HISTORICAL NOTE · “Placements” (often called “product placements”) are a form of promotion in which an advertiser pays to make its product or service part of a larger work

This booklet is based on information believed to be accurate and reliable. However,statutes, regulations, and administrative and judicial decisions are subject to change.This information is not intended as, and does not constitute, legal advice for particular-ized facts. Legal counsel should be consulted for advice on specific compliance issues.

HISTORICAL NOTEBased on Library of Congress Material

The representation of Uncle Sam on the cover is “the mostfamous poster in the world,” according to its creator, JamesMontgomery Flagg.

Originally, it was published as the July 6, 1916, cover ofLeslie’s Weekly with the title “What Are You Doing forPreparadeness?” It then was used for advertising.

In 1917, the words “I WANT YOU for the U.S. ARMY -ENLIST NOW” were added to Uncle Sam’s picture. Overfour million copies were printed as the United Statesentered World War I. The poster was later adapted for usein World War II.

Flagg served as his own model for the face of Uncle Sam.

Defending andChallengingAdvertisingA Refresher forCorporate Counsel andRegulatory Executives

Richard J. Leighton©2005

Defending and Challenging AdvertisingDefending and Challenging Advertising

Table of Contents

Introduction

I. KEY TERMS AND CONCEPTS ..................................................................1

A. “COMMERCIAL ADVERTISING” ..........................................................1B. CLAIMS IN ALL “MEDIA” AND FORMS CAN BE

“ACTIONABLE”..........................................................................................................11. “Promotions” ......................................................................................22. “Placements” ......................................................................................23. “Endorsements” and “Testimonials” ..................................................24. “Demonstrations” ..............................................................................3

C. CLAIMS MUST BE “MATERIAL” TO BE ACTIONABLE ..............3D. MATERIALLY “FALSE” CLAIMS USUALLY

ARE ACTIONABLE ....................................................................................41. The “Puffery” Exception ....................................................................42. Falsity by Necessary Implication ......................................................43. The “Establishment Claim” Exception to Proving Falsity ................5

E. “DECEPTIVE” CLAIMS OFTEN ARE ACTIONABLE ......................51. “Deceptive” Ad Claims ......................................................................52. “Substantial” Deception ......................................................................6

F. “UNFAIR” CLAIMS USUALLY ARE ACTIONABLE ........................6G. “UNSUBSTANTIATED” CLAIMS CAN BE ACTIONABLE ............6H. UNINTENDED CLAIMS USUALLY ARE ACTIONABLE;

INTENTIONAL CLAIMS CAN INCREASE LIABILITY ..................7I. CLAIMS USUALLY WILL BE INTERPRETED

WITHIN CONTEXT ....................................................................................7J. LIKELY AUDIENCES CONTROL CLAIM INTERPRETATION ......7

1. In General ..........................................................................................72. Children and Other Potentially Vulnerable Audiences ......................7

K. COMPARATIVE ADS ................................................................................81. “Direct[ly] Comparative Advertisements” ........................................82. “Indirect[ly] Comparative Advertisements” ......................................83. “Superiority Claims” ..........................................................................94. “Parity Claims” ..................................................................................95. Superiority and Parity Claim Combinations ......................................9

Table of Contents

6. “Line Claims” ....................................................................................9L. SPECIALIZED STATUTES, REGULATIONS, AND POLICY

STATEMENTS MAY CONTROL CLAIMS ..........................................10

II. CHALLENGING FALSE, DECEPTIVE, AND UNFAIR ADS........11

A. REGULAR MONITORING AND REPORTING..................................11B. USUALLY, IT IS BEST TO BEGIN THE CHALLENGE PROCESS

WITH LESS FORMAL REQUESTS TO THE COMPETITOR............111. Company-to-Company and Same-Level Communications..............112. Demand Letters ................................................................................113. Confirmation Letters ........................................................................13

C. INFORMAL AND FORMAL CHALLENGE OPTIONS ....................131. Seeking Mediation............................................................................132. Complaining to a Legislative or Regulatory Body ..........................133. Complaining to the Television Networks ........................................144. Complaining to a Self-Regulatory Body (NAD and CARU) ..........145. Seeking Arbitration ..........................................................................156. Filing Suit in Court ..........................................................................15

Defending and Challenging Advertising

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INTRODUCTION

This booklet is designed to be a handy reference that will allow in-house corpo-rate counsel and corporate regulatory affairs executives to refresh their recollection ofthe major requirements and options applicable to defending advertising claims madeby their company and deciding whether and how to challenge those made by competi-tors. Part I outlines key terms and concepts relating to good and required advertisingpractices. Part II evaluates major options for challenging improper advertisements.

I. KEY TERMS AND CONCEPTS

A. “COMMERCIAL ADVERTISING”The scope of this booklet is limited to “commercial advertising,” a form of

communication that differs from political and other noncommercial advertising. Incommercial advertising, an individual or entity (the “advertiser”) pays for a com-munication (the “advertisement” or “ad”) to be presented to an audience for thepurpose of ultimately benefiting the advertiser economically.

