challenges Competitor –Just as you review your competitor’s advertising, competitors in the market will scrutinize your advertising claims –There are many paths competitors can take to challenge claims Competing PR campaign FTC trade complaint National Advertising Division of the Council of Better Business Bureaus Electronic Retailing Self-Regulation Program Federal/state litigation © 2012 Venable LLP Jeffery D. Knowles Roger A. Colaizzi

8 Marketplace Challenges Consumer –Aggrieved consumers regularly bring claims against marketers for false advertising FTC complaint Better Business Bureau complaint Consumer class action Other litigation remedies –Uniform Deceptive Trade Practices Act –“Little FTC” Acts © 2012 Venable LLP Jeffery D. Knowles Roger A. Colaizzi

9 Varying Levels of Substantiation The substantiation required for a claim varies according to the type of claim and the forum in which the claim is challenged FTC/State attorneys general –Companies must have a “reasonable basis” for any/all claims – express and implied – communicated by the advertisement from the perspective of a reasonable consumer as determined by the FTC or state AG –Advertisers need the level of proof they claim to have – “Clinical tests prove…,” “Dentists agree...,” “Laboratory studies show…” before making the claim © 2012 Venable LLP Jeffery D. Knowles Roger A. Colaizzi

10 Varying Levels of Substantiation FTC/State attorneys general –Objective product claims must be supported by “competent and reliable evidence” before making the claim –For health, safety, or efficacy claims, the standard is “competent and reliable scientific evidence” Reliable scientific evidence generally means a double blind placebo study where applicable © 2012 Venable LLP Jeffery D. Knowles Roger A. Colaizzi

11 Prior Substantiation Doctrine Federal regulations require that an advertiser have substantiation for its advertising before making an advertising claim –“[A] firm's failure to possess and rely upon a reasonable basis for objective claims constitutes an unfair and deceptive act or practice in violation of Section 5 of the Federal Trade Commission Act.” This rule holds true for each type of advertising claim © 2012 Venable LLP Jeffery D. Knowles Roger A. Colaizzi

12 Varying Levels of Substantiation National Advertising Division of the Council of Better Business Bureaus –Only reviews national advertising campaigns –Companies must substantiate all claims – express and implied – communicated by the advertisement Advertisers are obligated to support all reasonable interpretations of its claims, not just the message or messages it intended to convey In the absence of consumer perception evidence, NAD routinely steps into the shoes of the consumer to determine what implied messages, if any are conveyed by an advertisement © 2012 Venable LLP Jeffery D. Knowles Roger A. Colaizzi

13 Varying Levels of Substantiation National Advertising Division –The advertiser has the initial burden of presenting a reasonable basis for its claims. If NAD finds that an advertiser has provided a reasonable basis for its claim, the burden shifts to the challenger to show either that the advertiser’s evidence is fatally flawed or that the challenger possesses stronger, more persuasive evidence reaching a different result –Advertisers need the level of proof they say they have – “Clinical tests prove…,” “Dentists agree...,” “Laboratory studies show…” before making the claim © 2012 Venable LLP Jeffery D. Knowles Roger A. Colaizzi

14 Varying Levels of Substantiation National Advertising Division –Unqualified superiority claims must be supported by testing against all relevant competitors in the market that existed before the claim was made –Claims that expressly or implicitly disparage a competing product must be truthful, accurate, and narrowly drawn © 2012 Venable LLP Jeffery D. Knowles Roger A. Colaizzi

15 Varying Levels of Substantiation © 2012 Venable LLP Federal/state court litigation –Companies must substantiate all claims – express and implied – communicated by the advertisement A challenger must prove the message or claim the advertisement conveys to the ordinary consumer The challenger must then prove that the message communicated is false* Challenged advertisements must be material to the consumer’s purchasing decision *J. Thomas McCarthy, McCarthy on Trademarks and Unfair Competition§27:55 (4th ed. 2011) Jeffery D. Knowles Roger A. Colaizzi

16 Varying Levels of Substantiation © 2012 Venable LLP Federal/state court litigation –Misrepresentations must be factual and not opinion to fall under the purview of the Lanham Act –Surveys are regularly used to determine the message communicated by advertising as well as whether consumers are deceived by the advertising claims Jeffery D. Knowles Roger A. Colaizzi

17 Qualifying Claims Advertisers can use supers or disclaimers to clarify advertising claims If a disclosure is necessary to prevent an ad from being deceptive, the disclosure must be “clear and conspicuous” © 2012 Venable LLP Jeffery D. Knowles Roger A. Colaizzi

18 Qualifying Claims FTC “[Disclaimers] should be presented clearly and conspicuously so that consumers can actually notice and understand it.... [A]dvertisers [cannot] use fine print to contradict other statements in an ad or to clear up misimpressions that the ad would leave otherwise.” advertising-faqs-guide-small-businesshttp://business.ftc.gov/documents/bus35- advertising-faqs-guide-small-business © 2012 Venable LLP Jeffery D. Knowles Roger A. Colaizzi

