We won’t bury the lede. The short but surprising answer here is yes. And this may be a rule ripe for reconsideration by the National Advertising Division (NAD).
NAD has jurisdiction to hear cases involving national (not purely local) advertising. NAD does not have jurisdiction or can lose jurisdiction in a few circumstances. The one that comes up most often (although still relatively rare, it happened to us in two cases in the past year): If a challenged claim is or becomes the subject of pending litigation or a court order, NAD closes shop. This can be a Lanham Act filing by a competitor or a putative class action filing or even litigation with the government. There does have to be a complaint filed and not simply threatened.
NAD also does not have jurisdiction if a challenged claim is the subject of a federal government consent order or decree. (Why aren’t state consent orders or decrees included here? That is a question for another day.) In a case filed by Olé Mexican Foods against its competitor Gruma Corp., maker of La Banderita Flour Tortillas and La Casera Corn Tortillas, Gruma asserted that since it had received a Food and Drug Administration (FDA) inquiry regarding the challenged sodium content claims, NAD should not review them. The decision does not make clear whether the FDA inquiry was still pending or if the inquiry had been pending but was now resolved. NAD was unmoved, stating, “In this case, there is no consent decree or order, rather only an inquiry from the FDA regarding Olé’s sodium content claims. NAD is not deprived of jurisdiction when a government body simply makes an inquiry regarding claims similar to those found in a challenge.” Since Gruma did not provide any support backing its sodium claims but focused solely on the jurisdiction argument, NAD recommended the claims be discontinued.
NAD was clearly correct under its procedures, but is it time to rethink this rule? First, consider a company that is currently the subject of a regulatory investigation regarding the same claim. The last thing it is going to want to do is participate in a self-regulatory proceeding regarding the same claim. And the regulators are in a much better position to ultimately reach a decision on the claim since, unlike NAD, they can utilize compulsory process, conduct hearings and hire outside experts. Finally, the challenger, though deprived of a self-regulatory challenge, is now aware that a regulatory challenge is pending and, if it so desires, may press its case with the regulator rather than with the self-regulator. So, does NAD pressing onward really make any sense? And wouldn’t most advertisers simply refuse to participate since being referred to the agency already investigating them is likely preferable to a decision on the merits?
If, on the other hand, the regulatory inquiry had been pending but was now closed, the argument that NAD should step aside is less weighty, though in our minds still compelling. Sometimes regulatory inquiries are closed because the advertiser settles or informally agrees to modify the claim. In either of those instances, the claim would presumably be discontinued and so no challenge would move forward on that basis. But what if the inquiry was closed with no action being taken?
If a regulatory inquiry is closed with no action being taken, it does not always mean that the regulator found no violation of law. For example, sometimes inquiries are closed because of resource constraints, particularly if the facts or legal basis to move forward does not seem especially compelling. But in all our combined years of practice, we have never seen a case closed with no action where the misrepresentation and consumer harm were egregious. NAD, of course, does not have the same concerns regarding whether it should allocate resources to “win” a weak case and does not directly concern itself with consumer harm. Nevertheless, does it make sense for NAD to proceed in this situation as well? Presumably the advertiser spent a lot of time and resources defending itself in the regulatory inquiry and got the matter closed, and NAD will have no way of knowing whether the regulator determined that the advertising was lawful. Presumably NAD would give some weight to the regulator’s decision to close the matter, but does NAD really want to re-adjudicate the claim and perhaps come to a conclusion contrary to the regulator, which had the benefit of a much fuller record? Should the advertiser have to relive the prior investigation? And what if NAD does recommend the advertising be discontinued? Will the advertiser just take a referral, gambling that the regulator that already looked at the claim once and did nothing will not be anxious to look at it again?
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