Most often, the intent of commercial advertising is to ultimately induce a saleor other transaction with respect to what is advertised. Sometimes, the advertiserdirects claims to “influencers” such as physicians, stockbrokers, and retailers in thehope that they will praise or recommend the purchase of its product or service.Sometimes, the advertiser merely tries to create valuable good will toward itself orits products or services through “institutional advertising.”

If the ad is part of a process that involves or affects commerce within morethan one state (“interstate commerce”), it is potentially subject to federal advertis-ing statutes, as well as state and local laws. If the effect of the ad is limited tocommerce within a state, it is potentially subject to state and local advertising laws.

B. CLAIMS IN ALL “MEDIA” AND FORMS CAN BE“ACTIONABLE”

The laws make advertising claims “actionable” when they authorize regulators,competitors, or purchasers to challenge the claims in court or elsewhere. Under thelaws that make an advertiser liable for improper claims, it makes no differencewhat “medium” is used to convey the claims, if other legal criteria are met.Advertising “media” are the vehicles used to communicate the ad to its intendedaudience, including broadcasting or cablecasting, magazines, newspapers, theInternet, telephones, facsimile machines, indoor and outside signs, labels, directmail, handouts, and even airplane banners.

It also makes no difference in terms of legal liability what form of communica-tion is used to make advertising claims. Unless stated otherwise, “advertising” asused here includes ads not only in obvious forms (such as 30-second broadcastcommercials and print ads in magazines and elsewhere), it consists of all forms,including the following:

Key Terms and Concepts

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1. “Promotions”Some differentiate the term “promotion” from “advertisement,” but both are

actionable under the same legal criteria. A promotion usually is a short-term mar-keting effort to boost interest in goods or services (especially new ones). Often,promotions relate to a special value or event.

For example, promotions include providing coupons in newspaper free-stand-ing inserts (“FSIs”) for price discounts, giving away toys or other premiums with asale, running sweepstakes and contests, and having special displays or demonstra-tions in stores.

2. “Placements”“Placements” (often called “product placements”) are a form of promotion in

which an advertiser pays to make its product or service part of a larger work orevent that will be seen by an audience. This usually is done without calling atten-tion to the fact that the placement was paid for by the advertiser, a practice that hasled some to seek greater regulation of placements. As with other advertisements,care must be taken to assure that the placement does not communicate a false ordeceptive message about the qualities or capabilities of the product or service thathas been “placed.”

For example, placements include identifiable branded clothing in sportingevents or on television shows and identifiable restaurants or makes of cars inmovies or video games.

3. “Endorsements” and “Testimonials” “Endorsements” and “testimonials” mean the same thing: Representations

made in an ad by a real, identifiable individual or organization that are likely to beperceived as the views of that “endorser,” rather than just those of the sponsoringadvertiser. An endorsement can be in any form, including spoken or written words,a signature, a photograph showing the endorser using the product or service, or anorganization’s seal. The message inferred by the audience is the key to determiningwhether the representation is an endorsement.

Payment or other actual or promised consideration given by the advertiser tothe endorser and any other fact that likely would be material must be conspicuouslyrevealed where such fact would not reasonably be assumed by the audience. Issuesinvolving endorsements also include whether typical consumers, organizations, orexperts make them, and whether the reported experiences are typical. However, thekey point is that an endorsement must reflect the honest and non-deceptive view ofthe endorser at the time the audience sees it. The endorsement must be discontinuedif the advertiser learns that the endorser has adopted a materially different view.[The following examples are based on Federal Trade Commission guidelines.]


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For example, representations considered to be endorsements include a com-mercial for golf balls that showed a famous golfer hitting the balls (without anyother personalized statement) and a print ad containing parts of a previously pub-lished movie review by famous reviewers.

For example, representations considered not to be endorsements include acommercial showing two unidentified actors posing as consumers having a conver-sation about the benefits of a detergent and a commercial in which non-personal-ized statements (on screen and in “voice-over”) about the benefits of a pain relieverwere made by an announcer well known for making such commercials for theadvertising company.

For example, a material fact was considered as a necessary disclosure relatedto a documentary-like commercial done in a restaurant. Actual restaurant cus-tomers were asked on-camera for their “spontaneous” opinions about a new prod-uct. However, the customers were warned before entering the restaurant that theylikely would be interviewed about the product for a commercial. Disclosure of thatwarning was considered necessary, since the opinions likely were not “sponta-neous.” (If there were no prior warning and the customers did not know they werebeing recorded until after the interviews, no disclosure would have to be made,even if reasonable payments were given the customers for their “air time.”)

4. “Demonstrations”“Demonstrations” (often called “product demonstrations”) of a product’s or

service’s performance, appearance, or other effects can be stand-alone events orpart of a larger advertisement. An advertiser is allowed to artificially createimpressions for demonstrations of its product or service to show it at its best advan-tage, so long as the impressions are consistent with the experiences that typicalpurchasers would have. It is improper to depict a product or service as materiallyfaster, more effective, bigger, meatier, stronger, or as having other important quali-ties that are superior to what the advertised product or service actually has.

