A. This outline provides an overview of the actions an advertiser can take when it believes a competitor's claims are unsubstantiated or otherwise false and misleading and the pros and cons of the various approaches, which include:
- Direct contact with the competitor/demand letter
- Direct contact with the media/networks
- Initiating a proceeding with the NAD (National Advertising Division, the advertising industry's self-regulatory organization)
- Initiating litigation (under the Lanham Act or state laws that pertain to deceptive trade or business practices)
- Filing a complaint with the Federal Trade Commission
- Filing a complaint with a state Attorney General
- Initiating a counter-campaign or public relations effort
B. An advertiser may pursue one or more of these actions, often simultaneously, or sequentially if one or more options has been pursued but did not result in a favorable resolution.
C. This outline will also examine in particular the factors that may assist an advertiser in determining whether to pursue a lawsuit under the Lanham Act or an NAD action and how federal courts have treated NAD decisions in Lanham Act litigations.
II. Direct Contact with Competitor/Demand Letter
A. Direct contact with a competitor may be in the form of letters between CEOs, meetings or phone conversations of outside and/or inside counsel, etc.
- Direct contact with the competitor may provide a fast resolution if you can get the competitor to agree to resolve the dispute.
- It may help develop or maintain a good working relationship with your competitor while demonstrating that you are keeping an eye on what they are doing.
- It can be prepared quickly, and may be a good first step, unless there is immediate and irreparable harm being caused by your competitor's campaign.
- It demonstrates you have made a good faith attempt to resolve the dispute which may be useful in subsequent proceedings. Note that it is generally a prerequisite to initiating a network challenge.
- Cost can be minimal.
- There is no guarantee your competitor will agree to your demand and generally there is no ability to enforce any understanding you may reach if your competitor later changes its mind.
- An offensive ad will continue running while you await your competitor's response (setting a time limit for response is a good idea.).
- You should be prepared to take additional steps to maintain credibility.
- It could give your competitor time to launch a counter-offensive before you have had the time to act.
III. Direct Contact with Media/Networks
- Major networks have advertising standards and procedures that apply to challenges.
- You may succeed in getting an offending ad off the air in a particular media outlet, although ads generally continue to run during a challenge.
- This can provide a fast resolution, but the timing of a resolution, if any, is unpredictable.
- It can provide the same result as initiating litigation and getting a temporary restraining order for minimal cost.
- Such an approach may require you to work with many outlets simultaneously, some of which may have no procedure for handling disputes between advertisers and can lead to conflicting results.
- Your competitor may also file a complaint with the network challenging your ads.
- Networks are sometimes reluctant to take a major advertiser's ads off the air (since the advertiser can be a significant source of revenue).
- There is no guarantee that the ad won't be shown somewhere else (e.g., a network challenge won't prevent the ad from running on cable).
- No appeal available.
IV. NAD Complaint
A. The National Advertising Division (NAD) is administered by the Better Business Bureaus (BBB) National Programs and is the advertising industry's self-regulation forum for resolving disputes over truth and accuracy in national advertising claims. The NAD's dispute resolution service is intended to be faster, less costly, and more private than litigation. Claims are brought by competitors or by the NAD itself.
B. NAD accepts written submissions from the advertiser and the challenger and issues a final decision which is published in the NAD Case Reports. When reviewing a case, the NAD relies on and refers to:
- The BBB Code of Advertising
- NAD's own precedent, as reflected in previously published NAD case reports
- FTC Guidelines and Rules (e.g., FTC Guides Concerning Use of Endorsements and Testimonials in Advertising; FTC Guide Concerning Use of the Word "Free" and Similar Representations)
- Specific industry laws (e.g., Dietary Supplements Health and Education Act)
- FTC administrative rulings
- State and federal court decisions
- Professional expertise and judgment of NAD
C. Participation in the NAD process is voluntary, as is compliance with NAD's final rulings. The only remedy that NAD can provide is a request that the advertiser modify or discontinue its advertisement if NAD finds that the claim in the ad is not adequately substantiated or is otherwise not true or accurate. The NAD encourages compliance by reminding advertisers that it routinely refers cases of non-compliance to the Federal Trade Commission. The FTC has repeatedly and publicly said that referrals from NAD "go to the top of the pile." NAD decisions can be appealed to the National Advertising Review Board.
- It is an informal proceeding.
- NAD attorneys are experts in evaluating ad claims.
