Feature

False Advertising Disputes: Interplay between Courts and the NAD

Bradley L. Cohn and Kristine A. Bergman

©2016. Published in Landslide, Vol. 8, No. 5, May/June 2016, by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association or the copyright holder.

The National Advertising Division of the Council of Better Business Bureaus (NAD) provides a self-regulatory system for addressing disputes over false and misleading advertising. The NAD, which is staffed by attorneys experienced in advertising law, offers an organized and often effective means of resolving such disputes.

An NAD proceeding is typically initiated when either a consumer or a business challenges an advertising claim on the grounds that it is false or misleading. NAD staff can also initiate investigations of advertising if there appears to be a question as to whether or not an advertising claim is substantiated.

The advertiser has an opportunity to provide the NAD with its evidence of claim substantiation, and a challenger can offer counterevidence if it chooses. After considering the evidence, the NAD will issue a decision as to whether it believes the advertising claim is substantiated or not. If the NAD believes the advertising claim is not substantiated, the NAD will recommend that the advertising either be discontinued or modified. An advertiser that does not agree with the NAD’s decision may request an appeal to the National Advertising Review Board (NARB).

Notably, the NAD lacks an enforcement mechanism. Advertisers risk bad publicity, however, for failing to comply with NAD decisions. Moreover, the NAD may refer a matter to the Federal Trade Commission if an advertiser refuses to participate or comply with NAD recommendations to discontinue or modify advertising.

Resolving disputes under the NAD has multiple benefits: for example, it may be speedier and less expensive than a lawsuit. NAD proceedings are also confidential, except for the final case decision. From a challenger’s perspective, possible downsides to an NAD proceeding include lack of monetary and injunctive relief, lack of a discovery process, and lack of a preliminary injunction option.

In some instances, an NAD proceeding is followed by a lawsuit for false or deceptive advertising. In other instances, a false advertising suit is already pending in court when one of the parties decides to seek NAD review of the same advertising at issue in the lawsuit. When that happens, how have courts viewed the previous or parallel NAD proceedings? Will courts stay a lawsuit pending the outcome of the companion NAD proceeding? Is a prior NAD decision admissible in court? And what value, if any, does a court give to an NAD decision? We examine these questions below.

Motions to Stay

NAD rules require that when an advertising claim that is the subject of a pending NAD proceeding also becomes the subject of a pending litigation or court order, the NAD will administratively close its proceeding.1 Thus, the NAD is prepared to defer to a court’s jurisdiction when any parallel litigation arises.

But are courts willing to return the favor and stay a pending lawsuit in favor of resolution through an NAD proceeding? Courts have decided both ways. In Expedia, Inc. v. Priceline.com Inc., the United States District Court for the Western District of Washington denied the defendant’s motion to stay.2 There, the plaintiff had originally filed an NAD action, but when the plaintiff came to believe the NAD would find in the defendant’s favor, the plaintiff filed a false advertising lawsuit in federal court. This triggered the closing of the NAD proceeding. Upon closing, the NAD provided the parties with the analysis that “it would have conducted had procedural considerations not required an administrative closing.”3 The analysis generally favored the defendant’s position. The NAD also indicated it would be willing to reopen its proceeding should the court remand the dispute to the NAD or dismiss the lawsuit for other reasons.

The defendant moved to stay the federal lawsuit, arguing that a final NAD decision would simplify the case and a remand would “help prevent the type of procedural gamesmanship [the plaintiff] employed here.”4 The court found these arguments unconvincing. Because the NAD had already offered its analysis, the court found that delaying litigation for the NAD’s final determination would not provide any additional benefits for the parties.

