National Advertising Division (NAD) Advertising & Self Regulation

1. National Advertising Division (NAD)Advertising & Self Regulation Kathryn L. Farrara NABCA 16th Annual Symposium on Alcohol Beverage Law & Regulation March 9-11, 2009

2. History of NAD 1971 – NAD was formed by advertising trade associations and the Council of Better Business Bureaus.

3. SELF-REGULATION COMPONENTS

4. Low-cost Speedy Substantially easier burden of proof (reasonable basis) Challengers do not have to prove that the advertising is misleading. No standing issues Voluntary participation Ample opportunity to be heard and full access to NAD throughout the process. Confidential Why Choose NAD over Federal Court?

5. Product Categories Reviewed: • Automobile Accessories • Communications • Computers/Electronics • Clothing/Accessories • Cosmetics • Drugs/Healthcare • Energy • Financial Services • Food and Beverage • Alcoholic Beverages • Hardware/Garden Products • Home Furnishings • Household Products • Insurance • Leisure/Toys • Restaurants/Retail Chains • Sports Products • Telecommunications • Travel/Accommodations

7. NAD examines many types ofclaim substantiation: • Puffery • Consumer surveys • Product testing • Demonstrations • Taste tests • Pricing • Disclosures “Tastes better than the leading brand!” “The best value on the planet!” “4 out of 5 Dentists Recommend…” “2X the cleaning power* *but still leaves it pretty grimy.” “Clinical Tests Prove...!

8. NAD Review Process • Challenge/ Monitoring • The source of an NAD case can be competitors, consumer complaints, referral by local BBB, trade associations, advocacy groups or the NAD monitoring program. • Two Rounds of Submissions • Opportunity for expedited proceeding. • Meetings with NAD • NAD Decision

9. NAD’S Approach to Claim Review • What are the messages that are reasonably conveyed? • Determines whether the advertiser has established a “reasonable basis” for its claims (does the testing/data support the challenged claim?) • “Steps into the shoes” of the reasonable consumer to determine all reasonable interpretations of the advertising at issue. • Consult regulatory authorities for “guidance” where there is a clearly articulated position and harmonize its decisions whenever possible.

10. Russian Standard Vodka, Inc., Case #4591, NAD/CARU Case Reports (January 2008).

11. Procedural History • Initiated June 2006 • Advertiser argued that the advertising at issue was not “national advertising” within the scope of NAD’s jurisdiction, and the statements at issue were the subject of pending litigation. • NAD concluded that jurisdiction was proper. • §1.1 (A) “National Advertising” shall include any paid commercial message, in any medium (including labeling), if it has the purpose of inducing a sale or other commercial transaction or persuading the audience of the value or usefulness of a company, product or service... • Both actions cited by the Advertiser had been dropped prior to resolution of the issues and therefore not considered the subject of pending litigation. • Advertiser filed a complaint seeking declaratory judgment – NAD administratively closes the proceeding.

12. Federal court stayed the case for 30 days, pending resolution of the NAD proceeding, and NAD reopened the original review proceeding. • The Court stated: • “Allowing NAD to complete its decision regarding Stoli’s authenticity as a Russian vodka would allow it to set advertising standards for the industry on an important issue. The public and industry would benefit greatly from hearing the NAD’s opinion on the issue …”

13. Challenger’s Position: • Stoli is produced in Russia from 100% Russian wheat, water, and yeast. • US “country of origin” laws require Stoli be described as a “Product of Russia.” • Under Customs regulations the country of origin remains the country of production so long as the packaging process does not change the name, character, or use of the product. • Russian labeling requirements are inconsistent with US law and irrelevant. • Advertiser’s consumer perception survey is flawed and irrelevant.

14. Advertiser’s Position: • Stoli sold in the US is filtered, bottled, labeled, packaged in and exported from Latvia. • Consumer Perception Survey – 90% believe that an “authentic” Russian vodka must be bottled in or imported from Russia. • Export records and chemical testing demonstrate significant differences between US Stoli and the vodka exported from Russia by S.P.I. • Stoli’s claims of Russian authenticity have been questioned and rejected by international tribunals

15. The Challenged Claims • There is an “absence of a first-rate, authentic Russian vodkas in the [U.S.] luxury [alcohol] marketplace” • “Stolichnaya brand vodka is not authentically Russian.” • “If Stolichnaya vodka comes from Latvia rather than Russia, then they should be honest about that. We think they should be proud of their Latvian heritage.”

16. Product Denigration Issue: Can the advertiser truthfully make certain statements in its advertising questioning the nature and origin of Stolichnaya Vodka without falsely disparaging Stolichnaya Vodka? Rule: Denigrating claims must be truthful, accurate, narrowly drawn and do not falsely disparage a competitor’s product.

17. Does evidence indicate that more than just filtering and bottling is taking place in Latvia? NAD reviewed the following evidence submitted by the parties: • Customs Records • Chemical Testing • KPMG Report • Statements made by Pernod NAD Concluded: • The evidence was inconclusive and could not individually, or in total, provide a reasonable basis for claims that anything more than filtering, bottling and labeling of Stolichnaya vodka was taking place in Latvia.

18. Assuming only filtering andbottling take place in Latvia, does this action render Stolichnaya “not authentically Russian”?

19. Consumer Perception Survey: • “What, if anything would have to occur for a brand of vodka to be called Authentic Russian Vodka?” • “If you saw a vodka advertised as authentic Russian vodka, which, if any, of the following would you expect to be true about that brand of vodka?” • The vodka is made with Russian ingredients • The vodka is distilled in Russia • The vodka is bottled in Russia • The vodka’s bottle is labeled in Russia • The vodka is imported from Russia • The vodka is sold in Russia

20. Consumer Perception Surveys • As a general rule, open-ended questions are better indicators of how consumers interpret a commercial message because respondents’ answers are not colored by the suggestions contained in the questions themselves. • Closed-ended questions typically are reserved for situations where the researcher wants respondents to choose between the parties' respective interpretations of a claim or where an open-ended approach would not pick up subtle differences in meaning. • The absence of a control advertisement is not necessarily a fatal flaw, though it can be particularly useful when survey respondents’ answers are likely to reflect pre-existing beliefs rather than impressions produced by the advertisement.

21. In the absence of reliable consumer perception data, NAD will use its experienced judgment to determine the reasonable messages conveyed by an advertisement. • NAD reasoned that while some vodka drinkers may find these factors to be essential to the Russian-ness of authentic Russian vodka, others may not. • Regardless of customs laws, certain vodka drinkers/consumers may want to know that Stolichnaya vodka is filtered, bottled and labeled in Latvia, not Russia. • NAD concluded that the consumer should be the one to determine what is, and is not, authentic Russian vodka.

22. Conclusion • NAD recommended that the advertiser discontinue making claims that Stolichnaya is distilled in Latvia including statements that ‘[Stolichnaya vodka] is distilled and bottled in Latvia,” and that Stolichnaya products “should be proud of their Latvian heritage.” • In addition, NAD found that the advertiser could question the “Russian authenticity” of Stolichnaya vodka in its advertising, as long as the advertiser clearly and adequately discloses why it believes Stolichnaya vodka is not truly authentic Russian vodka.

23. NAD Case Reports • Available via online subscription at: www.nadreview.org/ • Archives serve as a research tool offering education, guidance and support; access NAD decisions, NARB appeals and more; • Search by issue, company, date or key phrases

24. Thank you. Kathryn L. Farrara kfarrara@nad.bbb.org