For example, likely allowable demonstrations include using a “food stylist” toprepare a turkey for filming by giving it a “roasted look” with suntan lotion or toput mashed potatoes in ice cream cones where ice cream would melt under the setlights.

For example, an improper demonstration was used in an advertisement to extola car’s strength and safety by showing a huge big-tired vehicle running over a lineof cars, crushing the roofs of all except the advertiser’s. What it did not show wasthat the advertiser’s car was the only one that had been “reconstructed” for the ad,with added internal posts and other materials to support the roof.

C. CLAIMS MUST BE “MATERIAL” TO BE ACTIONABLEA claim is “material” when it likely would motivate reasonable members of its

audience to do or not do something relatively important, such as purchase what is


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being advertised or not purchase something that is compared unfavorably in the ad.Generally, a claim must be material to be challenged successfully. In some jurisdic-tions, materiality is presumed where the claim is literally false, false by necessaryimplication, intentionally deceptive, directly comparative, or about important attrib-utes such as price, quality, or safety. Trivial mistakes or statements in an ad thataudience members likely would not notice or rely on usually may not be the basis ofa challenge to the claim, even if the mistakes or statements make the ad inaccurate.

D. MATERIALLY “FALSE” CLAIMS USUALLY AREACTIONABLE

An advertising claim is “false” when it expressly asserts something that isuntrue. Such representations are sometimes called “literally false” or “faciallyfalse” because the falsehood is an explicit part of the claim, not something that theaudience has to infer. Where the asserted falsity is material to a significant propor-tion of its audience, the claim usually is actionable.

For example, the simplified claim “TESTS PROVE THAT CONSUMERSPREFER BRAND X OVER BRAND Y” would be false if no such tests ever weredone.

1. The “Puffery” Exception“Puffery” is not actionable. But it also is not easily definable outside the con-

text of a particular advertisement. Essentially, a “puff” is an obviously false orunprovable representation that is not material to its audience. It is something thatreasonable people would not rely on in making decisions with respect to what isadvertised.

Typically, puffery encompasses claims that appear to be merely the boastfulopinions of the advertiser or seller, rather than assertions of fact that can be provedby measurement or some other objective and tangible means. For example, theclaim “AMERICA’S FAVORITE PASTA” has been found to be a nonactionablepuff.

The context in which the claim is made can change non-actionable puffery intoactionable falsity or deception. For example, in one leading case, the claim “BET-TER INGREDIENTS. BETTER PIZZA” was found to be non-actionable pufferywhen displayed standing alone (as on a pizza box or in a store sign). But it wasfound to be an actionable assertion of fact when it was part of a television commer-cial about the ingredients used in the advertiser’s pizzas.

2. “Falsity by Necessary Implication”Some jurisdictions treat as false a literally true or ambiguous advertising claim

that is “false by necessary implication.” This implication is found when the onlymessage the audience reasonably could take away from the claim is false.


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For example, in such jurisdictions, the simplified claim “TESTS PROVETHAT CONSUMERS PREFER BRAND X OVER BRAND Y” likely would beconsidered to be false by necessary implication where the tests did not show thatmore consumers preferred Brand X over Brand Y. That numeric superiority likelywould be held to be the reasonable and necessary implication of the claim. This isso even though the representation would be literally true where fewer (e.g., 20%)preferred X and more (e.g., 80%) preferred Y; that is, all the claim literally says isthat some consumers prefer X.

3. The “Establishment Claim” Exception to Proving FalsityAn “establishment claim” (or “tests prove claim”) expressly or impliedly asserts

that there is a valid testing or similar scientific basis that establishes the truth of theasserted fact (such as a survey/test that proves consumers prefer the advertiser’s prod-uct). Such a scientific basis generally is considered to be a highly persuasive motivator.

If the test or other scientific process that is the basis of the establishment claimdoes not support the asserted fact, the claim is false. This is so even though theunderlying fact (such as the existence of a consumer preference) has not beenshown to be false by the challenger — and may even be true. Such an establish-ment claim is false because the asserted testing or scientific basis, itself, is part ofthe claim and is being represented as reliable proof when it is not. (And, as will beseen later, the failure to have a reasonable basis for the claim prior to that claim’spublication is an independent problem for advertisers in some jurisdictions.)

For example, the simplified claim “TESTS PROVE THAT CONSUMERSPREFER BRAND X OVER BRAND Y” would be false and actionable if thosetests were shown to be invalid due to faulty sampling. The challenger would nothave to conduct its own preference tests to prove that there was no preference.

E. “DECEPTIVE” CLAIMS OFTEN ARE ACTIONABLE

1. “Deceptive” Ad ClaimsA true or ambiguous advertising claim is “deceptive” (called “misleading” in

some laws) when it implies a message that is untrue. Words, pictures and othernon-verbal representations can cause deception. It also may be caused by the omis-sion of important facts or explanations that, had they been included, likely wouldaffect purchase decisions or other important actions.

