United States: Diamonds Are Forever - Are False Advertising Claims?

Last Updated: February 18 2013
Article by Barry M. Benjamin

Did you know that Turtle Wax is not actually wax? Launched in the mid-1970s, Turtle Wax is actually a nonwax substance containing mineral seal oils and wax emulsions. It could be sold cheaper than products made by its competitor Hot Wax Inc., which produced a product made of genuine carnauba wax, because Turtle Wax is not truly made of wax. Hot Wax Inc. knew of this issue, yet did not sue Turtle Wax until 1997, when it asserted that Turtle Wax deceived the public because it failed to contain any real wax.

Notwithstanding Hot Wax's attempts to justify its delay in bringing suit, the court ultimately dismissed Hot Wax's complaint based on a laches defense. Hot Wax Inc. v. Turtle Wax Inc., 191 F.3d 813 (7th Cir. 1999). The court found that during the 10- to 20-year period Turtle Wax was on the market prior to the suit, Turtle Wax invested significant amounts of time and money in product development and advertising. For that reason, the court dismissed the claim as time-barred, due to the prejudice Turtle Wax would suffer if ordered to change its product positioning. 191 F.3d at 824. This seems like an odd result — false advertising may continue to run, and continue to be false and deceptive, because they have been running so long?

Yes, depending on who brings the action to stop the false claims. While government regulators and self-regulatory bodies are not constrained by a laches defense, it is much more common for a competitor to invest the time, resources and legal fees to bring a Lanham Act claim seeking to stop the publication of false and unsubstantiated advertising claims. Yet competitors are subject to the strictures of the Lanham Act, related state law claims, and the legal defenses under those theories, including laches. And laches is an effective defense to a Lanham Act claim, yet it can also lead to an awkward outcome, that is, the perpetuation of a false advertising claim.

When a company sees its competitor making a false or unsubstantiated claim about its products, it has a number of potential responses, both legal and nonlegal. It can ignore it, assuming that the competitor will not gain any traction with its false claims and it will eventually stop running it. It can engage in counter-advertising, either talking about its own product or tackling the false claim head on, but this may have the counterproductive effect of bringing more awareness and publicity to the competitor's product and its false claim. It may also try to bring proceedings at the National Advertising Division of the Council of Better Business Bureaus, but that forum is a voluntary arbitral forum where the defendant may choose not to participate (the NAD is further discussed below).

It can also bring a federal action. If it chooses this avenue, the primary weapon is the Lanham Act, which authorizes suits by competitors to enjoin publication of false commercial advertising (and potentially recover monetary damages), whether those claims are about their own or their competitor's product. See, e.g., Southland Sod Farms v. Stover Seed Co., 108 F.3d 1134, 1139 (9th Cir. 1997).

The nonlegal options are often more desirable as they have the benefit of not having to pay sometimes expensive attorneys' and experts' fees, as well as not having to subject your own company to the invasive discovery process of litigation. Yet by first taking those nonlegal steps, crucial time passes. By ignoring a competitor's false claims or deploying counter-advertising, the strength of a later-commenced Lanham Act case brought to stop the false claims potentially weakens, especially when considering the potential for a laches defense by the advertiser. And if a laches defense is successful in defeating a false advertising claim, can the false claim continue forever?

Laches is an equitable time limitation on a party's right to bring an action, in essence requiring a party to bring an action in a timely fashion and not to sleep on its rights, which would result in prejudice to the opposing party. Jarrow Formulas Inc. v. Nutrition Now Inc., 304 F.3d 829, 835 (9th Cir. 2002). Laches consists of two legal elements: (1) inexcusable delay in bringing suit, and (2) prejudice to the defendant as a result of the delay. Santana Products Inc. v. Bobrick Washroom Equipment Inc., 401 F.3d 123, 137 (3d Cir.), cert. denied, 546 U.S. 1031, 126 S.Ct. 734, 163 L.Ed.2d 569 (2005). Laches is not to be confused with a statute of limitations, which sets a specific time period by law within which certain types of claims (e.g., breach of contract, negligence, fraud) must be brought. "Laches [is] an equitable defense ... distinct from the statute of limitations, a creature of law." Jackson v. Axton, 25 F.3d 884, 888 (9th Cir. 1994).

The Lanham Act has no explicit statute of limitations. Jarrow, at 836. Given the premise of a false advertising action — that the public is being actively deceived by a particular advertising claim — it would seem logical that such claims should never be time-barred. This argument has not received any support in the law, and courts have applied time-based defenses to competitor false advertising challenges.

Some courts have proffered the argument that Congress' lack of inclusion of a statutory limitations period in the Lanham Act was a conscious choice, to have laches apply as the only time period for false advertising claims. This argument has not been persuasive, however, and courts have chosen to "borrow" the statute of limitations period from closely analogous state law claims, and applied those time-bar periods to false advertising claims. Jarrow, at 836. Thus both a statute of limitations defense and a laches defense may be available to parties facing false advertising claims.

Laches was the key factor in the courts dismissal of the Jarrow plaintiff's false advertising claim. At issue were certain efficacy claims about a nutritional supplement product. The plaintiff had voiced complaints to the defendant in 1993, and continued to threaten litigation, but failed to bring a lawsuit until the year 2000. The evidence showed that the defendant closely tied the efficacy claims to the overall marketing of the product, prominently displayed the claims on the product label, and spent hundreds of thousands of dollars on national advertising campaigns for the product. Jarrow, at 839.

