Monday, November 01, 2010

Supplement Marketer's Compliance with FTC Consent Decrees to Be Reconsidered

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

The U.S. Court of Appeals in Philadelphia has ruled that a lower court clearly erred when it denied the Federal Trade Commission's motion to hold a supplement and cosmetics marketer, its sole shareholder, and a consultant in contempt for violation of consent decrees resolving an earlier FTC enforcement action.

The lower court's decision denying the contempt motion (2009-2 Trade Cases ¶76,708) was vacated, and the matter was remanded to the lower court for further proceedings.

Consent Decrees

The FTC contended that the defendants violated consent decrees reached in 2000 with the agency. The consent decrees resolved FTC claims that the defendants made unsubstantiated representations pertaining to a dietary supplement and a cosmetic cream. In relevant part, the consent decrees prohibited the defendants from making unsubstantiated claims and misrepresenting the results or conclusions of any test, study, or research.

It was an abuse of discretion to deny the motion for contempt to the extent the defendants' claims for a calcium supplement were unsupported by competent or reliable scientific evidence, the appellate court held. The defendants did not support claims that the supplement was unique in its ability to increase bone density or that it was superior to prescription osteoporosis medicines.

However, the lower court did not clearly err by finding that representations about the supplement's ability to increase bone density in the hip were in accord with the consent decree. The issue of whether claims that the calcium supplement was more absorbable than other calcium supplements violated the consent decree was remanded so that the district court could address these particular claims more exhaustively.

The district court did not properly consider the FTC's contention that the defendants misrepresented scientific research in violation of the underlying consent decrees. Rather, the district court improperly focused on the product’s overall salutary effects. Although some of the representations were unlikely to survive careful factual scrutiny, the initial resolution of each issue was left to the district court, according to the appellate court.

Substantial Compliance

Although the defense of substantial compliance was available in a contempt proceeding, the district court failed to support its determination that the defendants were entitled to the defense, the appellate court held. In order to avail oneself of the defense, a party had to show that it (1) had taken all reasonable steps to comply with the valid court order, and (2) had violated the order in a manner that was merely “technical” or inadvertent.”

The district court recognized that some violations occurred but concluded that the defendants complied with “the spirit” of the consent decrees. However, the court neither identified the misconduct nor explained why the conduct qualified as a “technical” or inadvertent” violation of the consent decrees.

Absent specific findings addressing this second step of the substantial compliance test, the appellate court was unable to conduct meaningful appellate review. Thus, the district court’s finding that the defendants substantially complied with the consent decrees was vacated.

The October 26 decision in FTC v. Lane Labs-USA, Inc., will appear at 2010-2 Trade Cases ¶77,204.

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