For example, soon after entering P.T. Barnum’s museum of freaks and curiosi-ties, customers saw a prominent and literally true sign: “THIS WAY TO THEEGRESS.” It misled many to go through a self-locking door, end up out on thestreet, and pay another quarter to reenter and finish their tour. A more modern exam-ple of deception would be a television commercial that uses pictorial demonstrationsand voice-overs to extol a product’s superior benefits, but uses unreadable superim-posed text (usually called a “super”) to disclaim many of the implied benefits.


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2. “Substantial” DeceptionBecause a deceptive claim is not literally false or false by necessary implica-

tion, two questions arise: (a) how do you know it is conveying an untruthful mes-sage, and (b) how much of its audience must it likely (or actually) deceive before itbecomes actionable? The Federal Trade Commission, National AdvertisingDivision of the Council of Better Business Bureaus, and other agencies that regu-late or self-regulate advertising are recognized as having the expertise to answerthose questions themselves on a case-by-case basis.

Where a competitor sues a competitor, however, the challenger of the advertise-ment usually has the burden of proving that the ad was (or likely was) communicatinga deceptive message to a “substantial” (or “not insubstantial”) portion of the intendedaudience. This usually is proved through a perception survey that tests a representa-tive sample of the appropriate audience and shows that at least 15 percent of the audi-ence was taking away a deceptive message. That percentage may vary depending onthe circumstances, but 20 percent would seem safe in virtually all federal courts.Some courts have recognized 12 percent or less as being substantial, especially whenthe number of potential purchasers is large. Some may recognize an even smaller per-centage in certain cases, such as where there is the potential for physical harm.

F. “UNFAIR” CLAIMS USUALLY ARE ACTIONABLESome of the applicable federal and state laws on false or deceptive advertising

evolved out of trademark statutes and were based on the principle of protectingcompetitors (and sometimes consumers) from “unfair competition.” The FederalTrade Commission, however, has expanded this concept with its “unfairness doc-trine.” This doctrine is a catchall policy under which the agency regulates advertis-ing and other practices that are not necessarily false or deceptive when viewed byconventional analysis.

Ads that are “unfair practices” under this doctrine include those where the ben-efits of allowing the representations to be made are outweighed by their likelihoodto cause substantial harm that cannot be reasonably avoided. Also included inFTC’s definition of what is unfair is conduct that falls into the broad categories ofbeing immoral, unethical, oppressive, or unscrupulous, or that otherwise violatepublic policy.

For example, unfairness determinations include a television commercial thatshowed beer drinking in a fast-moving powerboat; the direct mailing of samplerazor blades to residences (where children might be given “junk mail” to playwith), and attempts to sell children 900 telephone numbers.

G. “UNSUBSTANTIATED” CLAIMS CAN BE ACTIONABLEThe Federal Trade Commission and a growing number of other authorities

hold that a claim is deceptive or otherwise illegal if the advertiser did not have ade-quate substantiation of the claim’s truth, in the form of a reasonable factual basis,


7

prior to publication of the claim. This finding of illegality will remain even wherethe claim might be shown to be true by subsequently acquired proof.

H. UNINTENDED CLAIMS USUALLY ARE ACTIONABLE;INTENTIONAL CLAIMS CAN INCREASE LIABILITY

The advertiser is liable for any advertising claim that is materially false ordeceptive, whether or not the falsity or deception is intended. Where it is provedthat the advertiser intended to issue a false or deceptive claim, the consequencescan be more severe.

The potential consequences of issuing an intentionally false or deceptive adinclude having to pay enhanced damages (e.g., punitive damages to consumers orcompetitors under state law or up to three times actual damages to a competitorunder federal law); disgorgement of all profits associated with the claim to a chal-lenging competitor or to a public treasury; payment of the challenger’s legal feesand costs; required publication of “corrective advertising,” and, in certain rare situ-ations, seizure of products and imprisonment.

I. CLAIMS USUALLY WILL BE INTERPRETED WITHINCONTEXT

The falsity or deception of a challenged claim will be interpreted by viewingthe claim within the context of the entire ad in which it appears and, where rele-vant, within the context of a series of ads or other related stimuli.

J. LIKELY AUDIENCES CONTROL CLAIM INTERPRETATION

1. In GeneralThe knowledge and experience of an advertisement’s likely audience usually

will control how the ad should be interpreted during any challenge. Care must betaken to differentiate the likely audience from the intended audience. That is, caremust be taken to assure that the claim’s audience does not contain a substantial pro-portion of unanticipated members who might be deceived by claims that would notmislead the intended audience.

Thus, an advertisement in a medical journal subscribed to by physicians usual-ly would be viewed through the eyes of those knowledgeable doctors who, forexample, would be unlikely to be deceived by unexplained medical terms used inthe ad. Similarly, an advertisement in a flyer distributed to retailers or other mem-bers of “the trade” usually would be viewed with the understanding that such anaudience had specialized knowledge that the general public did not have.

