Power Balance Case Shows There Are Limits to Self-regulation

Companies Snitching on One Another Is Feature of the System, but It Only Works if the Competitors Care

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A correction has been made in this story. See below for details.

In the U.S., self-regulation goes a long way.

The ad industry polices itself in a sort of skewered reality where it's less about having each other's back and more about stabbing each other in the back. Or, as Clark Rector, senior VP-government relations for the American Advertising Federation, diplomatically puts it, "it's competitors keeping an eye on each other."

The system, for the most part, works.

For the most part.

There are limits to self-regulation, and a good example is that of the scrutiny being focused on Orange County, Calif.-based Power Balance. The company makes and markets bracelets and pendants featuring holograms that, it says, were designed to interact with the body's natural energy flow and help improve performance.

The claim is boosted by celebrity endorsers such as National Basketball Association stars Shaquille O' Neal and Lamar Odom, who wear the product. But Power Balance recently ran afoul of marketing restrictions abroad, and was reprimanded by the Australian Competition and Consumer Commission, which said the company admitted "there is no credible scientific basis for the claims."

In the U.S., Power Balance is facing a series of lawsuits, including one filed last month by the New York, California and Washington-based law firm Manatt, Phelps & Phillips. Yet the company is sticking to its guns and even states it never said its product had no scientific basis for the claims.

In a statement on its website, Power Balance, which did not respond to an interview request, said "there has been some negative press about our products coming out of Australia recently, followed by a class-action lawsuit filed here in the U.S. based on those misstatements, and we wanted to set the record straight. Contrary to recent assertions in the Australian press, Power Balance has made no claims that our product does not perform. This is simply untrue. Apparently, some previous claims in our marketing ads in Australia were not up to ACCC standards. Changes were voluntarily made immediately [and] approved, and the issues were believed to have been resolved. We were obviously surprised to see the recent press coming out of Australia followed by a class-action lawsuit here in the United States."

So how does it continue to operate in the U.S., serving as an official sponsor of the NBA, and, as of March 1, as a multimillion-dollar naming-rights sponsor for the NBA's Sacramento Kings' newly renamed Power Balance Pavilion?

To say that Power Balance has no competitor ready to pounce is just too simplistic.

"I can't comment on specific cases, but not every company and not every advertiser is a candidate for self-regulation," said David Mallen, deputy director for the National Advertising Division of the Council of Better Business Bureau, the independent organization that settles advertising disputes between marketers. "There are companies and advertisers that don't have a lot of accurate claims they can make. Most responsible advertisers are companies that have a lot at stake in terms of the credibility of their brand, and have an interest in seeing voluntary self-regulation work. But there are always those companies who live over the line."

NAD says it has a 95% success rate in reviewing disputes and coming to a quick, transparent determination. Part of that is the decision of marketers to avoid what could be costly fees to fight each other in court; the other is the looming power of government regulation to back up with the NAD does.

"The distinction between self-regulation and regulation is not as complete as people think it is," said Dan Jaffe, exec VP-government relations for the Association of National Advertisers. "But once people sign on to take self-regulation and to make commitments in the food area, for instance, or the privacy area, then the Federal Trade Commission has the authority to step in if they do not keep the promises that they make."

Added Chris Cole, a New York-based attorney and self-regulation expert for Manatt, Phelps & Phillips: "Industry itself is pretty powerful. A lot of stuff gets pulled because companies are watching each other. The combination [of NAD and FTC] is certainly better than just having an enforcement agency. Could some things be done to improve self-regulation? I suppose so. NAD has done a great job, by and large. It's not perfect, but it's a better world with it than without it."

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CORRECTION: An earlier version of this story identified Dan Jaffe as exec VP-government relations for the 4A's. He is exec VP-government relations for the ANA.

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