19 Qualifying Claims NAD “While disclosures may be used in advertising to reduce the potential for consumer confusion, they cannot be used to change the express meaning of a claim or to render truthful an otherwise misleading advertising claim.” AT&T Services, Inc. v. Verizon Wireless, Case #5411 (January 5, 2012) © 2012 Venable LLP Jeffery D. Knowles Roger A. Colaizzi

20 Qualifying Claims Federal court One cannot escape liability for a literally false claim by pointing to a later disclaimer. QVC INC. et al v. YOUR VITAMINS INC., 439 Fed.Appx. 165, 168 (3rd Cir. 2011) “If the advertisement contains a definition or disclaimer which purports to change the apparent meaning of the claims and render them literally truthful, but which is so inconspicuously located or in such fine print that readers tend to overlook it, it will not remedy the misleading nature of the claims.” American Home Products Corp. v. Johnson & Johnson, 654 F. Supp. 568 (SDNY 1987) © 2012 Venable LLP Jeffery D. Knowles Roger A. Colaizzi

21 Regulatory Guidance Regarding Specific Types of Claims Environmental claims – marketing/environmental-marketinghttp://business.ftc.gov/advertising-and- marketing/environmental-marketing Health claims – marketing/health-claimshttp://business.ftc.gov/advertising-and- marketing/health-claims © 2012 Venable LLP Jeffery D. Knowles Roger A. Colaizzi

22 Regulatory Guidance Regarding Specific Types of Claims Online advertising and marketing –Affiliate marketing – marketing/online-advertising-and-marketinghttp://business.ftc.gov/advertising-and- marketing/online-advertising-and-marketing Telemarketing – marketing/telemarketinghttp://business.ftc.gov/advertising-and- marketing/telemarketing © 2012 Venable LLP Jeffery D. Knowles Roger A. Colaizzi

23 A challenger has a number of options for filing an advertising claim –Selecting the appropriate forum depends on the particular facts and goals of the challenge Considerations: –Burden of proof –Timing –Evidence –Cost –Other issues © 2012 Venable LLP Challenging Competitor Claims Jeffery D. Knowles Roger A. Colaizzi

24 Challenging Competitor Claims Cease and desist Letter –Should you notify the other side –Possibility of amicable resolution –Risk of declaratory judgment (“DJ”) –A letter may slow the process The Advertiser's response to the demand letter –Is the claim-in-question literally false –Can execution of the ad be changed without affecting campaign –Possibility of seeking DJ or making a counterclaim © 2012 Venable LLP Jeffery D. Knowles Roger A. Colaizzi

25 FTC Trade Complaint –Section 5 of FTC Act –Only FTC can enforce FTC Act, but FTC will consider complaints filed by market participants in determining whether to bring action Considerations –FTC can be a useful tool against improper advertising –Burden of proof is on the advertiser to provide a “reasonable basis” for its claims –Challenger “loses control” over the challenge –Timing –Agency’s concerns/incentives likely differ from challenger’s © 2012 Venable LLP Challenging Competitor Claims Jeffery D. Knowles Roger A. Colaizzi

26 National Advertising Division (NAD) –Voluntary self-regulatory practice for advertisers –No enforcement power, but FTC will often enforce advertising violations NAD brings to its attention –Electronic Retailing Self-Regulation Program (ERSP) is a similar process Considerations –Burden of proof is on the advertiser to substantiate all reasonable interpretations of its claims –No survey required for implied claims –NAD process can take longer than litigation –Lack of discovery can be a disadvantage © 2012 Venable LLP Challenging Competitor Claims Jeffery D. Knowles Roger A. Colaizzi

27 Commercial Litigation –Lanham Act –15 U.S.C. 1125(a)(1)(B) (a) (1) Any person who... uses in commerce any... false designation of origin, false or misleading description of fact, or false or misleading representation of fact, which— (B) in commercial advertising or promotion, misrepresents the nature, characteristics, qualities, or geographic origin of his or her or another person’s goods, services, or commercial activities, shall be liable in a civil action by any person who believes that he or she is or is likely to be damaged by such act. © 2012 Venable LLP Challenging Competitor Claims Jeffery D. Knowles Roger A. Colaizzi

28 Commercial litigation –State laws –Temporary restraining order/preliminary injunction Considerations –How significant is the claim-in-question –Timing –Burden of proof on plaintiff to establish falsity of claim –Survey evidence may be required –Risk of counterclaims –Discovery can be both “good” and “bad” © 2012 Venable LLP Challenging Competitor Claims Jeffery D. Knowles Roger A. Colaizzi

29 © 2012 Venable LLP contact information Jeffery D. Knowles, partner t f Roger Colaizzi, partner t f