National Dynamics Corporation

Text (OCR of the scan at left; may contain errors)

IN THE MATTER OF NATIONAL DYNAMICS CORPORATION, ET AL.

MODIFIED ORDER, OPINION, ETC., IN REGARD TO ALLEGED VIOLATION OF THE FEDERAL TRADE COMMISSION ACT Docket BRO,!. Decision, Feb. , 197.'1 - Modified Order, Mur. -4, 1975 Order modifying previous Commission order, 82 F. C. 48, 38 F. R. 9157, issued against a New York City seller of battery additive, VX-6 and other products by changing the provisions of Paragrph 1 of the order to permt respondents to represent sales, earnings, and profits in a format utilizng ranges instead of :192 FEDERAL TRADE COMMISSION DECISIONS Opinion 85 T.C. averages. Paragraph 2 was modified to require maintenance of substantialion claims made pursuant to the requirements of Paragraph 1 as modified. Appeamnces For the Commission: Jeffrey Tureck and Michael McCarey. For the respondents: Solomon H. Friend New York, N.Y.. OPINION OF THE COMMISSION By DIXON Commissioner:

The Commission issued an order in this case on Feb. 16, 1973, from which respondents appealed to the Court of Appeals for the Second Circuit, challenging four of the six order paragraphs. he court has remanded the matter to the Commission with instructions that paragraphs 1 and 2 of the Commission s order be reformulated in accordance with the court' s decision. 1 The paragraphs in question would enjoin respondents from: 1. Representing, directly or hy implication, that persons purchasing respondents' products can or will derive any stated amount of sales profits or earnings; or representing, directly or by implication, the past or present sales, profits or earnings of purchasers of respondents products unless in fact the past sales, or profits and earnings represented, are those of a substantial number of purchasers and accurately reflect the average sales, profits or earnings of such purchasers under circumstances similar to those of the purchaser or prospective purchaser to whom the representation is made; or misrepresenting in. any manner, the past, present or future sales profits or earnings from the resale of respondents' products. 2. Failing to maintain accurate records which substantiate that the past or present sales, profits or earnings represented are accuate and are those of a suhstantial number of purchasers and accurately reflect the average sales, profits or earnings of such purchasers under circumstances similar to those of the purchaser or prospective purchaser to whom the representation is being made. In framing these order provisions, the Commission sought to eliminate the substantial misrepresentations of earnings figures which were found hy the administrative law judge and whose existence was unchallenged before the Court of Appeals. The cour concluded however, that the Commission had reined respondents in too tightly. It expressed disapproval of the prohibition on representations of earnings figures that were not average figures, and use of the phra. e "under circumstances similar to those of the purchaser* * *" which the cour , Na/ioJlal n!l"(!llIiC5Corl'. 492 F'2d 13.1.1 (2d Cir. 1974); c..rt. d.."ied. 419 u.s. 99;j (1974). Certior..ri had been sought by respondents with respt'Ct to the two paragrphs of the order which the Court of Appeals affirmed. NATIUNAL U I J.ftlnJ.vu ""'- n_- 391 Opinion concluded was unduly vague. The cour indicated that respondents should be able to make use of ranges of earnings in their advertisements. Paragraph 2, a record keeping requirement, was remanded so that it could be changed to reflect whatever alterations were made in Paragraph 1.

The Commission on remand has considered the views of respondents and complaint counsel. Both have submitted proposed drafts of a reformulated order, and have commented on each other s proposal. While we do not doubt that the submissions evidence that "good wil on both sides" which the court thought would yield a solution on remand to say that the parties remain at odds is an understatement. The Commission has sought to address the court's mandate hy retaining those portions of the broad prohibitory language in Paragrph 1 which the court did not disapprove, while adding two provisos which make clear the right of respondents under the order to us" earnings ranges and testimonials under specified conditions. The Commission believes that this order addresses the court's fundamental concern which was to allow respondents utilze certain common approaches to the advertising of earnings, while forhidding them to use these or other techniques to perpetuate the deceptions descrihed in the record. Under modified Paragraph 1, use of earnings ranges may be made provided that for any stated range ( $5- 00), respondents also provide an equally clear and conspicuous statement of the numher of distributors who achieved earings within that range, and a statement of the period of time over which the figures were compiled. In addition the top figure for the highest earnings range may not exceed the highest earnings figure actually achieved hy a distributor, to prevent for example, use of a $20- 00 category when the highest achieved figue might be only $30 000. We believe that these requirements are necessary to prevent the deceptive use of earngs ranges, without being unduly hurdensome.

