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Sour Dough: Pizza Hut v. Papa John's

May 21, 2001

- Jim Edwards

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 back-door 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/general 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, doesn't it?"

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