In This Issue:

• Study Finds Low Compliance for Native Advertising
• FTC Says Personal Care Products Less Than "Natural"
• NARB: Dietary Supplement Claims Lack Sufficient Support
• Deceptive-Pricing Class Action Costs Kohl's $6.15M

Study Finds Low Compliance for Native Advertising

According to a new study, roughly 70 percent of websites are not compliant with the Federal Trade Commission's recently released native advertising guidelines.

Last December the agency issued Native Advertising: A Guide for Businesses, in which it stated that consumers must be able to quickly and easily distinguish sponsored content from content that is independently created and produced. The FTC provided detailed recommendations as to how the necessary disclaimers must appear so that consumers know before they choose to view a native ad that it is commercial in nature. Ads that fail to do so are presumptively deceptive, the agency said.

To gauge compliance over the last few months, MediaRadar reviewed thousands of native ads and found that just 33 percent of publishers are currently labeling them in compliance with the FTC's guidance. Roughly 12 percent of the ads contained no label at all.

For those publishers that did label native ads, 54 percent used the term "sponsor" or "sponsored." Other popular terminology included "promoted," found on about 12 percent of the ads, and the word "ad" itself, used on approximately 5 percent of the sites. Less than 5 percent contained phrases such as "brought to you by," "partner content," or "content by."

Even publishers that applied a label failed to achieve compliance, because often the labels were either in the wrong place or were too subtle to be noticed by consumers, MediaRadar found.

The study also considered which industries favor native advertising. While the use of such ads is growing in general, the apparel and accessories category increased the most (up 82 percent from 2014 to 2015), followed by financial and real estate, food, and retail and travel, all with about 30 percent more native ads over the prior year.

"One of the reasons native is so fascinating is because it means many different things to publishers," according to the report. It noted that it tracked "almost 40 different implementation styles. Some are clearly identified, but others are extremely difficult to know that they were sponsored in any way."

Why it matters: The study demonstrates that advertisers are still struggling to achieve compliance with the FTC guidelines released little more than three months ago. However, the agency has already taken enforcement action, settling a case with Lord & Taylor. The department store chain launched an advertising campaign to promote its private-label clothing brand, using branded blog posts, photos, video uploads, native advertising editorials in online fashion magazines, and online endorsements by a team of specially selected "fashion influencers." The FTC said the company failed to disclose that the native articles and posts were paid commercial content and the fashion influencers failed to disclose they had been paid by Lord & Taylor and received free product.

FTC Says Personal Care Products Less Than "Natural"

Four companies that marketed their personal care products as "natural," "all natural," or "100% natural" agreed to a deal with the Federal Trade Commission after the agency asserted that the claims were false and deceptive.

The defendants each sold their products online and touted them as natural. For example, Trans-India Products, Inc. offered "All Natural Hand and Body Lotion" and "All Natural Moisturizing Gel" on its own websites and third-party sites. The lotion, however, contains dimethicone, ethyhexyl glycerin and phenoxyethanol, while the gel has phenoxyethanol, the FTC alleged.

Similarly, Erickson Marketing Group's "all natural" line—including the "Natural Face Stick"—actually contains dimethicone, polyethylene, and other synthetic ingredients, according to the agency, while ABS Consumer Products touted the purity of its "Coconut Shea All Natural Styling Elixer" and "Jojoba Monoi All Natural Shampoo" despite the inclusion of synthetic ingredients, including polyquaternium-37, caprylyl glycol, and phenoxyethanol. The final defendant, Beyond Coastal, described its product as "Natural Sunscreen SPF 30" even though the product had dimethicone included, the FTC said.

To settle the charges, the four companies are subject to consent orders barring them from future misrepresentations, and when advertising, promoting, or selling a product they must truthfully describe whether the product is all natural, or 100 percent natural, the extent to which the product contains any natural or synthetic components, the ingredients or composition of the product, and the environmental or health benefits of the product.

Further, the defendants must have and rely upon competent and reliable evidence to support any product claims, and in appropriate circumstances competent and reliable scientific evidence, defined as "tests, analyses, research, or studies that have been conducted and evaluated in an objective manner by qualified persons, using procedures generally accepted in the profession to yield accurate and reliable results."

For a five-year period, each of the companies must retain all advertising and promotional material and make such material available to the FTC. The consent orders are open for public comment until May 12.

The FTC said a fifth defendant, California Naturel, sold "all natural sunscreen" on its website that the agency alleged contains dimethicone. For the alleged violations of Sections 5 and 12 of the FTC Act, the agency filed an administrative complaint.

To read the complaint and consent order in In the Matter of Trans-India Products, click here.

To read the complaint and consent order in In the Matter of The Erickson Marketing Group, click here.

To read the complaint and consent order in In the Matter of ABS Consumer Products, click here.

To read the complaint and consent order in In the Matter of Beyond Coastal, click here.

To read the administrative complaint in In the Matter of California Naturel, click here.

Why it matters: For years consumers have waged a battle against products labeled "natural" or "all natural"—and now the FTC has joined in. The agency's first actions challenging "natural" claims for personal care products put advertisers on notice. "'All natural' or '100 percent natural' means just that—no artificial ingredients or chemicals," Jessica Rich, Director of the FTC's Bureau of Consumer Protection, said in a statement about the action. "Companies should take a lesson from these cases."

NARB: Dietary Supplement Claims Lack Sufficient Support

Upholding a determination by the National Advertising Division, a panel of the National Advertising Review Board recommended that Clarion Brands, LLC modify or discontinue certain claims for a dietary supplement that stated or implied it could substantially reduce or eliminate tinnitus.

