A Gala Day for Comparative Advertising

Given the expense and burden of resolving false advertising cases in federal court, the promise of an expedient and less expensive alternate forum invites attention. Adding to speed and thrift an assurance that ads will be assessed by experts in the field makes the forum more interesting still. What is this alluring avenue of adjudication? For 33 years, the National Advertising Division of the Better Business Bureau (NAD) has sought to provide just such a mechanism. Yet, even for long-time veterans of federal proceedings, the NAD may be terra incognita. One recent decision by the NAD, In re Distillerie Stock USA Ltd., NAD Case No. 4197 (June 2004), reveals both benefits and drawbacks of the forum, particularly in how some familiar yet some unique allocations of the burdens of proof can produce results both similar to and quite unlike those in federal court.

Distillerie Stock recently retained the well-known taste-testing service, Beverage Testing Institute (BTI), to conduct blind taste tests comparing its GranGala triple orange liqueur, the second best selling brand in the United States, with number one Grand Marnier and virtually all of the other premium orange liqueurs available in this country. (As reported in another recent NAD decision, In re Sidney Frank Importing Co. Inc., NAD Case No. 4016 (Feb. 2003), the BTI has achieved remarkable consistency in its taste tests, far exceeding what a cynic might dismiss as an inherently subjective subject.) In relevant part, the test showed a marked preference for margaritas mixed with GranGala liqueur over Grand Marnier, numerically ranked at 94 to 86. Stock promptly produced print advertising promoting the comparative product rankings. “We Came, We Mixed, We Won” announced one such promotional item that also reported the test score. Marnier Lapostolle and its U.S. distributor, Schieffelin, objected ' first threatening suit, but ultimately opting instead to mediate the matter before the NAD.

To commence a mediation, the challenger submits to the NAD a complaint, typically in the form of a letter, together with a required fee (currently $1500 for members and $2500 for nonmembers). The complaint can incorporate virtually any manner of evidence, but need not, and no particular level of formality is required. The advertiser then has at least 15 business days to respond. A further reply and surreply are permitted (each after 10 business days, subject to extensions). The parties can request a hearing, but one is not strictly required, and under NAD rules, the decision to hold a hearing is discretionary with the NAD. With or without a hearing, the NAD renders a decision, which it submits to the advertiser for comment (principally to indicate whether it will or will not comply with the NAD's rulings) before the decision is then published. Either party can appeal to the National Advertising Review Board. If the advertiser refuses to follow the NAD's recommendations, the NAD can refer the matter to the Federal Trade Commission.

In a decision dated June 1, 2004, the NAD rejected Lapostolle's and Schieffelin's main grievance, concluding, contrary to the complaint, that BTI's taste test adequately substantiated Stock's comparative advertising claims. In so doing, the NAD rejected as well Grand Marnier's other main challenge to the advertising, namely that the drink recipe used by BTI (taken from the Seagram's Bartending Guide) was not representative of consumer preferences and therefore flawed. The NAD similarly rejected other subsidiary arguments made by Grand Marnier about disputed inferences the advertising would or would not encourage. In these respects, concluded the NAD, the challengers had failed to sustain their burden of proof. However, on its own initiative, without any such suggestion being made by Lapostolle and Schieffelin, and without any specific evidence in the record, the NAD also concluded that Stock's inclusion in its print advertising of a drink recipe slightly different from the one used in the BTI test could be misleading.

The NAD's conclusions well exemplify how NAD proceedings are at once similar to and yet quite different from proceedings in federal court. As a matter of law, a party claiming false advertising in federal court has three main burdens. The plaintiff must 1) identify the purportedly false message in the disputed advertising and 2) prove that to a significant part of the relevant public the message was literally false or, alternatively, misleading. Survey evidence or other extrinsic proof is required to prove a literally true statement is misleading. Johnson & Johnson Merck Consumer Pharm. Co. v. Smithkline Beecham Corp., 960 F.2d 294, 297-98 (2d Cir. 1992); Glaxo Warner-Lambert OTC G.P. v. Johnson & Johnson Merck Co., 935 F. Supp. 327, 331 (S.D.N.Y. 1996). Finally, the plaintiff must: 3) prove the materiality of any allegedly misleading statements. N.B.A. v. Motorola, Inc., 105 F.3d 841, 855 (2d Cir. 1997). NAD precedent has similarly recognized that in the absence of evidence to support a claim of falsity, no finding of false advertising is permissible. In re Nestle USA ' Beverage Division, Inc., Case No. 3949 at p. 15 (8/27/02).

