MESSAGE FROM ASSOC. PROF. PAMELA S.

EVERS, ATTORNEY AT LAW

This article has been offered by web posting to UNCW students for educational purposes only.
Articles posted may have been edited for clarity and format by Pamela S. Evers.

Sour Daugh: Pizza Hut v. Papa John's

Brandweek, May 21, 2001 by Jim Edwards
How risky is comparative advertising? Consider what happened when two pizza giants went to
court over increasingly puffed-up claims about each other's products.

In the spring of 1997, Pizza Hut's then-president David Novak stood on the deck of a World War
II aircraft carrier and declared "war" on "skimpy low-quality pizza." The act was filmed as a TV
commercial by BBDO, New York, in which viewers were dared to find a better pizza than Pizza
Hut's-a pretty unremarkable ad in a category that, historically has been littered with over-the-top
ad strategies.

At the time, Novak probably did not imagine that his publicity stunt would become the genesis
of a nearly three-year legal fight that ultimately ended up in the U.S. Supreme Court. The
dispute, which came to a conclusion on March 19, ran up lawyers' bills in the millions, exposed
the often unappetizing ways in which Pizza Hut's pizzas are prepared and made the company the
butt of newspaper editorial jokes across the nation. Even worse, it became a distraction at a time
when Pizza Hut's business needed serious attention to revive flagging sales and a stagnant store-
building program.

For marketers, settling an advertising war in the courts poses some serious risks." You don't want
to lose control of the information you send out to people about your brand," said John Allen,
senior partner at consultancy Lippincott & Margulies, New York." A lawsuit is definitely the last
resort."

"The whole issue here in this case is one that's of no interest to consumers," added John Grace,
executive director of consultancy Interbrand, New York. "Great brands are not built on the
functional promises of ingredients. And pizza consumers don't want to know."

Indeed, the case may be looked at as a cautionary tale: it formed a textbook example of how not
to go about challenging consumers to compare your rivals' products.

Oddly, though, it still handed Pizza Hut something of a backdoor victory Here's how it
happened.

Perhaps predictably Novak's war cry was immediately answered by Pizza Hut's hated rival, Papa
John's pizza. (The two have corporate headquarters based uncomfortably close to each other, in
Louisville, Ky.) For two years, Papa John's marketing slogan had been, "Better Ingredients.
Better Pizza." The same month as Novak's ad first ran, the smaller chain aired a retaliatory spot
in which Pizza Hut founder Frank Carney-who sold Pizza Hut in 1977 to PepsiCo and then
joined Papa John's as a franchisee in the 1980s--appeared at a fictional Pizza Hut conference to
declare, "I found a better pizza!," meaning Papa John's.

Sensing blood in the water, Papa John's upped the ante considerably in 1998 with a series of ads
via Fricks/Firestone, Atlanta, skewering Pizza Hut in an illustration of just why the smaller chain
believed that better ingredients do indeed make better pizza.

One memorable spot showed Papa John's CEO John Schnatter describing how Papa John's dough
was made with "clear, filtered water" and yeast that was given "several days to work its magic."
The dough was contrasted with that of "the biggest chain" (that's Pizza Hut, incidentally), which
it said uses "whatever comes out of the tap" to make "frozen dough or dough made the same
day." The description was accompanied by the image of a back-of-the-house cleanup area, where
a grungy youth in a tie-dyed T shirt was washing an even grungier pile of dishes as a faucet
dripped water into the sink.

Pizza Hut, of course, did not take the assault lying down. The company responded with what its
top lawyer,svp/genearal counsel Bob Millen, described as a "corrective" ad on the dough issue.
The commercial used a snippet of the Papa John's ad in which "John Schnatter was saying, 'We'd
never use dough the same day.'" The intent of the ad was to alert consumers to the fact that Papa
John's "make[s] their dough in regional dough factories, kind of like Wonder Bread is made,"
said Millen.

In August 1998, after getting no sympathy at the National Advertising Division of the Better
Business Bureau, Pizza Hut accompanied its "corrective" campaign with a lawsuit in Dallas
Federal District Court, claiming that much of Papa John's advertising was false and misleading.
The suit was heard in November 1999. Part of the case revolved around differences in the way
the two chains prepare their tomato sauce. Pizza Hut's is cooked and then bagged before water is
added at the restaurant, whereas Papa John's is canned before being reheated. Neither method
sounded too pleasant.

As Millen recalled, the testimony bordered on the comical. At one point, a scientist was brought
in by Pizza Hut to testify that both sauces in fact taste identical. The fresh taste of the sauce, as it
turned out, was not produced by the freshness of the product (both sauces sit around for weeks
before they even see a pizza) but by a naturally occurring amino acid that produces a "fresh"
sensation on the tongue. "That, quite frankly, astonished me," Millen said. "They actually had a
science around this!"

