This article was originally published on Law360.com
By Ross Weiner
The National Advertising Division (the advertising industry’s voluntary self-regulator) is as busy as ever this year. Recently, the NAD recommended Spectrum Mobile discontinue claims of “fastest overall speeds” in response to a challenge from AT&T. It also recently directed Zarbee’s to qualify its use of the term “natural” on certain products.
Be warned: the companies involved and the advertising industry are hardly the only ones monitoring such disputes between competitors about advertising claims. When a company contends that a competitor’s advertising claim is misleading, the plaintiff’s class action bar takes notice. When a dispute is resolved by the NAD or when one competitor sues another for lost profits under the federal Lanham Act, the class action bar takes notices.
Allegations of false advertising continue to be a growing area of consumer class action litigation. These suits are typically grounded in consumer-friendly statutes such as California’s Unfair Competition Law and Consumer Legal Remedies Act. Legal risk managers need to know that the attorneys filing these lawsuits are monitoring disputes between competing enterprises.
There are dozens of recent examples of consumer class action allegations being ripped from the pages of commercial disputes between industry competitors. To fully anticipate and manage the risk of class action litigation, industry counsel need to understand how disputes between competitors can inspire follow-on or copycat consumer litigation and keep a close eye on all such disputes in their industry.
From NAD Dispute with Competitor to Class Action Settlement
When Sherwin-Williams wanted to challenge advertising claims being made by its competitor Rust-Oleum, it brought its complaint to the NAD, the investigative unit of the advertising industry’s system of self-regulation. The NAD is administered by the Council of Better Business Bureaus and its legal team specializes in examining advertising claims.
Companies sometimes choose to challenge the advertising practices of competitors before the NAD because the process is generally faster and cheaper than litigation. There is no document discovery or depositions, claims are often resolved within a matter of months, and the process is largely confidential. However, the conclusions and recommendations of the NAD are released to the public.
Sherwin-Williams challenged Rust-Oleum’s claims that its “Painter’s Touch Ultra Cover 2X Spray Paint” provided twice as much coverage as competing spray paint products. For example, the product packaging featured a prominent “2X” adjacent to a gold seal, the statement “made with double cover technology,” and a picture of one Rust-Oleum paint can next to two other paint cans—suggesting one can of Rust-Oleum equals the coverage supplied by two cans of a competitor’s product.
The NAD found that Rust-Oleum’s marketing materials conveyed the message that the paint delivers twice the coverage of competing brands but the evidence presented failed to support the claim. The NAD panel recommended that Rust-Oleum discontinue claims that the product provides twice as much and discontinue use of “2X” as part of the product’s name. The panel’s decision was affirmed by the NAD’s appellate arm, the National Advertising Review Board (NARB). The matter was referred to the FTC and concluded only when Rust-Oleum voluntary made some changes to the product’s label and marketing materials.
Meanwhile, not long after the NAD had issued a press release to announce its decision, consumer class action lawyers were already posting web pages about the NAD ruling. Consumers who purchased the Rust-Oleum product were advised to contact class action lawyers “for a free consultation regarding your legal options.”
Soon after the NARB affirmed the NAD decision, a nationwide class action was filed against Rust-Oleum in a state court in Missouri and a nearly identical class action was filed against Rust-Oleum in a federal court in Illinois.
The lawsuits closely tracked the allegations that had first been raised by Sherwin-Williams in the NAD against Rust-Oleum. Indeed, the allegations of liability in the class actions appear to have come directly from the NAD’s final report, amounting to little more than a paraphrasing of the NAD’s findings and conclusions. The class actions added that, despite the NAD decision, Rust-Oleum continued to market the product as providing double coverage.
Rust-Oleum eventually settled on a claims-made basis, agreeing to pay up to $20 per household that purchased the product from December 2011 to May 2017. The amount that a class member could receive depended on information submitted to support their claim. Those who submitted proof of purchase with their claim were potentially entitled to the maximum amount.
The road from NAD decision to consumer class action is becoming well-travelled. Consumer class action lawyers are closely monitoring activity at the NAD in search of potential deceptive advertising claims. The tale of Rust-Oleum is just one example. Colgate challenging Crest, Purina challenging Blue Buffalo, and Proctor & Gamble challenging GlaxoSmithKline are other examples of advertising disputes before the NAD that ultimately inspired consumer class action allegations. The ensuing lawsuits clearly relied heavily on the investigation and conclusions of the NAD. Such class action allegations also benefit from the efforts of the defendant’s competitor, i.e., the company that first raised the challenge with the NAD and then used its industry-insider expertise to undermine the advertising claims at issue.
