Beware your client’s competition!

Nick and I were talking about this article/post we saw recently about a silly lawsuit over a kitty litter commercial.
Nick thinks this is a positive for The Clorox Co. because the plaintiff (Arm & Hammer) looks silly “Cats do not talk.” Really?
I understand why he might see this as positive publicity for Clorox, but I disagree.  In my experience with retail, the old adage “there’s no such thing as bad publicity” does not always ring true; particularly in the mind of the client, there absolutely IS bad publicity.
In the fierce world of retail, a lawsuit like this could be seen as simply that, A LAWSUIT.  What AE wants to hear “Your ad campaign got me sued?”  Even if the plaintiff is grasping at straws and the suit is frivolous, it’s still a lawsuit.  Many retail clients might think a lawsuit over a marketing message could deter other consumers from shopping their stores.  And in retail, there is nothing worse than reduced foot traffic and reduced sales!
What do you think? Is a lawsuit like this a good thing or bad thing?