When to Choose Between a Lawsuit or Filing a Challenge With the NAD

For those unfamiliar with it, the NAD is a voluntary self-regulatory forum for the resolution of false advertising disputes. Created in 1971 and located in New York, the NAD provides a streamlined forum for competitors to challenge advertising claims. Disputes are heard by staff attorneys who are well-versed at reviewing advertising claims and supporting evidence. The NAD’s jurisdiction is limited to “national advertising,” but this is defined broadly to include advertising disseminated “to a substantial portion of the United States.”

Because the NAD is a self-regulatory forum, compliance with its decisions is voluntary. However, as the NAD has recently made clear, the forum has teeth. When an advertiser refuses to participate or follow NAD recommendations, the NAD will refer the matter to the relevant government agency, typically the Federal Trade Commission (FTC). This past March, Alexander Goldman, an NAD staff attorney, warned that “when companies take the chance that a referral to the FTC will not result in an investigation of their advertising, our statistics show that the gamble is unlikely to pay off.” In fact, according to Goldman, the FTC took action in 15 out of 19 referred NAD cases in the last two years.

Pursuing an action with the NAD to stop false advertising claims is very different than pursuing a court action, however. So, which one is right for you? Here are some factors to consider when crafting your strategy.

Timing of relief

If your competitor’s false or misleading advertising is egregious, then each day that the advertising is live could harm your brand’s reputation and sales. Seeking a temporary restraining order or preliminary injunction in federal court is the fastest route to relief. On the other hand, if you don’t need immediate injunctive relief, an NAD case can take about three months from challenge to published decision, depending on the complexity of the matter. A full court case, on the other hand, could take years.

Evidence

In the Lanham Act false advertising case, the burden of proof is on the challenger to show all elements of a false advertising claim, including:

• a false or misleading statement of fact;
• that is used in commercial advertising;
• that deceives or is likely to deceive in a material way;
• in interstate commerce; and
• has caused or is likely to cause injury to the challenger.

Some of these elements—such as whether the advertising claims at issue were material to consumer’s purchasing decisions—usually require consumer survey evidence, and good surveys are not cheap. At the NAD, however, once the challenger files its complaint, the burden is on the advertiser to substantiate its advertising, meaning the challenger can opt to forego survey and other expert evidence.

Types of relief

The most the NAD can do is issue a decision recommending that the advertiser discontinue or modify the advertising. It is up to the advertiser to comply, although most do. The NAD cannot award monetary damages, even if you have proof that your brand’s sales were harmed by the false advertising. In a court case, however, a challenger can pursue a court-ordered injunction, monetary damages, and in some exceptional cases, recovery of attorneys’ fees.

Costs

Getting that relief in court, however, and bearing the burden of proving all the elements of a false advertising claim can be expensive. Costs associated with NAD challenges are generally magnitudes lower than traditional litigation, in part because the parties are limited to a couple rounds of written submissions and one (optional) round of oral argument

Confidentiality

NAD submissions are not available to the public, and if you have sensitive information to submit in support of your position, you don’t have to share it with your competitor (although you do need to summarize it). While you can seek to protect sensitive information in court, it is much harder. Even highly sensitive information will likely need to be shared with the opposing party’s lawyers.

Building momentum

Filing an NAD challenge may also be a low cost way to sound the alarm for regulators, plaintiffs’ attorneys and even other challengers. Filing an NAD challenge does not preclude anyone from later filing a lawsuit and may inspire change in your industry.

The bottom line is that brands should think carefully and strategically when deciding where and how to challenge a competitor’s false or misleading advertising. The path you choose will depend on the facts of your case, the relief you seek, costs and other considerations discussed above. Still, it is important to recognize and consider the NAD forum as a viable option for combating false and misleading advertising by your competitors.