The NAD: A Primary Forum For Resolving Advertising Disputes

Thursday, January 1, 2009 - 01:00

The National Advertising Division of the Council of Better Business Bureaus ("NAD") has become the advertising dispute resolution forum of choice for companies contesting allegedly misleading national advertising claims because it is a faster, simpler, and less costly alternative to litigation. These factors - coupled with the current economic uncertainty that can lead companies to overstate advertising claims - have caused the number of cases handled by the NAD to skyrocket.

Many Fortune 500 companies and countless smaller entities have been involved in NAD cases. The Wall Street Journal recently reported that, in August 2008 alone, the NAD received 15 complaints involving allegedly misleading performance claims, as compared to six such complaints in the same timeframe last year. Complaints filed in September 2008 likewise were up 50 percent over last year. The agency handled a total of 176 cases in 2007, and it will easily exceed that number in 2008.

The advertising industry created the NAD in 1971 as a self-regulatory body to resolve "complaints or questions from any source involving the truth or accuracy of national advertising." NAD Rule of Procedure 2.1A. The NAD has developed a recognized expertise in resolving advertising disputes and routinely handles issues that figure prominently in today's news as indicated in the two "case studies" presented below. Federal courts, the Federal Trade Commission ("FTC"), and the National Advertising Review Board (which hears appeals from the NAD) respect NAD decisions. While it is a voluntary forum, most parties comply with NAD decisions because those that do not are referred to the FTC or other appropriate government agency for enforcement. As explained below, in contrast to federal litigation under the Lanham Act, the NAD offers a confidential, quick, and low-cost advertising dispute resolution forum.

NAD Case Study #1 - Continental Products v. GP Plastics Corporation

Continental Products challenged environmental advertising claims of GP Plastics, a competing provider of plastic bags used to deliver newspapers to subscribers. GP Plastics Corp ., NAD Case #4944 (Dec. 4, 2008). Among the primary claims challenged were that GP's plastic bags are: "100 percent oxo-biodegradable" and "completely recyclable" as well as general claims of environmental benefits, such as "eco-friendly," promising a "green tomorrow" and "saving the planet." The NAD ruled that GP did not provide adequate substantiation for any of the claims and recommended that GP discontinue them. GP Plastics intends to appeal the NAD decision to the National Advertising Review Board.

The NAD recognizes the importance of eliminating false and deceptive environmental advertising claims. Because "consumers cannot typically verify for themselves the truth of environmental claims, advertising self-regulation is playing an increasingly significant role in ensuring that environmental claims are truthful, non-misleading and adequately substantiated." Id . The disposition of plastic bags has become a prominent and contentious environmental issue in numerous states, including New York, California and Minnesota. GP Plastics currently is the largest distributor of newspaper delivery bags. Each day, approximately 100 million people read a newspaper, many of which are delivered in GP plastic bags. Following the NAD decision, the New York Times said that it would not use the bags until more research was done. Other "green" advertising claim cases are pending, and the NAD recognizes that "this is an area of unfolding advertising law."

NAD Case Study #2 - GlaxoSmithKline v. The Winning Combination

GlaxoSmithKline Consumer Healthcare, a maker of smoking-cessation aids, challenged claims regarding the efficacy of The Winning Combination's ("TWC's") Resolve Stop Smoking Aid. The Winning Combination , NAD Case #4912 (Sept. 2, 2008). TWC had claimed that its product offered "clinically tested stop smoking results" that enabled smokers to stop smoking "with far less stress and anxiety" "in as little as 3 weeks."

NAD determined that TWC's study was insufficient to support the broad smoking cessation claims and concluded that the claims should be discontinued. NAD further determined that the advertiser did not establish, by competent and reliable evidence, that users of TWC's product experienced less stress or anxiety than users of competitive smoking cessation products. TWC said it would comply with the NAD decision.

The NAD Process

Filing An NAD Challenge . Filing a challenge with the NAD is relatively simple. Parties submit a letter complaint and filing fee (which is $2,500 for CBBB members or $6,000 for non-members), along with supporting exhibits that include the challenged ads. The advertiser responds within 15 business days, followed by the challenger's reply ten business days later, and the advertiser's final response ten business days thereafter. As there is no discovery ( e . g. , no document requests, interrogatories, or depositions), there are no motions to compel. The challenge thus proceeds in a timely manner. If necessary for its decision, the NAD may request additional information from a party and gives the other party 6 days to respond to such information.

In contrast to a federal Lanham Act case, where only direct competitors may file a false advertising suit, any party can file an NAD challenge. The NAD, however, addresses only false commercial advertising claims. In a federal Lanham Act case, corporate defamation and product disparagement causes of action may be added, but the standards of proof for these claims are considerably higher than for false advertising under the Lanham Act.

The Burden of Proof . Successful advertisers before the NAD follow NAD precedent that requires them to have adequate substantiation in hand prior to running the challenged advertisement, including up-to-date scientific testing and consumer perception evidence, as appropriate. The FTC similarly places the burden of providing substantiation for the challenged claim upon the advertiser.

This is not so in a federal lawsuit under the Lanham Act. Under the Lanham Act, unless the challenged claim is explicitly false or unavoidably conveys a false message, the complainant must prove that the claim is misleading by means of a properly conducted consumer survey. Such surveys are quite expensive and time consuming. The NAD - like the FTC - does not require any survey evidence, for the agency relies upon its professional expertise in evaluating a reasonable interpretation of the challenged advertising.