In so finding, the Expedia court noted:

Nor is it this Court’s role to safeguard the relevance and effectiveness of an industry’s self-regulatory body. If NAD’s rules allow a challenger to “opt out” of the NAD process by filing a duplicative court action, the obvious remedy would be to amend the rules if the industry agrees that this is not an optimal use of the parties’ or the organization’s time and resources. This Court will not provide a “fix” or attempt to send any sort of “message” to other participants in the NAD process based on the limited information before it.5

By contrast, in Russian Standard Vodka (USA), Inc. v. Allied Domecq Spirits & Wine USA, Inc., the court granted Allied’s motion to stay after evaluating the interests of the parties, the court, and the public.6 In that case, Allied initiated an NAD proceeding based on Russian Standard’s allegedly false statements that Allied’s Stoli vodka was not truly a “Russian” vodka.7 As in the Expedia case, the parties were in the final stages of an NAD proceeding when Russian Standard filed a declaratory judgment action in federal court. The NAD then closed its proceeding, but without issuing any analysis of the case.

On the defendants’ motion to stay the lawsuit, the Southern District of New York held that because the parties had already expended substantial time and money in the NAD proceeding, they would suffer harm if the NAD were not allowed to continue its investigation. The court also noted the defendants had requested a period of stay for only 30 days. Further, the court believed the NAD’s “expert view on Stoli’s authenticity as a Russian vodka would be extremely useful in resolving remaining claims in the complaint” and “would promote settlement between the parties.”8 Finally, the court concluded that “[a]­llowing NAD to complete its decision . . . would allow it to set advertising standards for the industry on an important issue.”9

These two cases may perhaps be reconciled on the fact that the NAD had already shared its analysis in the Expedia case, but had not yet done so in the Russian Standard Vodka dispute. It seems the courts took differing views as to the relevance of the time period for the requested stays: in Russian Standard Vodka, the court found a stay of 30 days to be “nominal at best,”10 whereas the Expedia court denied the motion to stay even though the delay would be “for a few weeks.”11

Admissibility of NAD Decisions under the Federal Rules of Evidence

Courts have taken divergent approaches when analyzing the admissibility of NAD decisions.

In Russian Standard Vodka, for example, the court stated the NAD decision would be “extremely useful in resolving remaining claims in the complaint” and “informative to the court in its own decision.”12 The court did not address any hearsay concerns. Similarly, in BellSouth Telecommunications, Inc. v. Hawk Communications, LLC, an NAD determination was used to support the court’s findings on a ruling for preliminary injunction.13 At issue was whether the defendant’s claim of its DSL speed was false and deceptive. The court found that the defendant’s advertising wrongly implied to consumers that the DSL speed applied to all online functions. The court drew support from the fact that, in the parties’ earlier NAD proceeding, the NAD had interpreted the advertisement in the same way.

Other courts have not treated NAD decisions with the same deference. In Rexall Sundown, Inc. v. Perrigo Co., Perrigo moved for summary judgment on its claim that Rexall’s advertisements were false and misleading.14 Rexall sold nutritional supplements for joints and claimed in its advertising that the supplements were “Clinically Tested” and the “No. 1 Dr. Recommended Brand,” among other things.15 Perrigo offered prior NAD and NARB decisions in which Rexall’s advertising was found to be false.

The court declined to consider the evidence for multiple reasons. First, it would be improper under Second Circuit law to “substitut[e] the findings of the NAD and NARB decision-makers for that of the district judge.”16 Second, the NAD and NARB decisions did not make findings on consumer deception or the likelihood of consumer deception. Further, “to the extent Perrigo is attempting to rely upon such findings for the truth of the matter asserted,” Perrigo failed to show how the decisions could be admitted under the Federal Rules of Evidence.17 Finally, Perrigo supplied no cases where NAD or NARB decisions constituted admissible evidence that could support a false or misleading advertising claim.

Likewise, in the Expedia case discussed earlier, the court found that the defendant had failed to show “that a final NAD decision would be admissible under the Federal Rules of Evidence.”18

Nevertheless, in some contexts, courts have admitted NAD decisions or briefs for other purposes. For example, in PBM Products, LLC v. Mead Johnson Nutrition Co., an NAD ruling was admitted in a case for defamation.19 In that case, the plaintiff originally filed a lawsuit for false and misleading advertisements. The defendant counterclaimed, alleging defamation for the statements made by the plaintiff in a press release. The plaintiff had stated that the defendant had produced various false and misleading advertisements about the defendant’s baby formula products. The parties filed cross-motions for summary judgment on the defendant’s defamation claim.