In federal court, “[w]here a plaintiff challenges a test-proven superiority advertisement, … [p]laintiff must then prove that these tests did not establish the proposition for which they were cited.” Castrol, Inc. v. Quaker State Corp., 977 F.2d 57, 63 (2d Cir. 1992); accord Pfizer, Inc. v. Y2K Shipping and Trading, Inc., 70 U.S.P.Q.2d 1592, 1599 (E.D.N.Y. 2004). NAD evidentiary rules are no different: “In an NAD proceeding, when an advertiser has shown what it believes to be a reasonable basis for its claims, the burden shifts to the challenger to show that it has better data 'or that there is a material flaw in the advertiser's data.'” Discus Dental, Inc., NAD Case No. 4009 (1/24/03) at p. 14 n. 48, quoting In re Brach & BrockConfections, Inc., NAD Case No. 3372 (3/1/97).

Although the burdens of proof are in these respects very similar in NAD proceedings and actions in federal court, NAD precedent also establishes that in NAD proceedings the advertiser bears the independent burden of supporting “all reasonable interpretations of claims made in its advertising,” See Discus Dental at p. 17. The NAD thus deems itself free, even in the absence of empirical proof, to draw on its own expertise to make inferences as to what message may have been implied in consumers' minds by any given advertising, even if not expressly so-stated in the advertising. Id.

In assessing the parties' burdens of proof in In re Distillerie Stock, the NAD agreed with Stock that its offer as evidence of the BTI taste test shifted to Lapostolle and Schieffelin the burden of producing scientific or other empirical evidence to challenge BTI's findings. In its decision, the NAD flatly rejected Lapostolle's and Schieffelin's contention that “unshakable NAD precedent” held otherwise. It was not sufficient for Lapostolle and Schieffelin to rely simply on other NAD precedent, no matter how similar such other cases might have been, in the absence of clear empirical evidence that the specific taste test was flawed or that Stock had misrepresented the test results. In this important respect, the NAD's decision thus clarifies it will follow federal law that a party challenging “test-proven” superiority claims bears the burden of proving the tests did not establish the proposition for which they were cited. Stock offered evidence in the form of the BTI taste tests, yet Lapostolle and Schieffelin offered no empirical evidence that the test was conducted improperly or would have yielded different results if a different methodology had been employed. Similarly, Stock offered evidence that the drink recipe used in the test was reasonable, and the challengers failed to sustain their burden of proving otherwise.

However, in raising sua sponte the issue of whether Stock's use of a drink recipe different from the recipe used in the BTI taste test was in any way misleading, the NAD followed its own particular rules, thereby departing from settled federal practice. Lapostolle and Schieffelin never raised the issue or offered evidence to support the NAD's ultimate conclusion. The NAD has said before and here reiterated that it enjoys discretion to draw “reasonable” inferences wholly independent of record proof. The NAD simply rejected without comment or analysis Stock's contention that the NAD itself should limit its conclusions to those supported by empirical evidence. The NAD overlooked as well Stock's contention, drawn from a growing body of federal law focusing on the complainant's burden of proving materiality (see generally R. Leighton, Materiality and Puffing in Lanham Act False Advertising Cases: The Proofs, Presumptions and Pretexts, 94 Trademark Rptr. 585 (2004)), that the difference between the two recipes would not influence purchase decisions and certainly had not been shown to be material. (On the other hand, precisely because Stock deemed the difference immaterial, the unexpected conclusion was of no consequence.) Although not at all what the NAD did in In re Distillerie Stock, the decision does allow for the possibility that even were a challenger to fail in sustaining its burden of proof, the NAD itself could exercise its discretion to draw a “reasonable inference” adverse to the advertiser and deem the disputed ad false or misleading.

A decision that was in fact carefully reasoned and rendered after only a few months of briefing and hearings, a decision indeed that adheres in the main to familiar settled precedent and evidentiary rules, is perhaps reason to raise a glass. Less intoxicating, however, are concerns that the recipe permits a mix of subjective inferences (even “expert” inferences) unsupported by empirical proof. There are surely cases for which NAD mediation will be preferred over federal court litigation; some for which it will indeed be a gala day. Others however may give cause to recall Groucho's line in “Duck Soup” when being feted as the new head of state of fictitious Fredonia: “a gal-a-day; that's about all I can handle.”