2. Children and Other Potentially Vulnerable AudiencesThe policy of interpreting advertising through the eyes and ears of its likely

audience can have significant ramifications when an ad’s audience has a significant


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number of members who are recognized as potentially vulnerable to falsity, decep-tion, or unfairness. Special care must be taken in such circumstances, whether ornot an ad is specifically intended for vulnerable members of the audience.

Chief among such vulnerable audiences are children under 12 years of age.Children often are impressionable and their cognitive skills usually have not beenfully developed. In developing ads that are likely to be perceived by a substantialnumber of children, advertisers should, at a minimum, adhere to television networkstandards and the Self-Regulatory Guidelines for Children’s Advertising publishedand updated by the Children’s Advertising Review Unit of the Council of BetterBusiness Bureaus.

Depending on the situation, other vulnerable audiences can include the elderly,the infirm, and those suffering from a personal tragedy (e.g., the death of a lovedone). In some cases, federal, state, or local regulations may apply limitations onhow to sell products or services to such groups; in other cases, the law as it hasdeveloped in court cases or self-regulatory bodies can provide guidance.

K. COMPARATIVE ADS

1. “Direct[ly] Comparative Advertisements”A “direct[ly] comparative advertisement” contains a “direct comparison”

between one or more of the advertiser’s expressly named products or services andat least one other expressly named product or service (usually directly competitiveones). Needless to say, claims such as these get the attention of the competitor and,often, are challenged in court or elsewhere.

For example, these simplified claims are directly comparative:

• “CONSUMERS PREFER COKE® OVER PEPSI®”

• “CONSUMERS PREFER PEPSI® OVER COKE® AND 7-UP®”

2. “Indirect[ly] Comparative Advertisements”An “indirect[ly] comparative advertisement” compares one or more of the

described or expressly named advertiser’s products and at least one other describedor implied, but not expressly named, product or service (usually directly competi-tive ones).

For example, these simplified claims are indirectly comparative:

• “CONSUMERS PREFER PEPSI® OVER THE LEADINGBRAND”

• “COKE®: SHOWN TO BE THE BEST TASTING SOFT DRINKIN THE REGION”

• “NO ONE BEATS OUR PRICES”


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3. “Superiority Claims”A “superiority claim” asserts that the advertiser’s product or service is better in

some or all respects than other product(s) or service(s) that are directly or indirectlydescribed or named in the ad.

For example, these are simplified superiority claims:

• “CONSUMERS PREFER COKE® OVER PEPSI®”

• “CONSUMERS PREFER PEPSI® OVER THE LEADINGBRAND”

• “THE FASTEST DELIVERY SERVICE IN THE AREA”

• “THE ONLY FORK WITH TEFLON® COATING”

• “LESS FAT”

4. “Parity Claims”A “parity claim” asserts that the advertiser’s product or service is at least equal

in some or all respects to the product(s) or service(s) that are directly or indirectlydescribed or named in the ad. The comparison usually is stated as positively aspossible.

For example, these are simplified parity claims:

• “NO ONE BEATS OUR PRICES”

• “THERE’S NOTHING BETTER FOR CLEANING POTS”

• “AS EFFECTIVE AS THE LEADING BRAND”

• “UNSURPASSED”

5. Superiority and Parity Claim CombinationsIt is not unusual to see a combination of superiority and parity claims to pro-

mote two attributes. For example, here is a combination parity and superiorityclaim: “JUST AS EFFECTIVE AS THE LEADING BRAND, BUT FAR LESSEXPENSIVE.”

6. “Line Claims” A “line claim” asserts that a number of the advertiser’s products or services

(such as the advertiser’s entire “line” of shoes) is, in some or all respects, equal toor better than the product(s) or service(s) that are directly or indirectly named ordescribed in the ad.

Often, an advertiser unintentionally implies a line claim, thereby opening itselfto liability where it has no substantiation applicable to more than one product. This


10

can happen when a brand name that applies to many products is carelessly used in aclaim intended for only one of those products or when a graphic representation of aline of the advertiser’s products is shown in an ad designed to make express claimsfor only one of those products.

For example, here are several fictional variations of line claims based onsome that have been challenged [supplied background material necessary forcomprehension]:

• “X-CELL®, NOW WITH 10% LESS FAT THAN Y-NOT®! *”

[Background: This is a large headline in a print ad above a photo of acan of X-Cell brand Chicken Soup. That soup is part of a line of sixvarieties of X-Cell brand soups (chicken, tomato, etc.), all of which com-pete with a line of Y-Not brand soups (chicken, tomato, etc.). The aster-isk refers to a small footnote that states: “Based on 2005 tests of X-CellChicken Soup and Y-Not Chicken Soup. Y-Not is a trademark of Y-Not,Inc.” A consumer perception test done for Y-Not, Inc., shows that 30percent of potential soup purchasers take away the message that ALL X-Cell brand soups have 10 percent less fat than ANY Y-Not brand soup,which is not true.]