Clarion's ads for its Lipo-Flavonoid Plus claimed that the dietary supplement "can help provide tinnitus relief" and "Helps ease the ear ringing that characterizes tinnitus." The advertiser also relied on a consumer testimonial video called "Debby's Store of Hope," where a customer spoke about the ringing in her ears. Diagnosed with Meniere's disease (a disorder of the inner ear that causes vertigo, tinnitus, and hearing loss), Debby was told by her doctor that she would eventually go deaf as a result of the disease. But after a friend recommended Lipo-Flavonoid, she has had no tinnitus, vertigo, or hearing loss for two years. The video featured a disclaimer stating, "Individual results may vary."

After considering the advertising, the NAD recommended that the claims and the consumer testimonial be discontinued, as they reasonably conveyed a message that Lipo-Flavonoid can substantially reduce or eliminate tinnitus.

Clarion appealed.

The NARB panel agreed with the NAD, finding that the consumer testimonial "reasonably conveys a message that Lipo-Flavonoid Plus provides significant or complete relief from tinnitus and other symptoms of Meniere's Disease." It cited the Federal Trade Commission's Guides Concerning the Use of Endorsements and Testimonials in Advertising, which states that "consumer statements about their experience with a product will likely be interpreted as representing that the consumer's experience is representative of what consumers will generally achieve with the product." As for the disclaimer, the panel "does not believe that the … disclaimer is sufficient to change this message."

Clarion's efficacy claims for Lipo-Flavonoid met a similar fate. "[I]n the context of the advertising," the panel wrote, the advertising "also reasonably conveys the message that Lipo-Flavonoid Plus provides significant or complete relief from tinnitus." The advertiser offered a number of scientific studies, case reports, and medical articles in support of its claims. But the NARB panel noted that the studies most heavily relied upon by Clarion were not double-blinded, were not placebo-controlled, and were not subject to a statistical analysis.

"For health claims, the reasonable basis must be established by competent and reliable scientific evidence," the panel explained, noting its methodological concerns with Clarion's studies. "While the panel recognized that the FTC and [the Food and Drug Administration] have established a flexible standard for substantiation of dietary supplement claims, studies should use procedures that are generally accepted in the profession to yield accurate and reliable results. At the very least, [the] failure to use a placebo control group or to conduct a statistical analysis raises questions about the reliability of [the] findings."

After considering the totality of the evidence in the record, "the panel finds there is sufficient support for a claim that Lipo-Flavonoid Plus may provide relief for some consumers who suffer from tinnitus." Lacking sufficient support, Clarion's stronger claims should be discontinued.

"This decision does not preclude Clarion from truthfully advertising that Lipo-Flavonoid Plus may provide relief for some people who suffer from tinnitus," the panel added.

To read the NARB's press release about the decision, click here.

Why it matters: While the NARB recognized that the FTC and FDA have established a "flexible standard" for determining whether the competent and reliable scientific standard has been met in substantiating advertising claims for dietary supplements, the panel expressed concern that the studies relied upon by the advertiser had methodological problems because they were not double-blinded, placebo-controlled, or subject to a statistical analysis. "[S]tudies should use procedures that are generally accepted in the profession to yield accurate and reliable results," the panel wrote, noting that both of the federal agencies "generally recognize that the standard may be met by tests, analyses, research, studies or other evidence based on the expertise of professionals using procedures generally accepted in the profession to yield accurate and reliable results."

Deceptive-Pricing Class Action Costs Kohl's $6.15M

The cost of a deceptive-pricing consumer class action against Kohl's Department Stores: a $6.15 million settlement agreement, which was granted preliminary approval from a California federal court judge.

Steven Russell and Donna Caffey sued the national retailer, alleging that they purchased products from Kohl's on 15 and over 10 occasions, respectively. The items featured two prices: a selling price and a significantly higher price represented to be the item's "regular" or "original" price. According to the complaint, Kohl's led consumers to believe that they were receiving a substantial discount by simultaneously displaying the two prices.

However, the plaintiffs claimed that the higher amount was a false price and not the true regular or original price for Kohl's merchandise, nor was it the prevailing market retail price within the three months immediately preceding its advertisement, as required by California law.

U.S. District Court Judge R. Gary Klausner denied Kohl's motion to dismiss the suit and granted the plaintiffs' motion for class certification, albeit only as to a class seeking injunctive relief. The parties then reached a deal, composed of both monetary and injunctive relief.

Kohl's agreed to provide a total of $6.15 million, divided among settlement administration costs not to exceed $1 million, reasonable attorneys' fees and costs not to exceed 25 percent of the total or $1.53 million, two class representative payments of $7,500, and roughly $3,597,500 to be disbursed to the class.

Class members are defined as individuals who purchased one or more items from one of the 116 Kohl's stores in California between June 11, 2011, and the present at a purported discount of at least 30 percent off the "original" or "regular" price. Each class member will receive a gift card credit, estimated to be worth $20. The gift cards are fully transferrable and have no expiration date.

As for injunctive relief, the defendant agreed to changes in its price-comparison advertising policies and promised to "enhance and expand programs designed to promote legal compliance including enhanced pricing compliance computer systems and pricing compliance training for employees in the relevant buying office."

Judge Klausner granted preliminary approval to the deal, finding that all requirements under both Federal Rule of Civil Procedure 23(a) and (b)(3) were satisfied. "After careful review of argument and evidence in support of the amount requested, the court finds that preliminary approval of the class settlement is appropriate," he wrote.

To read the order in Russell v. Kohl's Department Stores, Inc., click here.

Why it matters: Many retailers are facing suits that challenge their pricing for markdowns (including Columbia Sportswear Company and J. Crew). The deal in the Kohl's litigation is slightly higher than the agreement reached by Michael Kors in a similar suit, where the retailer agreed to pay $4.9 million.