Given the expense and burden of resolving false advertising cases in federal court, the promise of an expedient and less expensive alternate forum invites attention. Adding to speed and thrift an assurance that ads will be assessed by experts in the field makes the forum more interesting still. What is this alluring avenue of adjudication? For 33 years, the National Advertising Division of the Better Business Bureau (NAD) has sought to provide just such a mechanism. Yet, even for long-time veterans of federal proceedings, the NAD may be terra incognita. One recent decision by the NAD, In re Distillerie Stock USA Ltd., NAD Case No. 4197 (June 2004), reveals both benefits and drawbacks of the forum, particularly in how some familiar yet some unique allocations of the burdens of proof can produce results both similar to and quite unlike those in federal court.

Distillerie Stock recently retained the well-known taste-testing service, Beverage Testing Institute (BTI), to conduct blind taste tests comparing its GranGala triple orange liqueur, the second best selling brand in the United States, with number one Grand Marnier and virtually all of the other premium orange liqueurs available in this country. (As reported in another recent NAD decision, In re Sidney Frank Importing Co. Inc., NAD Case No. 4016 (Feb. 2003), the BTI has achieved remarkable consistency in its taste tests, far exceeding what a cynic might dismiss as an inherently subjective subject.) In relevant part, the test showed a marked preference for margaritas mixed with GranGala liqueur over Grand Marnier, numerically ranked at 94 to 86. Stock promptly produced print advertising promoting the comparative product rankings. “We Came, We Mixed, We Won” announced one such promotional item that also reported the test score. Marnier Lapostolle and its U.S. distributor, Schieffelin, objected ' first threatening suit, but ultimately opting instead to mediate the matter before the NAD.

To commence a mediation, the challenger submits to the NAD a complaint, typically in the form of a letter, together with a required fee (currently $1500 for members and $2500 for nonmembers). The complaint can incorporate virtually any manner of evidence, but need not, and no particular level of formality is required. The advertiser then has at least 15 business days to respond. A further reply and surreply are permitted (each after 10 business days, subject to extensions). The parties can request a hearing, but one is not strictly required, and under NAD rules, the decision to hold a hearing is discretionary with the NAD. With or without a hearing, the NAD renders a decision, which it submits to the advertiser for comment (principally to indicate whether it will or will not comply with the NAD's rulings) before the decision is then published. Either party can appeal to the National Advertising Review Board. If the advertiser refuses to follow the NAD's recommendations, the NAD can refer the matter to the Federal Trade Commission.

In a decision dated June 1, 2004, the NAD rejected Lapostolle's and Schieffelin's main grievance, concluding, contrary to the complaint, that BTI's taste test adequately substantiated Stock's comparative advertising claims. In so doing, the NAD rejected as well Grand Marnier's other main challenge to the advertising, namely that the drink recipe used by BTI (taken from the Seagram's Bartending Guide) was not representative of consumer preferences and therefore flawed. The NAD similarly rejected other subsidiary arguments made by Grand Marnier about disputed inferences the advertising would or would not encourage. In these respects, concluded the NAD, the challengers had failed to sustain their burden of proof. However, on its own initiative, without any such suggestion being made by Lapostolle and Schieffelin, and without any specific evidence in the record, the NAD also concluded that Stock's inclusion in its print advertising of a drink recipe slightly different from the one used in the BTI test could be misleading.

The NAD's conclusions well exemplify how NAD proceedings are at once similar to and yet quite different from proceedings in federal court. As a matter of law, a party claiming false advertising in federal court has three main burdens. The plaintiff must 1) identify the purportedly false message in the disputed advertising and 2) prove that to a significant part of the relevant public the message was literally false or, alternatively, misleading. Survey evidence or other extrinsic proof is required to prove a literally true statement is misleading. Johnson & Johnson Merck Consumer Pharm. Co. v. Smithkline Beecham Corp., 960 F.2d 294, 297-98 (2d Cir. 1992); Glaxo Warner-Lambert OTC G.P. v. Johnson & Johnson Merck Co., 935 F. Supp. 327, 331 (S.D.N.Y. 1996). Finally, the plaintiff must: 3) prove the materiality of any allegedly misleading statements. N.B.A. v. Motorola, Inc., 105 F.3d 841, 855 (2d Cir. 1997). NAD precedent has similarly recognized that in the absence of evidence to support a claim of falsity, no finding of false advertising is permissible. In re Nestle USA ' Beverage Division, Inc., Case No. 3949 at p. 15 (8/27/02).