The jury ruled in favor of Pizza Hut, as the ingredient comparisons were deemed misleading.
The judge admonished both sides for the dubious nature of their advertising, but to Pizza Hut's
delight, ordered an injunction on Papa John's entire "Better Ingredients. Better Pizza" marketing
blitz--pizza boxes, car toppers, menus, hats, ads and all.

The Appeal: 'Puffery' and Other Inflated Charges

Papa John's appealed to the 5th Circuit Court of Appeals in January 2000, complaining that the
judge had simply gotten the law wrong. Truth in advertising is codified partly in a body of laws
that define "puffery" and "puffing." In laymen's terms, puffing is the act of making commercial
statements so vague, ridiculous, outrageous or opinionated that they could not possibly be taken
seriously by consumers. "Better Ingredients. Better Pizza" fit this definition perfectly, Papa
John's argued. If it did not, then BMW would also find itself in court being asked to prove that
their cars really were ultimate driving machines, and Visa would be forced to prove that its cards
really are accepted everywhere you want to be.

That same month, the Court of Appeals handed down a complicated ruling containing matter that
would anger both sides. The bottom line was that the court sided with Papa John's on the puffery
issue, and lifted the injunction. The judges agreed that "Papa John's sauce and dough ads were
misleading" but nevertheless sided with Papa John's because, the ruling stated, Pizza Hut had
failed to provide enough evidence that consumers actually were misled in their purchasing
decisions. "Plaintiff must make some showing that the defendant's misrepresentation was
material' in the sense that it would have some effect on consumers' purchasing," the judges
wrote, "We conclude that the evidence proffered by Pizza Hut fails to make an adequate
showing."

The ruling was greeted with outrage at Pizza Hut. As "evidence," the company had produced
three different consumer surveys at the Dallas trial and all of them indicated that consumers in
some way were wrongly influenced by Papa John's campaign. All three, however, were ignored
by the courts on technicalities. Still, as Pizza Hut's attorneys saw it, the court had put the cart
before the horse: If the judges believed the advertising was misleading--and the ruling said they
did--they should have punished Papa John's.

So, last December, Pizza Hut's lawyers decided to appeal to the Supreme Court on the basis that
the appeals judges required an unreasonably high standard of evidence to prove that consumers
had been misled by Papa John's. "There is no social value in false advertising, and the concept
that you turn a blind eye to false advertising simply because of the inability to prove very precise
purchasing decisions strikes me as a standard of proof that is extremely high and completely
unwarranted' said Carter Phillips, an attorney with Sidley & Austin, in arguing Pizza Hut's case
before the Supreme Court.

Although the case had been followed by restaurant trades and by the companies' hometown
paper, the Louisville Courier-Journal, it now caught the attention of the national media. The
appeal was filed shortly after the Supreme Court had decided that George W. Bush was
president, not Al Gore, and comparisons between the two cases were not kind to the plaintiff.
"The case might seem like small potatoes to the justices," wrote the Associated Press. "Pepperoni
or chads on that?" joked the Chicago Sun-Times.

"The hypocrisy is breathtaking," added the Washington Times. "Pizza Hut unabashedly uses the
slogan 'Best Pizzas Under One Roof.'"

Phillips admits that the odds were against his case being taken up. "I'll probably go out drinking
that night," he laughed when asked what he would do if the court weighed in.
Over at Papa John's, officials were equally skeptical. "It would set a very bad precedent," said
Jeffrey Edelstein of Hall Dickler Kent Goldstein & Wood, New York, the advertising law firm
which had advised Papa John's in the early stages of the dispute.

"I think it opens a huge can of worms," added Karen Sherman, Papa John's vice president of
community and public relations. If the Supreme Court ruled in favor of Pizza Hut, she said, "I
think we might have some real issues with 'All the Best Pizzas Under One Roof.'"

On March 19, the Supreme Court handed down its two-word decision: "Petition DENIED." The
court of appeals ruling, which had favored Papa John's, was allowed to stand.

Topping it All Off: The Fallout

Litigation is expensive, draining resources that could be applied to brand building. Pizza Hut
declined to disclose how much it had spent on the case, but Papa John's earnings statements
indicate that it coughed up at least $7.1 million to cover the bills. It's reasonable to assume that
Pizza Hut incurred similar costs.

So, was it worth it?

"For our business, absolutely," said Millen. "Papa John's had a $300 million campaign that was
attempting to convince--and we showed to the jury, was successful in convincing--consumers
they had superior quality ingredients leading to a better tasting pizza. In the pizza business, that's
everything." The appeals court, in its declaration that Papa John's ads were misleading, shows
that the chain is "cheating the public," Millen added.