One of the allegedly defamatory statements made by the plaintiff in the press release was that the defendant “intentionally maintains its false advertising campaign . . . despite adverse rulings from the [NAD].”20 The plaintiff used a prior NAD decision on the defendant’s advertising to prove that the statement was true. The court considered the NAD decision, and held the decision demonstrated that the allegedly defamatory statement was in fact true. “Viewed in context, the gist of [the statement] is that even though [the defendant] has faced prior reprimand by NAD, it has continued to engage in false advertising.”21 Thus, as the plaintiff’s statement was true concerning the NAD’s adverse decision against the defendant, the defendant’s defamation claim was dismissed.

Also, in Conopco, Inc. v. Campbell Soup Co., the parties had initially brought their dispute before the NAD before the plaintiff filed a lawsuit for the same advertising.22 The defendant sought to admit expert testimony that analyzed the reasoning or meaning of the NAD decision. The court held this testimony was inadmissible on the grounds of relevance. The court did state, however, that “[t]o the extent defendant seeks to establish the terms of the NAD opinions, either to rebut plaintiff’s assertions or to establish its equitable defenses, it can rely on the opinions themselves.”23

On other occasions, courts have admitted NAD decisions and briefs as evidence, but only for limited purposes. In Johns v. Bayer Corp., for example, a brief from an NAD proceeding was admissible to the extent it went to the defendant’s knowledge of the scientific substantiation for one of its allegedly false and misleading claims.24 In Quigley Corp. v. Gumtech, Inc., briefs from an NAD proceeding were used to support a patent infringement claim, where the functionality of the allegedly infringing product was conceded by the defendant in a prior NAD proceeding that involved advertising for the product.25

NAD Decisions as Support for Pleadings

Many courts permit a claimant to use an NAD decision or briefs to support a complaint and survive a motion to dismiss. This issue typically arises in determining whether an actual case or controversy exists to uphold a claim for a declaratory judgment. For example, in Amazon.com, Inc. v. National Ass’n of College Stores, Inc., the plaintiff sought a declaratory judgment that its advertising was not “misleading, deceptive, literally false, and unsubstantiated” after an NAD complaint was filed by the National Association of College Stores (NACS).26 The NACS moved to dismiss on the grounds that there was no case or controversy. The court had “little trouble concluding there exist[ed] an actual controversy between the parties.”27 “Amazon’s allegations that it intends to continue using the three advertising claims challenged by NACS, and NACS’s conduct in . . . filing a complaint with the NAD, . . . demonstrate that there is a substantial controversy between adverse parties[.]”28

The Russian Standard Vodka case, discussed above, also involved a declaratory judgment action.29 Here too, a motion to dismiss was filed on the ground that there was no case or controversy. The court held that the plaintiffs failed to show an actual controversy existed concerning the plaintiffs’ past statements about Stoli vodka. This was due to the fact that the defendants had waived their right to sue the plaintiffs regarding those past statements. Regarding the threat of legal action for the plaintiffs’ future conduct, however, the court agreed this was sufficient to warrant declaratory relief. “Defendants have engaged in conduct that indicates there would be a controversy between the parties by sending a cease and desist letter to plaintiffs and initiating a proceeding at the NAD.”30

NAD proceedings have been used to support complaints outside the declaratory judgment realm as well. For example, in Karhu v. Vital Pharmaceuticals, Inc., the court held it was proper for the plaintiff to rely on the NAD for factual bases in its complaint for false and misleading statements.31 “Indeed, Plaintiff may reference [the NAD findings] as evidence that an industry group found Defendant’s advertising to be misleading.”32

Of course, an NAD decision alone will not substantiate pleadings. For example, relying on an NAD decision alone may not meet the particularity pleading standards for a claim of fraud. In Greifenstein v. Estée Lauder Corp., the court held the plaintiffs failed to plead with particularity that the alleged misrepresentations made by the defendants were false.33 The plaintiffs were a class of purchasers of Estée Lauder’s purported wrinkle repair cream who purportedly relied on representations in advertisements that the cream was “clinically proven” and “proven by science” to repair wrinkles.34 Some of the claims in the advertising campaign had been investigated by the NAD and discussed on appeal by the NARB. The NARB held that the wrinkle reduction advertising claim language was false because the product stopped working after four weeks.