• “X-CELL® CHICKEN SOUP, NOW WITH 10% LESS FAT THANY-NOT®! *”

[Background: The only thing changed was the addition of “CHICKEN”in the headline. A consumer perception test done for Y-Not, Inc., showsthat 20 percent of potential soup purchasers take away the message thatX-Cell brand Chicken Soup has 10 percent less fat than ANY Y-Not brandsoup, which is not true.]

• “X-CELL® CHICKEN SOUP, NOW WITH 10% LESS FAT THANY-NOT® CHICKEN SOUP! *”

[Background: Now the headline limits the express claim to chicken soupvs. chicken soup, BUT there is a photograph of all six X-Cell soups atthe bottom of the ad under a sub-headline stating “TRY ONE TODAY!”A consumer perception test done for Y-Not, Inc., shows that 15 percentof potential soup purchasers take away the false messages that ALL X-Cell brand soups have 10 percent less fat than either (a) their counter-partY-Not brand soup (chicken vs. chicken, tomato vs. tomato, etc.), or (b) Y-Not chicken soup.]

L. SPECIALIZED STATUTES, REGULATIONS, AND POLICYSTATEMENTS MAY CONTROL CLAIMS

Many federal, state, and local requirements and guidelines apply to how andwhen advertising and labeling representations may be made with respect to specificsubjects areas. These areas include nutrition, carcinogenic ingredients, funeral


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arrangements, textiles and textile care, used cars, loans and financing, telemarket-ing, direct mail, environmental attributes, sweepstakes, games, and contests, andmany others. It is beyond the scope of this booklet to delve into these.

II. CHALLENGING FALSE, DECEPTIVE, ANDUNFAIR ADS

A. REGULAR MONITORING AND REPORTINGIt is a good practice for you and your marketing colleagues to regularly moni-

tor your company’s and your competitors’ claims in point-of-sale promotions, trademedia, and public media, including the Internet. Outside counsel and other trustedpersons should be encouraged to be on the alert for potentially troublesome com-petitive claims, especially comparative ones, and to report them promptly.

B. USUALLY, IT IS BEST TO BEGIN THE CHALLENGEPROCESS WITH LESS FORMAL REQUESTS TO THECOMPETITOR

1. Company-to-Company and Same-Level CommunicationsWhere practicable, it usually is best to complain about a competitive ad in a

personal company-to-company telephone call or meeting between employees ofroughly equal rank. Of course, the sooner that contact is made after publication ofthe offending ad, the better.

For example, it usually is best to initiate communications about an offendingad by having your company’s general counsel or in-house advertising counsel con-tact the advertiser’s counterpart general counsel or in-house advertising counsel, orhaving your government affairs vice president or chief executive officer contacttheir counterpart vice president or CEO, etc.

If outside counsel makes the initial communication, this often results in thecompeting company asking its outside counsel to respond. Thus, one or two levelsof negotiation may have been lost. However, an initial complaint by outside coun-sel is one way to signal serious concern and resolve, which may be particularlyeffective against a company that fears the expense and distraction of litigation.

2. “Demand Letters”If the informal personal contact option is unsuccessful or is not implemented, a

so-called “demand letter” usually is the next step, assuming there is some hope of avoluntary cessation. Such a letter typically demands cessation or modification ofthe offending ad and expressly or implicitly threatens more formal action if the adis not discontinued or modified as requested. It usually is sent by a carrier that willprovide proof of receipt.

Challenging False, Deceptive, and Unfair Ads

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Where the informal personal contact option has not been used, it usually isbest for the demand letter to be on company stationery and between employees ofroughly equal rank. The more damaging the offending ad is, the higher the rank ofaddressee and addressor should be. Where that personal contact option wasattempted unsuccessfully, it is best to show increasing urgency by having thedemand letter issue from a higher-ranking employee or from outside counsel to thecompetitor’s general counsel or chief executive officer.

If the demand letter is unsuccessful and the claim is submitted for more formaladjudication, a good demand letter likely will be offered on your company’s behalfas evidence of its reasonableness and the challenged advertiser’s malice. If notdone well, the opposing advertiser might submit the letter to undermine your case.The best demand letters usually have the following characteristics and contents:

• A stern, but civil, tone; few adjectives and no florid or personalizedrhetoric:

Yes: “We demand that you immediately discontinue the appended falseand deceptive commercial for X-Cell® Chicken Soup.”

No: “The appended commercial shows that your philosophy of stealingbusiness from honest companies such as ours through exploitive anddishonest marketing knows no bounds. Pull it or my lawyers willbury you.”

• Enclosure of a full copy of the offending advertisement, plus a photoboard for television and a script for radio commercials.

• A statement of where and when the ad appeared to the extent known:

“Among other possible appearances, the subject X-Cell® ChickenSoup commercial was broadcast nationally on CBS during theFebruary 6, 2005, Super Bowl and on ….”

• The factual and legal basis that shows the ad to be improper andpotentially actionable [possibly with a request that the advertisershare any (unlikely) substantiation of the claim]:

“The claim in the subject commercial that X-Cell Chicken Soupcontains 10 percent less fat than Y-Not Chicken Soup is false. Allof our independent laboratory tests since 1995, including one com-pleted yesterday, demonstrate this falsity. [If you are aware of anytests to the contrary, we request that all materials relevant to them bemade available to us immediately.]”