From Lanham Act Dispute with Competitor to Class Action Settlement
In a Lanham Act lawsuit, an enterprise tries to collect lost profits due to “a false or misleading representation of fact” by a competitor in “commercial advertising or promotion.” 15 U.S.C. § 1125(a)(1). In 2015, Watkins, Inc. sued competitor McCormick & Company for misleading consumers as to the volume of black pepper inside its tins.
Watkins asserted that consumers became conditioned to several sizes of McCormick black pepper tins that had for decades held 2, 4, and 8 ounces. However, when McCormick started filling tins of the same size with only 1.5, 3, and 6 ounces, respectively, it only changed the net weight label.
Almost immediately after Watkins filed its suit, a series of consumer class actions against McCormick followed, each of which alleged the same deception regarding the volume of pepper inside the tins. The class actions closely tracked the factual allegations and legal reasoning of the Lanham Act suit. The lawsuits were consolidated and transferred to the U.S. District Court for the District of Columbia.
As for the class actions, McCormick eventually entered into a settlement benefitting California, Florida, and Missouri residents who purchased McCormick black pepper products between January 2015 and January 2020. The settlement provided $2.5 million to pay valid claims submitted by class members.
In recent years, many companies that have been sued by competitors under the Lanham Act have also been hit with copycat consumer class action lawsuits. Although the Lanham Act does not provide a cause of action for consumers, a competitor must demonstrate consumer confusion to prevail in a Lanham Act suit. Given the overlapping nature of competitor and consumer claims, it is hardly surprising that consumer class action lawyers keep an entrepreneurial eye on Lanham Act litigation between competitors.
From POM v. Coca-Cola Coke to Consumers v. POM and Coca-Cola
The nearly eight-year long false advertising battle between POM Wonderful, the pomegranate juice maker, and The Coca-Cola Company spawned consumer class actions against both companies. Litigation began with POM bringing a Lanham Act suit against Coca-Cola. POM alleged that Coca-Cola was misleading consumers with its Minute Maid division’s “Pomegranate Blueberry Flavored Blend of 5 Juices,” which contained only a half-percent of pomegranate and blueberry juice. Pom accused Coca-Cola of pilfering POM’s hard work to grow the pomegranate juice market and tricking customers into believing a much cheaper juice provided the healthy benefits of pomegranate juice. POM sought $77.6 million in lost profits. POM’s allegations fueled consumer class actions against Coke based on substantially similar allegations of false advertising regarding the Minute Maid juice.
Among the defenses that Coca-Cola raised in response to POM’s allegations was the defense of “unclean hands.” Coca-Cola contended that POM had made unsubstantiated claims about the health benefits of its own juice. It pointed to a 2012 administrative law judge’s decision in a case brought by the FTC against POM, which found POM made unsubstantiated claims that its juice treated, prevented, or reduced the risk of heart disease, prostate cancer, and erectile dysfunction. These same allegations against POM made their way into a consumer class action against POM.
A jury eventually sided with Coca-Cola in the suit brought by POM. However, the consumer class action against Coca-Cola resulted in a settlement. Coca-Cola agreed to provide full refunds to class members with proof of purchase (uncapped) and vouchers for free replacement products from Coca-Cola for class members submitting claims without proof of purchase.
Prepare for Consumer Litigation in the Wake of Competitor Disputes
Class action attorneys understand that competitor litigation can be exceedingly helpful in their own efforts to bring large, consumer-oriented cases. Information developed in a dispute between competitors can help consumers show that statements made by a company have been false or misleading—a key evidentiary hurdle in consumer class actions.
For competitors, a dispute over advertising claims may be an unavoidable price of doing business. Nevertheless, whether you are bringing or defending a claim of false advertising with a competitor, you should recognize and anticipate the additional legal risk that may accrue from follow-on consumer litigation. Class action counsel will almost certainly be watching and considering how to use your dispute to their advantage. Be prepared.
Ross Weiner is the Legal Director at Risk Settlements, where he helps evaluate new business, assess legal and financial risk, and create optimal settlement designs and risk transfer options. Prior to joining Risk Settlements, he was a litigator at Kirkland & Ellis LLP and focused upon class actions among other matters.
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