Yet, Interbrand's Grace argues that both Pizza Hut and Papa John's should stick to giving
consumers emotional reasons to come back to their brands. "I would advise them that they are
completely missing the point...They're denigrating a brand in the category instead of building
their own brand. For any company I can tell you this advice would be the same."

No question, the case led to the airing of some unpalatable truths--like the weeks-old tomato
sauce--that companies would just as soon keep quiet. "No one really wants to walk through a
sausage factory and see how the sausages are made," L&M's Allen noted.

While the suit did not have a measurable effect on Pizza Hut's sales, it came at a time when Pizza
Hut was defying the buoyant economy with its weak performance. In 1998, the company
recorded $4.8 billion in sales from 8,412 restaurants, per consultancy Technomic. Last year, it
chalked up $5 billion off 7,927 sites.

Technomic president Ron Paul said the company suffered as consumers went upscale to casual
dining restaurants with their newfound wealth. Plus, Pizza Hut's business has matured. Each new
restaurant risks stealing business from the Pizza Hut in the next neighborhood, rather than
creating new customers.
At Papa John's, it was a different story. The period of the suit was one of continued growth. Papa
John's surpassed Little Caesar's to become the third-largest chain in the U.S. In 1998, the firm's
1,879 sites produced $1.2 billion in sales. Last year, those numbers were up to $1.7 billion from
2,533 sites, a healthy increase of 17% from the prior year.

Pizza Hut's Millen is philosophical. "We're disappointed," he allowed. Still, he noted, the entire
suit effectively trapped Papa John's in a curious Catch 22: If Pizza Hut won, it could describe
Papa John's advertising as false. But if Papa John's won, it would only be because it had
successfully argued that its advertising was mere puffery--not to be believed--which is exactly
what happened.

"We're satisfied with either result," Millen said before the case was decided. Post-decision, he
remained ebullient. "The irony of the case is that Papa John's spent two-and-a-half years
convincing the American public that 'Better Ingredients. Better Pizza' means Papa John's has
superior quality ingredients. In fact, once we filed litigation, they essentially began convincing
the American public that the slogan means nothing."

At Papa John's, Sherman's take is a little simpler to digest: "We won! Yeah, it's over!"

Not quite. In District Court in Louisville, there's another lawsuit pending. This time, it's Papa
John's in the more risky role of plaintiff. The company believes that Pizza Hut did not have
permission to use that "snippet" of CEO Schnatter in its "corrective" dough ad. The company
also claims that the edited Schnatter clip is--you guessed it--misleading to consumers.

Whatever pain the two companies went through on their way from Dallas to D.C., they seem set
to endure again in Kentucky. "And for what?" Allen said. "'The Supreme Court says our pizzas
are the best?' It seems so amateur,

Jim Edwards "Sour Daugh: Pizza Hut v. Papa John's". Brandweek. FindArticles.com. 06 Sep,
2009. http://findarticles.com/p/articles/mi_m0BDW/is_21_42/ai_75028177/

True Lies

Duel Between Pizza Hut and Papa John's Comes to an End

Originally published in the Los Angeles Daily Journal, Tuesday, June 26, 2001.

By Donald M. Gindy

With a resounding thud, the pizza wars ended March 19, when the U.S. Supreme Court refused to review
the decision of the 5th U.S. Circuit Court of Appeals in PIzza Hut Inc. v Papa John's International Inc.,
121 S.Ct. 1355 (2001). The nature of the lawsuit was a claim of false advertising under the Lanham Act
allegedly committed by Papa John's when it claimed "Better Ingredients. Better Pizza."

Pizza Hut threw down the gauntlet as its president, from the deck of a World War II aircraft carrier,
declared "war" on poor-quality pizza. Pizza Hut "dared" anyone to come up with a better pizza. At about
the same time, Papa John's was launching a new advertising campaign proclaiming that it sold a better
pizza because it used better ingredients. The matter went to trial in Dallas, resulting in a verdict in favor of
Pizza Hut.

Under Section 43(a) of the Lanham Act, "a plaintiff must demonstrate that the commercial advertisement
or promotion is either literally false, or that it is likely to mislead and confuse consumers." Pizza Hut relied
on a theory that Papa John's ads were deceptive and were intended to mislead purchasers of pizza.

On appeal, the 5th Circuit threw out the verdict. Their decision points out that a prima facie case of false
advertising under Section 43(a) (codified at 15 U.S.C. Section 1125) requires that the following occur:

There is a false or misleading statement of fact about a product.

Such a statement either deceives of had the capacity to deceive a substantial segment of
potential consumers.
The deception is material, in that it is likely to influence the consumer's purchasing decision.
The product is in interstate commerce.
The plaintiff has been or likely will be injured as a result of the statement at issue.