In federal court, “[w]here a plaintiff challenges a test-proven superiority advertisement, … [p]laintiff must then prove that these tests did not establish the proposition for which they were cited.” Castrol, Inc. v. Quaker State Corp., 977 F.2d 57, 63 (2d Cir. 1992); accord Pfizer, Inc. v. Y2K Shipping and Trading, Inc., 70 U.S.P.Q.2d 1592, 1599 (E.D.N.Y. 2004). NAD evidentiary rules are no different: “In an NAD proceeding, when an advertiser has shown what it believes to be a reasonable basis for its claims, the burden shifts to the challenger to show that it has better data 'or that there is a material flaw in the advertiser's data.'” Discus Dental, Inc., NAD Case No. 4009 (1/24/03) at p. 14 n. 48, quoting In re Brach & BrockConfections, Inc., NAD Case No. 3372 (3/1/97).

Although the burdens of proof are in these respects very similar in NAD proceedings and actions in federal court, NAD precedent also establishes that in NAD proceedings the advertiser bears the independent burden of supporting “all reasonable interpretations of claims made in its advertising,” See Discus Dental at p. 17. The NAD thus deems itself free, even in the absence of empirical proof, to draw on its own expertise to make inferences as to what message may have been implied in consumers' minds by any given advertising, even if not expressly so-stated in the advertising. Id.

In assessing the parties' burdens of proof in In re Distillerie Stock, the NAD agreed with Stock that its offer as evidence of the BTI taste test shifted to Lapostolle and Schieffelin the burden of producing scientific or other empirical evidence to challenge BTI's findings. In its decision, the NAD flatly rejected Lapostolle's and Schieffelin's contention that “unshakable NAD precedent” held otherwise. It was not sufficient for Lapostolle and Schieffelin to rely simply on other NAD precedent, no matter how similar such other cases might have been, in the absence of clear empirical evidence that the specific taste test was flawed or that Stock had misrepresented the test results. In this important respect, the NAD's decision thus clarifies it will follow federal law that a party challenging “test-proven” superiority claims bears the burden of proving the tests did not establish the proposition for which they were cited. Stock offered evidence in the form of the BTI taste tests, yet Lapostolle and Schieffelin offered no empirical evidence that the test was conducted improperly or would have yielded different results if a different methodology had been employed. Similarly, Stock offered evidence that the drink recipe used in the test was reasonable, and the challengers failed to sustain their burden of proving otherwise.

However, in raising sua sponte the issue of whether Stock's use of a drink recipe different from the recipe used in the BTI taste test was in any way misleading, the NAD followed its own particular rules, thereby departing from settled federal practice. Lapostolle and Schieffelin never raised the issue or offered evidence to support the NAD's ultimate conclusion. The NAD has said before and here reiterated that it enjoys discretion to draw “reasonable” inferences wholly independent of record proof. The NAD simply rejected without comment or analysis Stock's contention that the NAD itself should limit its conclusions to those supported by empirical evidence. The NAD overlooked as well Stock's contention, drawn from a growing body of federal law focusing on the complainant's burden of proving materiality (see generally R. Leighton, Materiality and Puffing in Lanham Act False Advertising Cases: The Proofs, Presumptions and Pretexts, 94 Trademark Rptr. 585 (2004)), that the difference between the two recipes would not influence purchase decisions and certainly had not been shown to be material. (On the other hand, precisely because Stock deemed the difference immaterial, the unexpected conclusion was of no consequence.) Although not at all what the NAD did in In re Distillerie Stock, the decision does allow for the possibility that even were a challenger to fail in sustaining its burden of proof, the NAD itself could exercise its discretion to draw a “reasonable inference” adverse to the advertiser and deem the disputed ad false or misleading.

A decision that was in fact carefully reasoned and rendered after only a few months of briefing and hearings, a decision indeed that adheres in the main to familiar settled precedent and evidentiary rules, is perhaps reason to raise a glass. Less intoxicating, however, are concerns that the recipe permits a mix of subjective inferences (even “expert” inferences) unsupported by empirical proof. There are surely cases for which NAD mediation will be preferred over federal court litigation; some for which it will indeed be a gala day. Others however may give cause to recall Groucho's line in “Duck Soup” when being feted as the new head of state of fictitious Fredonia: “a gal-a-day; that's about all I can handle.”