- The proceedings are not publicized and submitted documents do not become part of the public record (although the NAD usually issues a press release when a decision is issued and includes a report in its case reports). The NAD has rules to protect the confidentiality of submitted documents.
- Although written statements and supporting documents are submitted, there is no discovery.
- An NAD decision can be appealed to National Advertising Review Board ("NARB").
- The process is relatively inexpensive. Filing fees are $17,500 for companies that have been BBB National Partners for one year or less and $15,000 for who have been for more than one year; and $20,000 or $25,000 for non-Partners depending on their annual revenue.
- A resolution may take 2-4 months at NAD, plus time for any appeals. A competitor's campaign may have reached the end of its life by the time the case is resolved.
- NAD review is limited to national advertising although NAD stretches to keep jurisdiction.
- Additional costs may be incurred for counsel fees, tests, surveys, experts, etc.
- NAD decisions have little or no precedential value with courts.
- The primary way NAD encourages compliance with its decisions is to remind participants that non-compliance is referred to the FTC.
- There are no monetary damages.
A. The federal Lanham Act, 15 U.S.C. § 1125(a)(1), allows an advertiser to file a claim to recover for injury resulting from false and/or misleading claims made by competitors. A plaintiff must show:
- The competitor's ad contains a false statement of fact about its own or another's product.
- The statement deceives or has a tendency to deceive.
- The statement is material (i.e., it affects the purchasing decision).
- The statement appears in commercial advertising in interstate commerce.
- The statement is likely to cause injury.
B. Interim Injunctive Relief:
- Obtaining interim injunctive relief (a temporary restraining order or preliminary injunction) will require you to establish a likelihood of success on the merits, the balance of equities/hardships weighing in your favor, and a likelihood of irreparable harm without the requested relief.
- In Lanham Act cases, where plaintiff can demonstrate that the challenged claim is literally false (or false by necessary implication), deception is presumed without the need for consumer perception survey evidence. Literal falsity means that in context, the clear meaning of the statement is unambiguously false. At the interim injunction stage, a plaintiff will also generally benefit from a presumption of irreparable harm in literal falsity cases.
- For establishment claims ("tests prove xx"), a plaintiff need not prove the claim itself false, but only that the tests on which the claim are based are inherently unreliable as support or irrelevant to the claim. The same presumptions will apply as in literal falsity cases.
- To the extent a claim is literally true but impliedly false (e.g. because of multiple potential readings or real-world conditions which alter the depicted results), a court will require evidence of actual consumer confusion, generally through consumer perception testing, prior to granting relief.
- A TRO (temporary restraining order) or PI (preliminary injunction) will suspend offending ads immediately. Although difficult to obtain, injunctive relieve is critical where the ads are causing long-term damage to your brand.
- Filing a claim under the Lanham Act allows you to forum shop; some jurisdictions have more developed advertising law than others, which can be an advantage.
- Remedies may include damages and requiring your competitor to run corrective advertising (though this is rarely granted).
- Attorneys fees and costs can be awarded to the prevailing party in "exceptional" cases.
- Filing a litigation sends a message to your competitor that you are serious.
- Counterclaims are possible
- Discovery and trial, if required, will demand substantial time from your businesspeople and ad agency.
- Most documents will become part of the public record, and press coverage may be substantial.
- Litigating a Lanham Act claim can be very expensive. Filing fees are minimal, but fees for outside counsel, experts, consumer surveys and testing firms can be substantial.
- Resolution (other than a TRO/PI) may take a very long time.
- There may be a negative public relations backlash that is difficult to control, particularly if an injunction is denied.
VI. FTC Complaint
A. While there is no private right of action under Section 5 of the FTC Act, an advertiser can file a complaint with the Federal Trade Commission (FTC) asking it to investigate and file a complaint against a competitor for violating Section 5, which prohibits false and deceptive acts or practices. An ad that clearly causes consumer harm is more likely to be of interest to the FTC than a mere dispute between competitors.
- FTC intervention will be taken very seriously by a competitor.
- The cost is minimal unless outside counsel is engaged.
- The FTC can act very quickly if it chooses to.
- Once you petition the FTC, you have no control over the proceeding and you will have little or no knowledge of the investigation if the FTC acts on your petition. This also means there will be little or no publicity about an investigation.
- There is no guarantee that any action will be taken at all. The FTC handles an extremely small number of national advertising cases.