• A clear statement of the remedy demanded discontinuance, modi-fication, issuance of corrective notices, etc.:

“We demand that you immediately cause the attached commercialand any other claim that X-Cell Chicken Soup has 10 percent lessfat than Y-Not Chicken Soup be discontinued permanently.”


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• A definite deadline by which the advertiser must have agreed to (orimplemented) the remedy, together with an unspecific notice ofpotential further action:

“We request that you confirm in writing to me that you have causedthe subject commercial and claim to be discontinued immediatelyand permanently. If I have not received such a confirmation before9 a.m. (Eastern Time) March 1, 2005, we likely shall take appropri-ate action without further notice to X-Cell, Inc.”

Some companies seem to view demand letters as an invitation to stall andobfuscate. Therefore, it is a good practice to establish, prior to sending a demandletter, an undisclosed “action deadline” by which your company will take furtheraction on, or ignore, the offending ad if it has not been discontinued or modified toyour satisfaction. Such an action deadline will help avoid indecision on your com-pany’s part if stalling tactics are employed.

3. Confirmation LettersShould you come to agreement with the advertiser on a course of action as a

result of the personal contact or demand letter, that agreement should be reduced towriting to avoid misunderstanding and protect against backsliding. Where theadvertiser’s counsel or other representative is reluctant to enter into a written agree-ment, it is best to reduce the agreement to writing and send it to that counsel or rep-resentative as your company’s understanding of the agreement. It also is a goodpractice to include a final paragraph that states, in effect, “If you or your companyhas a different understanding of what you agreed to, please advise me immediatelyof all such differences.”

C. INFORMAL AND FORMAL CHALLENGE OPTIONSDescribed below are other, more formalized, challenge options in ascending

order of formality, cost, and inconvenience.

1. Seeking MediationMediation is a confidential settlement process that is facilitated by a “neutral”

(the “mediator”). Mediators experienced in advertising law are available throughthe International Trademark Association/CPR Alternative Dispute Resolution Panelof Neutrals. The primary advantages of mediation are that it is relatively quick andinexpensive. The primary disadvantage of mediation is that both parties mustagree to mediation and to any settlement proposed therein.

2. Complaining to a Legislative or Regulatory BodyIt is not unusual for an aversely affected company to complain to a regulatory

agency or legislative body and seek enforcement action, hearings, or other pressurethat will terminate continued use of the ad. The primary advantages of such


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complaints and requests are that they are relatively inexpensive and may be pursued inaddition to other challenge options. Such complaints often can remain undisclosed, ifthe proper precautions are taken. The primary disadvantages are that few such effortsare successful, official investigations can take considerable time, and there is a riskthat any investigation and official action would expand beyond what is requested.

3. Complaining to the Television NetworksThe major networks have developed procedures for the processing of competi-

tive challenges to advertising being run by them. Each network has slightly differ-ent procedures, but the basic process is for the challenger to file a complaint inwriting with the network’s designated standards and clearance official, who thentransmits it to the advertiser for a response. There may be more written or oralcommunications, as needed. If the advertiser cannot substantiate the propriety ofits ad, the network will withdraw it.

The primary advantages of such complaints are that they are relatively inexpen-sive and may be pursued in addition to other challenge options. The primary disad-vantage is that few such efforts are successful. (The network, after all, probablyreviewed the advertisement for propriety and approved it before airing it.) In addition,the prevailing advertiser likely will bring the network’s rejection of the complaint tothe attention of any other forum chosen, where it may have some influence.

4. Complaining to a Self-Regulatory Body (NAD and CARU)The leading alternative to formalized adjudication for competitors is the filing of

a complaint before the National Advertising Division of the Council of Better BusinessBureaus (“NAD”) or, with regard to children’s advertising issues, the Children’sAdvertising Review Unit (“CARU”) of the Council. Filing fees are charged.

This is a self-regulatory process that is conducted primarily with submittedmaterials. In addition, a party may make a separate in-person presentation to theattorneys handling the case, and there may be telephone conversations with thoseattorneys. Published NAD and CARU decisions are used as precedents. Wherethere is a decision that recommends modification or discontinuance of the chal-lenged ad, the advertiser is requested to file an “Advertiser’s Statement” as towhether it will comply with the recommendation. The decision is then publishedwith that Advertiser’s Statement. If the advertiser fails to agree to the recommend-ed action, the issue is turned over to the appropriate regulatory body for resolution.(Most national advertisers agree to abide by the decision.)

Either party may appeal all or part of the initial decision to the industry’sNational Advertising Review Board (“NARB”) for a fee. If the appeal is not foundto be useless by the NARB Chair, a five-person panel will be appointed to reviewsubmissions and hear an oral presentation by the parties and representatives ofNAD (or CARU). NARB panels consist of three representatives who are employedby advertisers, one by an advertising agency, and one that represents the public


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interest. Three concurring votes are needed to decide any substantive issue. Thereis no appeal from the NARB decision.