With respect to testimonials the Commssion has taken a similar approach. Among the earings representations found deceptive by the administrative law judge were representations of the earings of a few exceptional individuals in a context which implied that they were typical. While the Cour of Appeals did not make clear its view on the , Theoourt aid' We likewise no riot see why NDC should be limited to ad..ertising only the ,..erage "'Ies Or earning, of distribljton; ,..ther than be pennitted to stale I'nges for ..anous types of distributors pro..id.... it doe not make deceptiw' USe of unusual ",earnings realiz only by a fl'w The court did not ad(J""ss itself expres ly to the question of earningstestimonia)s. Respondent ert that the;; should be pormitted; complaint counsel cite the quotM language a.-; evidence that the "court disapprove of such testimonials, and arlfe that to eit", the experi.'fCI of an atypical distributor in an adw,rtiscmcnt is inlJPrently deceptive. Th", aoon!--uoted language can certinly be read to imply that the court felt that noncJ "plive URe Cfu1d be made of unusual earnings realiz only hy a few. The Commission s rnodifiM order addresses this!;ue by requiring clarifying rlisclosur whe", earnings teslimoni;lis:l", us.-d. 5B9-H9 0- n - Opinion R5 F.

use of earnings testimonials, as opposed to earnings ranges, the Commission has endeavored to permt use of testimonials in a nondeceptive manner, in view of the court's general desire to permit truthful claims. The second proviso to Paragraph 1, therefore, permits accurate testimonials provided they are accompanied hy (1) a disclosure of the amount of time per week or per month required hy the testifying pary to achieve the stated results; (2) a disclosure of the year or years during which, and the geographic area in which, the stated results were achieved; and (3) a disclosure of the median or average results of all participants, or the following statement:

IMPORTANT NOTICK THE RESULTS ACHIEVED BY THIS PURCHASER ARE BETTER THAN, AND NOT TYPICAL OF, THE RESULTS ACHIEVED BY THE MAJORITY OF PURCHASERS WHO PARTICIPATED DURING THE TIME PERIOD DESCRIBED.

only if theOne of these last alternative disclosures must he made results described in the testimonial do not in fact represent the average or median results achieved hy purchasers of respondents' products. The necessity for these disclosures is readily apparent. Consumers cannot possibly assess the relevance of a testimonial to their own likely experience without knowing the amount of time per week or month devoted by the testifying pary to achieving the results, or the geographic area within which such results were achieved. A statement of the year or years during which the stated results were achieved is needed to ensure that testimonials either reflect recent results or consumers are aware that they do not.

The third disclosure is designed to eliminate the likelihood that a consumer will construe the testimonial of an individual as being representative of what the average participant in the program has achieved, when such performance is not representative. Even when testimonials are not accompanied by deceptive embellishments, there is a substantial likelihood that many consumers will understand them to represent a result that the average consumer can expect to achieve. Moreover, in this case respondents sought in many ways to convey to prospective purchasers that the exceptional results of individuals were not exceptional at all, for example, hy stressing the ordinarness of the individuals who had achieved the unusual results. Where the results descrihed in testimonials are not typical, we believe that the only way that deception may be avoided is hy means of disclosurs which indicate the lack of representativeness. An ideal solution would be a flat requirement that where stated performance is not typical respondents be required to state aff"lratively what exactly is the typical result. Only in this way is the consumer likely to be made fully aware of the extent to which the testimonial result depars from what the majority have accomplished. In recogntion, however, of the fact 391 Order that detailed compilation of average or median figures for all distrihutors may impose a substantial burden on respondents, our order provides, as an alternative, that respondents may state conspicuously that the performance of a testifying pary is not typical, and exceeds the average. Respondents recognze, in their own proposed order, the necessity for some indication of whether or not testimonial results are typical. We have enlarged upon this recognition simply to the extent of requiring that the lack of representativeness he disclosed clearly and forcefully, in a way that its import cannot he mitigated by the text ofthe testimonial.' With respect to the words "circumstances similar to those of the purchaser or prospective purchaser " to which the cour objected complaint counsel note that inclusion of these words may he unnecessarly cautious inasmuch as most of respondents' distributors are partime and any figures (mean, median, range) based on the performance of a large number of distrihutors would necessarily be largely results of part-time performers. In light of this the Commission has determined simply to omit the language to which the cour had ohjected. Paragraph 2 has been modifed to require maintenance of suhstantiation for claims made pursuant to the requirements of Pargraph The Commission has further determined to republish those portions of its order which were appealed and aff"umed hy the Cour of Appeals or not appealed at all. An appropriate order is appended. ORDER MODIFYING FINAL ORDER ON REMAND This matter is before the Commssion upon remand from the United States Cour of Appeals for the Second Circuit for revision of Paragraphs 1 and 2 of the order, and upon briefs submitted by counsel for respondents and complaint counsel relating to said paragraphs. The Commission has determined to modify paragraphs 1 and 2 as explained in the accompanying decision, and has furher determined to repuhlish the remainder of the order in the same fonn as issued, such remainder having become final. Therefore It is ordered That respondents National Dynamics Corpration, a corporation, and its offcers, and Ellott Meyer, individually and as an officer of such corporation, and respondents' agents, representatives and employees, directly or through any corporate or other device, in connection with the advertising, offering for sale, sale, or distribution of the battery additive, VX-6, or of any other products, in commerce, as , In this ffSplt earninr.l.ims may be somewhat differel1t from typical product performance claims, as to which information regardinga"erae performance "hol1!d be ..adily avaiblbk t(l the ad,' erti"eT. . Ifrespondents do not ..-ish to maintain informati(ln alo,,-ing them to kO(lw (ITwhethernot t.."timoniaJ results are typical we think clearly the presumption must be that suchreslllL exceed the average- Rcsplndents Can avoid this disclosure by compilin and stating aver..ge(IT median results 396 FEDlmAL TRADE COMMISSION DECISIONS Order 85 F.

