ADventures in Law

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We get asked all the time to lay out the pros and the cons of different ways a company can challenge a competitor’s false advertising. And no surprise -- we are big fans of the National Advertising Division (NAD) process, with its relatively speedy pathway to a decision at a relatively modest price point. And while there are no damages or injunctions, most companies agree to participate and agree to any recommendations NAD makes. Why? Because there is a widespread recognition among reputable companies that having a robust self-regulatory system for advertising review is good for everyone, increasing confidence in the industry. But there are some things in the fine print that, a recent case reminds us, potential challengers should consider when weighing options.

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The challenge by Baxter International to claims made by Exergen Corporation for its TAT-500 Temporal Artery Thermometer looked like fairly standard NAD fare, even if the professional thermometer category is one not often seen at NAD. “The fastest, gentlest, most accurate temperature in the world!” are bold claims likely to grab the attention of any competitor. And the promise that NAD will review an advertiser’s substantiation and issue a decision with recommendations in about six months is compelling. But this case closed with a whimper for those of us who read NAD’s decision but a decided bang for Baxter.

NAD had to <a href="https://bbbnp-bbbp-stf-use1-01.s3.amazonaws.com/docs/default-source/bbb-national-programs/procedures/nad_narbprocedures_current.pdf" target="_blank" rel="noreferrer noopener">administratively close the case because it no longer had jurisdiction over the matter</a>. Yes, NAD determined the case involved current national advertising (although that was in dispute). But the claims at issue became the subject of pending litigation. How? After Baxter filed its challenge and NAD opened the matter, Exergen filed a declaratory judgment (DJ) action against Baxter in federal court seeking a ruling that the advertising was not false and misleading. Why go to this trouble when NAD would have made findings on the same? Well, an NAD case has no discovery. In federal court, Exergen will have more access to Baxter’s records, which may have an impact on the case. And the burden on Baxter in the Lanham Act context to prove the claims false is higher, compared to the full burden falling on Exergen to prove that its claims are substantiated. Sometimes these decisions are more substantively motivated than out of an interest in a perceived procedural advantage. The decision in the NAD case database does not tell us how far along the case got at NAD before Exergen made its move. If claims become part of a pending litigation at any time during the NAD process prior to the issuance of a decision, NAD loses its jurisdiction. It is possible that the briefing was complete and Exergen had its meeting with NAD and sensed from the body language it was going to lose and made the pivot at that point. It is also possible Exergen put into place this exit strategy much earlier in the process. There was a unique twist in this case in that the statements at issue were made not in a social media post or video ads but in medical journals in response to published research about the products. While we don’t know all the details, NAD determined these statements were ads up front, as it needed to do this to open the case. Exergen asserted this was not advertising but editorial speech subject to greater First Amendment protections, albeit also asserting what it said was true and supported even under the standard for commercial speech. (Some of this information can be found in the complaint Exergen filed, available <a href="https://admin.bakerlaw.com/wp-content/uploads/2024/05/Entry_1_-_Exergen_Corporation.pdf" target="_blank" rel="noreferrer noopener">here</a>.

Having an advertiser file a DJ happens rarely; we have seen it about 10 times in this century. More regularly, we see NAD closing cases administratively when a class action gets filed at some point during NAD’s review. This is still relatively rare but happened to us twice in the past few months: In one instance, NAD needed to close an entire case, and in another, part of the case, due to later-filed class actions. NAD also loses jurisdiction if a federal (but not a state) court issues an enforcement order related to the claims at issue. Now, NAD hates to lose jurisdiction. Who wouldn’t? But it makes sense that if actual enforcement is underway, self-regulation should step aside since NAD does not have the force of law. (That said, there was one case about 20 years ago involving vodka where the judge assigned to the DJ action stayed the case and sent the parties back to NAD, stating that “the public and the industry would benefit greatly from hearing the NAD’s opinion on the issue.”)

When giving the pros and cons of selecting NAD for a competitive ad challenge, the focus is often on time and money. As lawyers, it is our job to identify and communicate the worst-case scenarios. But this recent case reminds me that we should detail that, while unlikely, there is at least the potential for the advertiser to take the matter to an entirely new venue – and that, of course, is more complicated and far more costly.

To NAD or Not to NAD: How Being a Challenger in a Self-Regulatory Dispute May Land You in Federal Court