The primary advantages of the NAD/CARU/NARB process are that it usuallyis less expensive and less time consuming than arbitration or litigation and thosemaking the decisions usually are experts in advertising. It also is less intrusive,since no depositions or other discovery is required, and the parties chose who, ifanyone, will attend presentations. The primary disadvantages are that temporary orpreliminary injunctive relief is not available, the decisions are not binding on theoffending advertiser, and it applies only to national advertising and advertising to asubstantial portion of the United States. Also, the challenger must agree to keep itscomplaint and the review process confidential while it is pending, thus, not beingable to notify the public of the alleged falsity or deception. The parties also mustagree not to publicize any decision, although NAD and CARU usually do issue apress release on their decisions.

5. Seeking ArbitrationArbitration is a confidential adversarial legal process in which a single “neu-

tral” (the “arbitrator”) or a panel of arbitrators (usually three) adjudicates a disputeaccording to procedures agreed upon by the parties. Some competitors enter intolong-term agreements to resolve their disputes only by confidential arbitration.

The arbitration process is similar to a non-jury trial, except discovery and rulesof evidence usually are very limited. Usually, there is an exchange of documents,followed by an evidentiary hearing, and a decision on liability and damages that isbinding on the parties. That decision is not appealable, but it is enforceable incourt. Arbitrators experienced in advertising law are available through theInternational Trademark Association/CPR Alternative Dispute Resolution Panel ofNeutrals and the American Arbitration Association.

The primary advantages of arbitration are that it is confidential (therefore, oth-ers who might file subsequent suits or take regulatory action likely would beunaware of the dispute). And, if the parties agree to appropriate procedures, arbi-tration can be less expensive, quicker, and less intrusive than litigation. (Withstreamlined procedures, arbitration can be less time consuming than even the self-regulatory process.) The primary disadvantages of arbitration are that a party can-not be forced to arbitrate a dispute and arbitrators often do not grant temporary orpreliminary injunctions, unless the parties have agreed to such remedies. In addi-tion, full discovery which can be an advantage or disadvantage usually is notavailable unless the parties have agreed to it.

6. Filing Suit in CourtLitigation is an adversarial legal process in which a judge, or a judge and jury,

decide a dispute according to judicial rules of procedure and evidence. The initialdecision usually may be appealed to an appeals court by right; subsequent appeals


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usually are discretionary with higher courts. Competitive advertising challengesusually are filed in federal court under Section 43(a) of the Lanham Act, with relat-ed state and common law causes of action also being pled there as ancillary mat-ters. The defending advertiser has the right to file a “counterclaim” against thechallenger alleging that the challenger was the one engaging in false or misleadingadvertising.

Early motions for temporary restraining orders, preliminary injunctions, dis-missal, and summary judgment are available to the parties, as is discovery throughdepositions, requests for documents, interrogatories, and requests for admissions.Potential final remedies include a permanent injunction against the offendingclaims, an order that the advertiser issue corrective ads or notices, and a full rangeof monetary awards and penalties. Monetarily, the losing party may be ordered topay the prevailing party the actual damages incurred by the prevailing party; up totreble those damages under federal law and beyond that under some state punitivedamages laws; all of the profits resulting from the challenged advertisement(s), andthe legal fees and costs associated with the prevailing party’s suit.

The primary advantages of litigation are its potential availability of an earlytemporary injunction, a permanent injunction and its full range of monetary awards.Bringing suit may result in achieving an early settlement from an advertiser that isnot seriously invested in the challenged claims or has significantly less resourcesthan the challenger.

The primary disadvantages of litigation are its potential monetary and resourcecosts, the intrusiveness of discovery, and the inability to unilaterally opt out of thelitigation after the defendant has filed a response to the complaint especially ifthat response includes a counterclaim. Awards of significant damages and orders toissue corrective advertising are not common.

Indeterminate litigation factors that could be either positive or negative,depending on the circumstances, include the ability to publicize the alleged falsitiesor deceptions and the creation of a reputation that would make competitors thinktwice about running directly comparative advertisements against your products orservices. Later, consumer class actions may be instituted against an advertiser thathas been found to have issued false or misleading ads. Where there is a counter-claim and each party shows the other to have issued improper ads, both may besubject to subsequent suits by third parties.

***

KELLER AND HECKMAN LLPwww.khlaw.com

RICHARD J. LEIGHTON

Dick Leighton chairs the Litigation Groupat Keller and Heckman LLP. He has beenassisting large and small advertisers forover 25 years, and has written numerousarticles and texts on the subject.

He is an active counselor, mediator,arbitrator and zealous advocate foradvertisers before trial and appeals courts,regulatory and legislative bodies, andself-regulatory forums.

[email protected]

WASHINGTON, D.C. BRUSSELS SAN FRANCISCO SHANGHAI

Documents

HISTORICAL NOTE · “Placements” (often called “product placements”) are a form of promotion in which an advertiser pays to make its product or service part of a larger work