commerce" is defined in the Federal Trade Commssion Act, do forthwith cease and desist from:

1. Representing, directly or by implication, that persons purchasing respondents' products can or will derive any stated amount of sales profits, or earnings; or misrepresenting in any manner, the past present, or future sales, profits, or earnings from the resale of respondents' products;

Provided That the foregoing paragraph shall not he construed to prohibit:

(a) an accurate representation of any range or ranges of sales profits, or earnings achieved by purchasers of respondents' products which includes a clear and conspicuous disclosure (in bold-face type at least equal in size to that of the representation of the range or ranges where such appear in print) of the following information: (i) an accurate statement of the numher of participants achieving sales, profits, or earnings within the stated range; and (ii) an accurate statement of the time period in which the reported figures were achieved.

The figure purporting to he the end figue of the highest range in an advertisement may not exceed the highest amount of sales, profits, or earings actually achieved by a purchaser.

(h) accurate testimonials reg-drding the sales, profits, or earnings achieved hy a purchaser of respondents' products; Provid That any such testimonial includes or is accompanied by the following clear and conspicuous disclosures (in hold-face type at least equal in size to that of the principal portion of the testimonial, if printed): (i) an accurate statement of the average amount of time per week or month required hy the purchaser to achieve the stated results; (ii) an accurate statement of the year or years durng which, and the geographical areas in which, the stated results were achieved; and (iii) if the results achieved hy the purchaser providing the testimonial do not represent the average or median sales (or profits or earnings, whichever is included in the testimonial) of all purchasers of respondents' products during the time period covered hy the testimoni- , an accurate statement of the average or median sales (or profits or earnings) of all purchasers of respondents' products durng the time period covered by the testimonial or the following statement: IMPORTANT NOTICE: THE RESULTS ACHIEVED BY THIS PURCHASER ARE BETTER THAN, AND NOT TYPICAL OF THE RESULTS ACHIEVED BY THE MAJORITY OF PURCHAS- ERS WHO PARTICIPATED DURING THE TIME PERIOD DE- SCRIBED.

2. Failing to maintain records which suhstantiate that any past or UrcA' .h_ 391 Order present sales, profits, or earnings represented are accurate. Where ranges of sales, profits, or earnings are represented, such records shall he sufficient to suhstantiate the number of purchasers achieving results within any stated range and the time period durng which such results were achieved. Where average or median figures are represent- , such records shall be suffcient to suhstantiate that such median or average figures are accurate. Where testimonials regarding sales profits or earnings are employed without the statement entitled IMPORTANT NOTICE " described in Paragraph I(b)(iii) above, such records shall he sufficient to substantiate that the performance described in the testimonial constitutes the average or median performance for all purchasers of respondents' products during the stated time period.

3. Representing, directly or hy implication, contrary to fact, that any product has been approved by any laboratory or by any other organization or person.

4. Representing, directly or by implication, in any advertisement that an independent laboratory has tested any product or that any laboratory test substantiates or supports performance claims in said advertisement, unless each performance claim in said advertisement has been substantiated hy a competent scientific test conducted by said laboratory or lahoratories and unless such laboratory or lahoratories have supplied respondents with a written report which deserihes, in detail, the entire test performed, including, hut not limited to, the product tested, instruments used, test procedures, data, and results of such test.

5. Using, publishing, or referrng to any testimonial or endorsement unless (1) such use, publication or reference is expressly authorized in writing, and unless (2) respondents have good reason to believe that at the time of such use, publication, or reference, the person or organization named subscribes to the facts and opinions therein contained.

6. Failng to deliver a copy of this order to cease and desist to all present salesmen or other persons engaged in the sale of respondents products, and failing to secure from each such salesman or other person a signed statement acknowledging receipt of such order. It is further ordered That the respondent corporation shall forthwith distribute a copy of this order to each of its operating divisions. It is further ordered That respondents shall notify the Commission at least 30 days prior to any proposed change in the corporate respondent such as dissolution, assignment, or sale resulting in the emergence of a successor corporation, the creation or dissolution of Order 85 F.

subsidiaries, or any other change in the corporation which may affect compliance ohligations arising out of the order. It is further ordered That respondent herein shall, within sixty (60) days after service upon it of this order, fie with the Commission a report, in writing, setting forth in detail the manner and form in which it has complied with this order.