United States: NAD Case Reports In Federal Court: What Evidentiary Value Does A Self-Regulatory Decision Hold?

Last Updated: November 14 2013
Article by David Conway, Roger Colaizzi and Amy R. Mudge

This week we are planning to post a series of blogs looking at NAD procedural issues.  For advertisers, how NAD works can sometimes be as important as what NAD decides.  This first posting, however, pertains to the intersection between the NAD and the federal courts.  The evidentiary value of an opinion by an advertising self-regulatory body like the NAD is an issue that has received relatively little attention.  Although NAD is designed to adjudicate advertising disputes quickly, efficiently, and effectively, sadly it does not always have the final word.  Sometimes a disappointed party before the NAD chooses to move the dispute to federal court under the Lanham Act.  Other times, the advertiser may find itself the subject of a consumer class action lawsuit after receiving an unfavorable NAD recommendation.  In either circumstance, your client may wonder: What evidentiary impact will the NAD's case report have if my advertising is challenged in federal court?  The answer is probably very little, although the impact may vary depending on the posture of the litigation and the reason for which the case report is offered as evidence.

For many lawyers, the hearsay rule remains seared into law school memory: Hearsay is an out-of-court statement that "a party offers in evidence to prove the truth of the matter asserted in the statement."  Even if relevant, hearsay is inadmissible as evidence unless offered for a non-hearsay purpose or under one of the numerous hearsay exceptions provided for by the rules.  In federal court, an NAD decision might be used for three reasons – one is typically inadmissible hearsay; the second is usually admissible non-hearsay; and the third is not evidentiary at all.

Reason #1: An advertiser might seek to bolster its scientific substantiation by offering the NAD's findings as evidence that its scientific testing was reliably conducted and adequate to support its advertising claims.  Or a challenger might seek to use an unfavorable NAD case report as evidence that the advertiser's substantiation is inadequate. 

Generally, an NAD decision will constitute inadmissible hearsay when offered to prove the truth of its contents, including with respect to the NAD's findings on consumer perception, the reliability of scientific testing, or the substantiation of advertising claims.  For example, the Eastern District of New York rejected one plaintiff's attempt, on summary judgment, to rely on the NAD and NARB's consumer perception findings as the sole extrinsic evidence of implied falsity.  As the court explained, "[t]hese findings, like judicial findings, are generally characterized as inadmissible hearsay that cannot be used to prove the truth of the matter asserted."  The court also noted that the plaintiff was unable "to point to any case in the United States, where NAD and NARB findings have been found to constitute admissible extrinsic evidence that could support an implied falsity claim."  Similarly, the Eastern District of California took judicial notice of the existence of an NAD referral to the FTC after one litigant refused to participate, but the Court refused to "attribute any weight to [its] contents so long as [it is] disputed by either party."  The District of New Jersey and the Southern District of New York have issued similar evidentiary rulings.

However, in the preliminary injunction context, where evidentiary requirements are typically relaxed, the district courts have sometimes permitted litigants to rely on NAD decisions for the truth of their contents, but only when offered as support for other extrinsic evidence.  For instance, the Northern District of Georgia allowed a plaintiff to support its consumer perception study with the NAD's consumer perception finding.  The Southern District of Indiana even allowed a litigant to support its extrinsic evidence with an unrelated NAD decision interpreting similar advertising.But the District of Minnesota has rejected a plaintiff's effort "to bolster" its survey evidence with the NAD and NARB's consumer perception findings even in the preliminary injunction context. 

Reason #2: An advertiser or challenger might want to rely on an NAD decision to show the advertiser's good faith belief that the advertising claims were adequately substantiated or bad faith intent to mislead consumers – a factor which could be relevant to the scope of enhanced damages or attorneys' fees awards in a private proceeding. 

The federal courts have recognized that, in cases where a person's state of mind is an issue, a statement offered to show its effect on the state of mind of that person is not hearsay.  In this regard, several federal courts have allowed parties to rely on NAD decisions for purposes of establishing equitable defenses or showing states of mind.  For example, in the case referenced above, the Eastern District of New York, after refusing to allow the plaintiff to offer the NAD and NARB decisions as extrinsic evidence of consumer perception, did allow it to offer the decisions as evidence of the defendant's state of mind.  On that basis, the plaintiff argued (unsuccessfully) that the defendant's refusal to modify its advertising after receiving an unfavorable NAD decision demonstrated its bad faith intent to deceive the public.

It is important to note, however, that even when an NAD decision is offered for a non-hearsay purpose, the Rules of Evidence still allow a district court to exclude the decision if it determines that the risk of jury confusion outweighs the potential benefit of admitting the evidence.  For example, the Eastern District of Pennsylvania (242 F.R.D. 303) granted the plaintiff's motion in limine to exclude evidence of a separate NAD proceeding brought by the plaintiff against a third party engaged in similar advertising.  In support of its laches defense, the defendant sought to introduce the NAD decision and related filings to show that the plaintiff had quickly challenged other competitors engaged in similar advertising, yet unreasonably delayed in bringing its lawsuit against the defendant.  Id. at 311.  The district court determined that evidence of the plaintiff's unrelated NAD challenge was largely irrelevant and "could confuse the jury with evidence of a wholly unrelated action, concerning an unrelated product made by a manufacturer with no connection to this lawsuit."

Reason #3: An advertiser or challenger might also cite to an NAD decision as persuasive legal authority for what is required to substantiate advertising claims under the FTC Act.

Federal courts have recognized the NAD's expertise in the field of advertising and claim substantiation, and on occasion they have cited NAD decisions involving unrelated litigants as persuasive interpretations of advertising law.  As one court has explained,

In the fourteen years since its formation, the NAD has developed its own process of reviewing complaints of deceptiveness, coupling relative informality and confidentiality with safeguards to ensure procedural fairness. . . . To these advantages . . . is added the unique ability of the NAD to decide what is fair in advertising. A judge might make this inquiry, but ultimately it would have to defer to the very expertise that NAD offers without resort to the courts.

One thing to keep in mind if citing an NAD case report for legal precedent: NAD applies section 5(a) of the FTC Act when adjudicating advertising disputes.  Although FTC law is largely consistent with private advertising law under the Lanham Act and state consumer protection acts, there are varying burdens and differing substantiation requirements that render the laws not entirely overlapping.  Always make sure that the legal principal for which you are citing an NAD case report also applies under the law governing your case.

In summary, although NAD participants should always be wary of the record they build and what future effect an NAD case report may have on their interests, from an evidentiary standpoint it is unlikely that the NAD's recommendation – favorable or otherwise – will make or break a subsequent federal lawsuit.  An NAD case report constitutes inadmissible hearsay when offered to prove consumer perception, adequacy of substantiation, or any other factual conclusion reached by NAD.  Although an advertiser's failure to comply with an NAD recommendation may open the door for a challenger to offer it as evidence of bad faith or intent to deceive, that advertiser will likely face much bigger concerns in the form of an NAD referral to an "appropriate federal or state law enforcement agency."

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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