According to the court, the plaintiffs had alleged in their complaint that the wrinkle repair serum had not worked at all, though as noted above the NARB decision focused on how long the serum actually worked. Thus, the court held the plaintiffs failed to properly plead fraud with particularity, because they alleged no facts other than “broad allegations” that “reach[ed] beyond what the NARB appeal . . . ultimately concluded.”35

Conclusion

As more and more NAD cases are filed, the chances increase that an NAD dispute will result from, or lead to, a lawsuit for false advertising. On these occasions, practitioners will want to be aware of the interplay between NAD proceedings and federal lawsuits. If a business is dissatisfied with an NAD proceeding or decision, practitioners may consider filing a subsequent lawsuit, but should be aware of the admissibility of that decision and whether a court may decide to stay the federal lawsuit.

Endnotes

1. Advertising Self-Regulatory Council (ASRC), The Advertising Industry’s Process of Voluntary Self-Regulation § 2.2(B)(1) (2015), available at http://www.asrcreviews.org/wp-content/uploads/2015/10/NAD-CARU-NARB-Procedures-Final-11.01.15.pdf.

2. No. C09-0712RSL, 2009 WL 4110851 (W.D. Wash. Nov. 23, 2009).

3. Id. at *1.

4. Id.

5. Id. at *2 (footnote omitted).

6. 523 F. Supp. 2d 376 (S.D.N.Y. 2007).

7. Id. at 379.

8. Id. at 384.

9. Id. at 385.

10. Id. at 384.

11. Expedia, Inc. v. Priceline.com Inc., No. C09-0712RSL, 2009 WL 4110851, at *1 (W.D. Wash. Nov. 23, 2009).

12. Russian Standard Vodka, 523 F. Supp. 2d at 384.

13. No. 1:04-CV-280-MHS, 2004 WL 1085324 (N.D. Ga. Apr. 12, 2004).

14. 651 F. Supp. 2d 9, 35–38 (E.D.N.Y. 2009).

15. Id. at 14.

16. Id. at 36.

17. Id.

18. Expedia, Inc. v. Priceline.com Inc., No. C09-0712RSL, 2009 WL 4110851, at *1 (W.D. Wash. Nov. 23, 2009).

19. 678 F. Supp. 2d 390 (E.D. Va. 2009).

20. Id. at 399.

21. Id. at 404.

22. No. 93 CIV. 4245 (LAP), 1994 WL 97556, at *1 (S.D.N.Y. Mar. 21, 1994).

23. Id.

24. No. 09cv1935, 2013 WL 1498965, at *39 n.56 (S.D. Cal. Apr. 10, 2013).

25. No. CIV A 99-5577, 2000 WL 264130, at *5 n.17 (E.D. Pa. Mar. 9, 2000).

26. 826 F. Supp. 2d 1242, 1249 (W.D. Wash. 2011).

27. Id.

28. Id. at 1250.

29. Russian Standard Vodka (USA), Inc. v. Allied Domecq Spirits & Wine USA, Inc., 523 F. Supp. 2d 376 (S.D.N.Y. 2007).

30. Id. at 383.

31. No. 13-60768-CIV, 2013 WL 4047016 (S.D. Fla. Aug. 9, 2013).

32. Id. at *3.

33. No. 12-cv-09235, 2013 WL 3874073 (N.D. Ill. July 26, 2013).

34. Id. at *1, *4.

35. Id. at *6.