The court was persuaded, therefore, that the allegedly false claims played a crucial, central role in the product's identity in the minds of the public, and that the defendant would suffer prejudice if forced to abandon this long-term investment in product advertising and positioning. Thus, due to the seven-year delay in bringing suit, and the prejudice that the defendant would suffer if required to change its marketing, laches barred the plaintiff's suit. Jarrow at 839-40.

But why would an advertising claim that is false be permitted to continue simply because the advertiser has invested a large sum of money in it? False is false, and consumers deserve better. It is understandable that a laches defense can successfully defeat a claim for monetary damages — if the claim was so damaging to a plaintiff's business, the plaintiff would have taken action long before a laches defense could be supportable. But why should laches defeat a request to enjoin a false claim, which would stop deceptive claims from being foisted upon the public?

While it has been observed in other areas that "laches is generally not a bar to prospective injunctive relief," Danjaq, 263 F.3d at 959-60 (copyright claim), the outcome in Jarrow showed otherwise, that laches can defeat a request for injunctive relief. Nevertheless, it is certainly questionable how a defendant could be prejudiced by ordering it to stop lying to the public.

In some instances, though, a laches defense will not be successful, specifically where there is a "public interest" in having the suit proceed and the relief requested granted. Maryland-National Capital Park and Planning Comm'n v. U.S. Postal Service, 487 F.2d 1029 (D.C. Cir 1973). The Ninth Circuit has stated that "[I]n order to ensure that laches remains a viable defense to Lanham Act claims, the public's interest will trump laches only when the suit concerns allegations that the product is harmful or otherwise a threat to public safety and well being." Jarrow, 304 F.3d at 841 (emphasis added). The Second Circuit has further reasoned that although courts must consider the public interest, it is "in no way determinative" of the application of laches unless any confusion or deception would implicate health and safety concerns. Conopco Inc. v. Campbell Soup Co., 95 F.3d 187, 193-94 (2d Cir. 1996).

So where does that leave a challenge to a nonpublic-health-related false advertising claim that is subject to a laches defense? Can the false advertisement proceed forever, continually deceiving the public long into the future, simply because it would be unfair ("prejudice" in laches parlance) to the advertiser to require its stoppage?

The answer is, like many legal questions, yes and no. While yes, the advertising claim may continue into the future, it is simply a matter of the right plaintiff bringing the case. While a private competitor challenge may be the subject of a laches defense, two important entities that can entertain false advertising proceedings are not limited by a laches argument: (1) government regulators such as the Federal Trade Commission and state attorneys general, and (2) self-regulatory bodies such as the NAD.

The Federal Trade Commission and state attorneys general usually only have the resources to act when the health or safety of the consumer is at risk, or where there is a serious risk of economic injury to consumers. For example, the sellers of Doan's back pain remedies, Novartis, became the subject of deceptiveness claims in violation of the Federal Trade Commission Act based on an unsubstantiated implied claim of superior efficacy.

Though the subject advertising campaign had been running for eight years, a laches argument was never at issue, even when Novartis appealed the commission's decision to the Court of Appeals for the D.C. Circuit. The only context in which this time period was broached was in determining how long the corrective advertising should run. See Novartis Corp. v. FTC, 223 F.3d 783 (D.C. Cir. 2000). Indeed, no statute of limitations exists in the FTC Act for bringing proceedings seeking injunctive relief to stop false or deceptive advertising. 15 U.S.C. Sec. 53(b); See U.S. v. Building Inspector of America Inc., 894 F.Supp. 507 (D.Mass. 1995).

Similarly at the NAD, no limitations period or laches argument may be sustained, regardless of whether a health or safety issue is presented. The NAD can take any false advertising claim regardless of its seriousness, as long as the claim is part of a "national" (not local) advertising campaign. The NAD has specifically held in its decisions that "the length of time a particular claim has appeared in the marketplace has no bearing on an assessment of its truthfulness or accuracy." Expedia Inc. (Expedia.com Savings), NAD Case Report # 5460 (June 2012). If the NAD does take up the case, while it lacks the power to compel participation in its adjudicative process or compliance with its decisions, it can and does refer noncompliant advertisers to the FTC. The FTC has expressed that it takes NAD referral very seriously.

Accordingly, when considering what action to take in response to a competitor's allegedly false advertising, laches is a crucial factor to consider in the equation. If there is a significant concern about laches, it may make more sense from the challenger's perspective to try to bring a proceeding in the NAD, whose adjudicators are not burdened by laches. Of course, that is a voluntary proceeding and the advertiser may decline to participate.

Bringing the false claim to the attention of state and federal regulators may be another avenue to pursue, but that carries no guarantee that the regulators will be interested or look into the matter. If the ultimate goal is to stop the advertiser from continuing to make the false claim, and not recover any monetary damages, it may require bringing a formal Lanham Act federal action and taking one's chances with the defense of laches.

False claims may well be all around us. We may just have to live in a world with Turtle Wax, which is neither wax nor from a turtle.

Originally published in Law360, February 1, 2013

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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