But was Papa John's ad mere "puffery?" That is to say, was the claim an expression of opinion on which
no reasonable person would rely? The court concluded that "Better ingredients. Better Pizza," standing
alone, would not mislead consumers. But Papa John's lost its bragging rights when it coupled the slogan
with misleading statements of specific differences in the ingredients used.

Pizza Hut asserted that its competitor had placed before the public "a measurable claim, capable of being
proved false or of being reasonably interpreted as a statement of objective fact." John's claimed that its
"vine ripened tomatoes" were superior to the "remanufactured tomato sauce" used by Pizza Hut and that
its fresh dough and filtered water created a better-tasting pizza.

By pointing to specific differences between itself and Pizza Hut and by failing to present at trial any
scientific support or the results of independent surveys to substantiate its claims (such as taste tests),
Papa John's had, in fact, left the arena of opinion and entered the realm of quantifiable fact. As a result, it
subjected itself to a claim that it misled consumers.

However, the burden of proving false advertising falls on the shoulders of the plaintiff. It is essential to a
cause of action for false advertising based on misleading ads that the plaintiff prove not how consumers
would react but how they actually do react. "[T]he success of a plaintiff's implied falsity claim usually turns
on the persuasiveness of consumer survey."

The test thus becomes, assuming that the ads were misleading, whether they actually influence a
reasonable consumer in his or her purchasing decision. Since the court found that Pizza HUt had
neglected to present such evidence, it had failed to satisfy the element of the cause of action relating to
the "materiality" of Papa John's ads. In the absence of such a survey, Pizza Hut's entire action had to fail.

An actionable claim of false advertising also may proceed where a plaintiff is able to prove "literal falsity"
of the claim. In S.C. Johnson v. The Clorox Co., 241 F.3d 232 (2nd Cir. 2001), which was rendered Feb.
23, Johnson, the manufacturer of Ziploc Slideloc bags, brought an action under the Lanham Act against
Clorox, the manufacturer of GLAD-LOCK resealable storage bags. The suit challenged the truthfulness of
a television commercial and a print advertisement.

On television, Clorox presented ads of side-by-side comparisons of its bag and Johnson's. The bags were
filled with water and turned upside down while an animated goldfish in a state of distress in the Ziploc bag
complained of water dripping from his bag. The Slideloc bag leaks rapidly while the GLAD-LOCK bag
does not leak at all. An expert hired by Johnson conducted "torture testing" on the Slideloc bags and
proved that a significant number did not leak at all and that other s leaked at a substantially slower rate
than depicted in the advertisement. The vice in this presentation, according to the trial court, was "no
depiction in the visual images to indicate anything else than the fact that the type of fairly rapid and
substantial leakage shown in the commercials is simply characteristic of that kind of bag."

The court concluded that the presentation was literally false. S.C. Johnson was, therefore, entitled to
permanent injunctive relief until Clorox is able to portray in a "truthful and fair way" the differences
between its product and the Slideloc product.

These cases amply demonstrate the two methods of proving false advertising claims. Literal falsity is
proved by demonstrating that the tests employed "are not sufficiently reliable to permit one to conclude
with reasonable certainty that they established the claim made." Procter & Gamble Co. v.
Cheeseborough-Pond's Inc., 747 F.2d 114 (2nd Cir. 1984). However, there is no need to demonstrate
how the particular advertisement had "impact on the buying public." PPX Enterprises Inc. v. Audiofidelity
Enterprises Inc., 818 F.2nd 266 (2nd Cir.1987).

However, implied falsity requires extrinsic evidence in the form of consumer surveys that clearly reflect
that consumers are misled or confused. "The question in such cases is -- what does the person to whom
the advertisement is addressed find to be the message?" Johnson & Johnson v Smithkline Beecham
Corp., 960 F.2d 294 (2nd Cir. 1992). It is not for a judge to decide intuitively that the consumer has been
misled. Rather, it must be established that a "statistically significant" and "not insubstantial" number of
consumers holds the false belief allegedly communicated in the ad. In the absence of such a showing, the
claim will fail.

Accordingly, one may conclude that an action based on implied falsity is an expensive endeavor, fraught
with statistical problems, conflicting expert testimony and a less-than-certain result whereas seeking relief
for literal falsity presents the court with a bright line. The advertising as presented is either true or it is not.
In such circumstances, plaintiffs may proceed with more assurance of the outcome of the litigation.

However, the common characteristic in most of these cases is a giant company challenging another of
equal strength. Counsel for the proponent of the comparison advertising should encourage their clients to
proceed with caution on these head-to-head encounters. Don't expect your opponent to sit back and
accept an advertisement that disparages its product. Be circumspect, for the outcome can be costly and
embarrassing.