The National Advertising Division: Resolving Labeling and Advertising Disputes
By August T. Horvath, Esq.
For decades, the National Advertising Division (NAD) of the Council of Better Business Bureaus (BBBs) has served as an alternative dispute resolution forum for companies that believe their competitor’s advertising or labeling is false, misleading, or unsubstantiated. In recent years, NAD’s case load and reputation have grown steadily, as the organization has built a reputation for detailed, fully reasoned decisions. Meanwhile, e-discovery and other developments have drive the cost of the main alternative to a NAD action—false-advertising litigation under Section 43(a) of the federal Lanham Act—ever higher. If your company is upset with the marketing practices of its competitors and the only alternatives seem to be to make hollow threats or to commit to expensive and open-ended federal litigation, NAD may be worth consideration as an alternative. NAD isn’t perfect, as we’ll describe below, but many companies have found it the best option.
What Is NAD?
NAD is a private, industry-supported, self-regulatory body. It functions in some respects as a private sector regulator, monitoring advertising practices in the marketplace and bringing its own matters. However, most of its activity consists of adjudicating cases brought by companies against their competitors. Companies bring roughly 80 challenges per year, spanning all sectors of consumer products and services, including food and beverage, electronics and telecommunications, personal care products, household items, and many more.
Participating at NAD is voluntary. When one company brings a challenge, if NAD determines that it is a reasonable, good-faith claim and concerns national advertising, the advertiser is offered the opportunity to participate. Even if the advertiser agrees, and responds to the challenger’s allegations, it is not legally obligated to abide by NAD’s decision concerning its advertising. However, if the advertiser declines to participate or comply at any point, NAD will forward its file to the Federal Trade Commission (FTC)’s Division of Advertising Practices, and if relevant, another federal agency such as the U.S. Food and Drug Administration (FDA), for possible investigation and other action. The FTC and other agencies are enthusiastic supporters of NAD’s self-regulatory effort, which they believe relieves them of what would otherwise be part of their regulatory burden. So when a report of non-compliance from NAD crosses their desk, the advertiser stands a good chance of getting some form of uncomfortable attention from the agency.
Why Should I Consider It?
A company that is upset by its competitor’s false or unsubstantiated advertising has a few options. None of them is 100 percent satisfactory.
• The company can first try to resolve the dispute informally through demand letters or other outreach. This can sometimes work, but it is likely to be effective only when backed by a credible threat to exercise one of the other, more unpleasant options. Even then, it can serve to warn the advertiser of trouble coming and give it time to prepare its defense, or even file for declarative relief in a forum of its choosing.
• The company can complain to a government agency such as FTC, FDA, or a state Attorney General. These dedicated but overloaded agencies have to be selective in what cases they choose to take up, and if the case is one without serious health, safety, or consumer financial overtones, and looks to them like a mere spat between competitors, they may not pursue it aggressively. Even if they launch an investigation, the challenger loses all control of and insight into what is going on.
• The company can file a federal lawsuit and seek preliminary and permanent injunctive relief, plus damages for lost profits. This option certainly has legal teeth and will get the miscreant advertiser’s focused attention. But it comes with the well-known drawbacks of federal litigation: high costs, long duration, intrusive discovery, and the prospect of counterclaims.
Against these alternatives, a NAD proceeding has some significant upsides. NAD challenges typically take between three and six months from initial complaint to final decision, and there is no compulsory discovery; the parties submit whatever they think will support their cases. The cost of a NAD matter, in legal fees, is comparable to that of contesting a preliminary injunction motion in federal court—just one stage of the Lanham Act litigation process. Counterclaims are not permitted at NAD, although of course an advertiser can file its own retaliatory challenge. The challenger maintains control over which advertising claims are challenged and what arguments are used.
Another advantage of NAD over a litigation challenge is the law NAD looks to and the burdens of proof that apply. NAD takes its cue from FTC advertising law rather than from the case law of false-advertising litigation, which has two important implications. First, NAD will recommend modification and discontinuation not only of advertising claims that have been proven false, but of claims that are merely unsubstantiated. This is consistent with FTC practice, but starkly contrasts with litigation, where there is usually no cause of action for unsubstantiated advertising and the plaintiff must show the claim to be false. Second, in a NAD proceeding, the burden is on the advertiser to prove that its claims are substantiated (or, in the case of implied claims, that it is not implying the misleading claims alleged by the challenger). Again, similar to an FTC matter, the challenger merely has to raise questions as to the substantiation for the advertiser’s claim to force the advertiser to substantiate it, in contrast with litigation, where the plaintiff bears the burden of proof.
Not surprisingly, these challenger-friendly rules result in a good success rate for challengers. In my analysis of the 66 cases between August 2017 and July 2018 in which NAD reached a decision on the merits (excluding 24 cases in which the case ended without a reasoned decision, for example, when the advertiser declined to participate), NAD recommended the most or all of the challenged claims be discontinued in 46 of the 66, and that at least some claims be discontinued in a further 16. In only four cases did the advertiser get off with a clean bill of health. So a challenger doesn’t have to worry too much about getting no satisfaction from the NAD process.