- There is no formal process or timetable. It could take a long time before it is resolved.
- When you involve the FTC, it may lead to the FTC having a dialogue with your competitor and/or examining industry practices. Therefore, be sure you have "clean hands" regarding your own practices.
VII. State Attorney General Complaint
A. An advertiser can also file a complaint with a state Attorney General alleging that a competitor is violating state unfair business practices or consumer protection statutes.
- Some state AGs (and even some local District Attorneys) are very aggressive in pursuing deceptive advertising claims.
- An AG investigation can trigger negative PR for your competitor.
- Involving the AG is an excellent resource for regional advertisements if the AG believes that consumers are injured by the false claims.
- The cost is minimal.
- Involving the AG does not allow you any control over the proceeding.
- There is no guarantee that any action will be taken at all (advertising issues may not be a priority for your AG).
- There is no formal process.
- Timing is unpredictable; it may take a long time before it is resolved.
- Remedy is limited by jurisdiction (i.e., a state AG's jurisdiction extends only to the boundaries of the state).
VIII. Lanham Act Lawsuit vs. NAD Action
A. Type of claim: An NAD action is limited to national advertising; the Lanham Act encompasses a broader range of claims.
B. Burden of proof: A Lanham Act claim requires you to meet a higher burden of proof than in an NAD proceeding; the plaintiff bears the initial burden of proof to demonstrate that the advertising is either literally false, or while literally true, is nonetheless misleading. The defendant does not need to justify its advertising practices until the plaintiff has established the false or misleading nature of the advertising at issue.
- Additionally, where a challenger does not present NAD with a consumer survey evidencing that the challenged advertisement conveys a deceptive message to consumers, NAD will substitute its judgment and determine the reasonable consumer take-aways. When seeking a preliminary injunction, however, "full-blown consumer surveys . . . are not an absolute prerequisite" but "the movant . . . must present evidence of deception" or consumer confusion. Scotts Co. v. United Indus Corp., 315 F.3d 264, 276 (4th Cir. 2002); see also Millenium Import Co. v. Sidney Frank Importing Co., No. Civ. 03-5145 JRT/FLN, 2004 WL 1447915, at *7 (D. Minn. June 11, 2004) (explaining that NAD determined the ad deceived and misled consumers but made the determination without the benefit of consumer surveys).
C. Cost: An NAD proceeding is relatively inexpensive compared to litigation. Lanham Act actions can subject you to enormous discovery burdens, substantial expenditures in evaluating scientific evidence or conducting consumer perception surveys, and to potentially damaging counterclaims that need to be defended.
D. Remedies: Compliance with an NAD proceeding is voluntary and no damage awards are available; a successful Lanham Act claim can result in an immediate TRO and/or damages and attorneys fees and costs.
E. Courts' Treatment of NAD Decisions: Courts have questioned whether NAD decisions are admissible under the Federal Rules of Evidence in order to support the plaintiff's or defendant's case. See Expedia, Inc. v. Priceline.corn Inc., No.009-0712RSL, 2009 WL 4110851, at *1 (W.D. Wash. Nov. 23, 2009); Glaxosmithkline Consumer Healthcare, L.P. v. Merix Pharmaceutical Corp., Civ. No. 05-898(DRD), 2005 WL 5980802, at *1 (D.N.J. June 23, 2005) (denying motion to exclude NAD decision but holding that it could not "be used to prove the truth of the matters contained therein"). For example, in Rexall Sundown, Inc. v. Perrigo Co., 651 F. Supp. 2d 9 (E.D.N.Y. 2009), the defendant asserted a counterclaim of implied falsity with respect to certain of Rexall Sundown's advertisements and argued that the NAD and NARB decisions analyzing the same claims constituted extrinsic evidence that the statements were misleading. The court rejected the argument and explained that NAD and NARB decisions, "like judicial findings, are generally characterized as inadmissible hearsay that cannot be used to prove the truth of the matter asserted." Id. at 36-37.
- However, other courts appear to have permitted a party to rely on an NAD decision in a Lanham Act litigation. See, e.g., Millenium Import Co. v. Sidney Frank Importing Co., No. Civ. 03-5145 JRT/FLN, 2004 WL 1447915, at *7 (D. Minn. June 11, 2004) (noting that plaintiff "bolster[ed]" its argument by pointing out that NAD determined the ad deceived and misled consumers).