Not So Settled: FTC Language Change Could Add Liability

Marketers Can No Longer Deny Wrongdoing in Settlements, Potentially Opening Door to Class Actions

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When faced with allegations of false advertising, the goal for most marketers is pretty simple: settle and stay out of court. But that might be harder to do as the Federal Trade Commission begins taking a harder line on deals, requiring new boilerplate language that ad lawyers say could harm the reputation of big brands.

At the same time, class-action attorneys appear to be cherry-picking allegations made by the industry's self-regulation bodies, potentially adding more risk to marketers partaking in a process that is meant to reduce such harm. The industry has seen "some cases where there were follow-on class actions and we think that is a very troubling trend," said Lee Peeler, president-CEO of the Advertising Self-Regulatory Council.

Together, the two developments are enough to rattle the nerves of marketers seeking to avoid expensive court cases and consumer backlash to bad PR.

The FTC change involves how marketers are allowed to frame settlements. Companies used to get some cover with language stating that the FTC's order is "for settlement purposes only" and does not equal "an admission by defendant" that "the facts alleged in the complaint, other than jurisdictional facts, are true." Ad lawyers say the agency is now taking it a step further by stating that the defendant "neither admits nor denies" the charges.

Under the new approach, "you don't have to admit liability, but you cannot expressly deny liability," said Linda Goldstein, chair of the advertising division at Manatt, Phelps & Phillips. And that denial was "extremely important," she added, "because it allows you to present the settlement in a certain way publicly -- that the settlement was entered into for expediency and the company doesn't admit any wrongdoing. Now you can't say that [because] it's directly contradicted by the terms of the settlement."

The new language could give class-action lawyers more fuel, some attorneys fear. "You've got to be really concerned about stuff like that," said one lawyer who routinely practices before the FTC. "Are you making some kind of corporate admission?"

The FTC began tweaking the language in the wake of concerns expressed late last year by then-Commissioner J. Thomas Rosch, who took issue with FTC settlements involving privacy allegations against Google and Facebook. Even though both internet giants faced sanctions, they were allowed to deny liability, which Mr. Rosch said in a dissenting opinion was not in the "public interest." A majority of the commission disagreed with him, saying it is the "evidentiary record" that forms the basis for action, not the settlement agreement. Still, the FTC said that "going forward, express denials will be strongly disfavored," suggesting that the phrase "neither admits nor denies" might be more appropriate.

That might not be the last word on the matter: Ad lawyers are keeping a close eye on a settlement case involving the Securities and Exchange Commission and Citigroup. U.S. District Judge Jed Rakoff took issue with the SEC's "admit nor deny" boilerplate language (the same verbiage the FTC is moving to), saying it "deprives the court of even the most minimal assurance that the substantial injunctive relief it is being asked to impose has any basis in fact." In other words, the company should have to admit wrongdoing. The ruling is now at an appeal's court, whose decision could influence how all federal agencies deal with settlements.

Meanwhile, class-action lawyers appear to be using findings of self-regulatory bodies such as the National Advertising Division in an attempt to bolster -- and potentially identify -- class-action cases. For instance, a 2011 lawsuit against Procter & Gamble was filed less than two months after NAD's recommendation that P&G modify claims that Crest Sensitivity Treatment & Protection Toothpaste lead to "relief within minutes." The lawsuit borrowed heavily from NAD's findings.

In response to these types of suits, NAD and the Children's Advertising Review Unit amended their procedures to state that their decisions do not "constitute a finding that the law has been violated" and that an "advertiser's voluntary participation in the self-regulatory process is not an admission and shall not be interpreted to constitute an admission by the advertiser or a finding that the law has been violated."

What could help marketers is that class-action lawyers face a higher burden of proof in court than what is required by NAD. This was evident in a recent case in which a judge dismissed a case against Bayer HealthCare that relied almost solely on a finding by NAD that Bayer used an unreliable study for ad claims involving a calcium-supplement product.

Still, why would a marketer even participate in self-regulation if it raises the risk, even slightly, of drawing more attention from class-action lawyers? It beats the alternative, said Randall Miller, a corporate lawyer with Arnold & Porter. "You can't blow off the NAD," he said. "Because what might happen is something worse, namely that the NAD refers you to the FTC, the FTC opens an investigation and then the FTC finds a violation." And that, he said, would "be trumpeted more loudly by the class-action lawyers" than even an NAD decision.

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