Confidentiality is Required . Parties to an NAD proceeding must agree to keep the proceedings confidential until a decision is issued and to not issue a press release or use the issued decision for promotional purposes. Parties also must agree to not subpoena witnesses or documents associated with the proceeding from the NAD and to pay NAD's attorney fees if any such subpoena is served. While the New York Times , Wall Street Journal and advertising industry trade press often report on published NAD decisions, NAD rules expressly forbid a party to an NAD proceeding to use the decision in its advertising.

NAD Review & Decision . The NAD aims to issue its decision within 60 business days from the filing of the complaint. The agency may meet individually with the parties, either in person or via teleconference, before issuing its decision. No new material may be introduced during these meetings, and discussions with NAD are limited to the record evidence.

When the NAD decides that some (or all) of the challenged ads have not been substantiated, the advertiser has five business days from its receipt of the decision to submit an Advertiser's Statement stating whether the advertiser will modify (or discontinue) the advertising or appeal. Appeals are heard by the National Advertising Review Board ("NARB"), which generally affirms the NAD's decisions. In 2007, the NARB affirmed all ten NAD cases that it decided.

The NAD recently has taken some steps to further expedite its review of cases in response to a 2007 survey of NAD users. For example, it has limited a party's ability to request extensions of time to respond. A party seeking an extension of four days or more must obtain the consent of the opposing party or the director of the NAD, who will only grant extensions for good cause.

NAD Has An Excellent Compliance Record

Although the NAD's self-regulatory process is "voluntary," compliance has been high. Indeed, the 2007 NAD user survey illustrated overall user satisfaction with the forum and fairness of NAD decisions. Where the advertiser refuses to cooperate with the NAD process or indicates that it will not comply with the NAD's decision, the NAD will forward the decision to the FTC or other appropriate government agency for enforcement purposes.

By way of example, in a challenge to Johns Manville's advertising for its fiber glass insulation products, the NAD determined that a number of the challenged claims should be discontinued. Johns Manville, Case #4395 (Oct. 3, 2005). After unsuccessful negotiations between the NAD and Johns Manville (and further complaints by the challenger), the NAD sent the case to the FTC, advising that "Johns Manville continued to disseminate certain troubling advertising." See Closing Letter from Mary Kay Engle, Associate Director of the FTC's Division of Advertising Practices to Johns Manville counsel (Aug. 1, 2008) available at http://www.ftc.gov/os/closings/staff/ 080801johnmanvillecorp.pdf. The case was resolved following the FTC's investigation when Johns Manville agreed to cease or modify its advertising claims so as to comply with the NAD decision.

Federal Courts Recognize The NAD's Expertise

Federal courts have recognized and relied upon the NAD in deciding advertising cases for more than two decades. In AMF Inc. v. Brunswick Corp., 621 F. Supp. 456 (S.D.N.Y. 1985), AMF brought an action seeking to compel Brunswick to comply with their settlement agreement in a Lanham Act false advertising case that required the parties to obtain a determination from the NAD in any future advertising disputes. When Brunswick refused to submit a subsequent advertising dispute to the NAD, AMF sought to enforce the settlement agreement as one subject to the Federal Arbitration Act and the Court agreed. In reaching its decision, the court described the NAD as follows:

The value of this [NAD procedure] lies largely in the particular experience and skill of the NAD as a resolver of disputes. 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. . . . As the NAD puts it: 'Speed, informality and modest cost are three chief benefits of [this] self-regulatory system.' . . . 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.

Id. at 462.

More recently, in Russian Standard Vodka (USA), Inc. v. Allied Domecq Spirits & Wine USA, Inc., 523 F.Supp.2d 376 (S.D.N.Y. 2007), the plaintiff made claims in its advertising that it was the only true Russian vodka and that defendant's Stoli vodka was not Russian. The defendant challenged these claims at the NAD, but in the middle of the proceedings Russian Standard went to federal court seeking a declaratory judgment. Under NAD Rules, when the advertising complained of is the subject of pending litigation, the NAD closes its investigation.

Back in federal court, defendant Allied Domecq moved for a 30-day stay to allow the NAD to conclude its proceeding. In granting defendant's motion and citing AMF, Inc. v. Brunswick Corp., the court specified that "allowing the NAD, a highly reputable institution, to provide its expert view on Stoli's authenticity as a Russian vodka would be extremely useful in resolving remaining claims in the complaint. This decision would promote judicial economy and be informative to the court in its own decision regarding the remaining claims." Id . at 384.

Hugh Latimer, Chair of Wiley Rein's Advertising Practice, has experience in a broad range of complex litigation involving advertising, sweepstakes, trademark, antitrust, trade regulation, international trade and other commercial law issues. John W. Kuzin is an Attorney in Wiley Rein's Advertising, Communications and Litigation Practices. He litigates disputes involving telecommunications equipment, consumer electronics, computer hardware, software and peripherals. He represents clients in a broad range of Federal Communications Commission (FCC) matters, including rulemakings, spectrum transactions, enforcement proceedings and equipment authorization issues.

Please email the authors at hlatimer@wileyrein.com and jkuzin@wileyrein.com with questions about this article.