Publicity in NAD cases is limited, something that cuts both ways for the parties. In their participation agreement, the parties commit not to disclose or promote the existence of the NAD challenge while it is in progress. When NAD issues a decision, it sends out a press release to various general media and advertising trade outlets, and invites the prevailing party to add additional recipients, such as its home industry trade press. Outside of that, the parties agree not to promote or publicize the NAD decision in any way. This is not always what the challenger would like. Some plaintiffs court public attention during and after an advertising litigation as a way of bringing pressure to bear on their opponents. The limited publicity is part of NAD’s commitment to being friendly to industry.
How Does NAD Work?
The NAD process is simple and streamlined compared with litigation. The challenger, at the time it requests the opening of a matter, submits a letter brief detailing its complaint. The challenger also, at that time, pays the NAD filing fee, which currently ranges from $15,000 to $25,000, depending on the challenger’s company size and whether it is a national BBB partner. NAD forwards the challenger’s brief to the advertiser along with its request to participate. The advertiser must decide relatively quickly whether to participate, and then has a few weeks to submit its own letter brief arguing that its claims are substantiated, with whatever evidence it wishes to submit. There is then a second round of reply briefing by the challenger and then the advertiser, limited to responding to issues raised in the opponent’s first brief.
Both sides are then invited to have meetings with NAD staff attorneys in New York. These are conducted with each party individually, and generally last 1 to 2 hours. Often, the parties send company executives, in-house counsel, and experts along with outside counsel to bolster the credibility of their case. No new evidence or argument is supposed to be submitted at these meetings. A few weeks to several weeks later, NAD issues its decision and recommendations as to modification or discontinuation of the advertising. Money damages are not available at NAD.
The advertiser has the option to appeal the NAD’s decision to the National Advertising Review Board, a panel convened to hear appeals to NAD cases. It is rare for the NARB to overturn any of NAD’s major findings.
Advertisers are given a reasonable time to comply with NAD’s recommendations. If the advertiser fails to comply after a reasonable time, the challenger may initiate a compliance challenge, during which NAD may find that the advertiser has not made appropriate efforts to comply with the decision, and may refer the case to the FTC and/or another appropriate government agency.
Examples of NAD Food Cases
What are some examples of how food companies use NAD to resolve disputes? Here are a few matters from recent years. These will give you a sense of the broad scope of issues that food companies come to NAD to resolve.
• Earlier this year, Kraft Heinz challenged Tyson Foods’ practice of removing the inner lining of turkey cold cuts packaging when filming its commercials, claiming that this represented that Tyson had developed a package without an inner bag—something Kraft Heinz claimed it had developed, at considerable cost, for its Oscar Mayer cold cuts. NAD found that Tyson had not altered the appearance of its product in its advertising in a misleading way (Case No. 6200, 6/29/2018).
• In April, NAD recommended that Perdue modify ads for its Harvestland Organic chicken brand that could imply that all Perdue chickens, and not just its organic ones, were raised using organic farming methods that result in “happy” chickens (Case No. 6177, 4/23/2018).
• French’s ketchup and mustard TV and Facebook ads were challenged by competitor Kraft Heinz for claiming that its products were “better” than competitors and were the “greatest tasting,” a claim that requires a competitive taste test for substantiation (Case No. 6119, 9/26/2017).
• In a challenge by the Campbell Soup Company, Mizkan America, maker of Ragu pasta sauces, was found by NAD to have adequately substantiated its taste preference claim through a properly conducted comparative taste test (Case No. 6115, 9/12/2017).
• Blue Diamond Growers, maker of Almond Breeze almond milk, was found to be communicating only nonactionable puffery when promoting its product as the “best” almond milk made from the “best” almonds. However, NAD agreed with challenger WhiteWave, maker of Silk almond milk, that Blue Diamond had not substantiated its claim to be the only almond milk made with Blue Diamond California almonds (Case No. 6079, 5/9/2017).
• In a challenge by Hidden Valley, NAD decided that Kraft Heinz could substantiate claims that its salad dressings have no artificial colors or synthetic flavors, but it recommend that Kraft Heinz discontinue claims that Hidden Valley dressings contain synthetic colors (Case No. 6035, 12/13/2016).
• In a case brought by Del Monte, NAD found that Dole misleadingly implied that all of its fruit bowl products are packaged in 100 percent fruit juice, recommending that Dole make clear which are packed in juice and which are packed in syrup. NAD found that Dole’s commercials did not unfairly disparage the challenger’s products (Case No. 5868, 7/27/2015).
Is NAD Right for You?
NAD plays an important role in America’s advertising regulatory and litigation ecosystem. If making a complaint to a government agency seems too passive, but you are reluctant to resort to federal litigation, you may find that a NAD proceeding fits you just right. For a relatively modest cost, you can have your competitor’s advertising reviewed by staff attorneys with many years of experience in evaluating advertising claims. You get to shape your case just the way you want it, and any recalcitrance by the other side in coughing up evidence to support its claims will work against it in meeting its burden to show that they are substantiated.
The drawbacks of a NAD action are that participation is voluntary, and compliance can be difficult to enforce. This is not always much of an issue. If the advertiser is a national brand with a reputation to be concerned about, it is overwhelmingly likely to agree to participate and ultimately to abide by NAD’s findings. Besides being relatively quick and modest in cost, NAD proceedings are a way for companies to work out their advertising disputes without drawing unwanted government, media or public attention to issues in the industry.
You can learn more about NAD at its web site, www.asrcreviews.org, or by consulting your advertising counsel.
August T. Horvath, Esq., is partner and co-chair of the Advertising & Marketing Law Practice at Foley Hoag LLP.