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.

Class Action Preferable to Thousands of Suits on Dietary Supplement Claims

This posting was written by William Zale, Editor of CCH Advertising Law Guide.

A purchaser of the dietary supplement Relacore established that a class action, rather than the prosecution of thousands individual small claims, was the superior method for proceeding on allegations that Carter-Reed Company violated the New Jersey Consumer Fraud Act by falsely representing that the product would shrink belly fat and improve mood, among other benefits, the New Jersey Supreme Court has ruled.

The core issues were (1) whether common issues of law and fact predominated, (2) whether the class action was superior to a myriad of individually litigated cases, and (3) whether a class action—given the number of individual claims involved—was manageable.

Carter-Reed did not dispute that the claims met the class action requirements of numerosity, commonality, typicality, and adequacy of representation.

Predominance of Common Issues

Carter-Reed argued that the purchaser had challenged only the marketing of Relacore as a weight-reducing dietary supplement and that class certification inevitably would spawn a host of individual questions concerning why a particular consumer bought Relacore and whether the advertised benefits were realized.

However, the purchaser's detailed allegations asserted that Relacore provided none of the advertised benefits, that no sound scientific evidence supported Carter Reed’s representations about Relacore, and that Carter Reed’s entire marketing scheme was nothing more than a web of lies, according to the court.

A corporate defendant engaged in a marketing scheme founded on a multiplicity of deceptions should not be in a better position in fending off a motion for class certification than a defendant engaged in a sole marketing deception, the court reasoned.

The alleged out-of-pocket ascertainable loss was the purchase price of a bottle of Relacore. While individual questions remained as to the number of bottles purchased by each class member without refunds, these questions did not present an insuperable obstacle, the court found.

Superiority, Manageability

The class action was a superior means for resolving the dispute despite a 30-day refund policy that Carter-Reed offered in some of its advertising but that did not appear on Relacore packaging and labeling, the court determined.

Denying class certification on manageability grounds was disfavored in general and not in any way justified in this case, the court held. If discovery indicates that some of Carter's Reed's claims for Relacore were scientifically sound, then the trial court would have options including subdividing, or in a worst-case scenario, decertifying the class.

The burden would be on the plaintiff to provide the necessary evidence to support the allegations that justified the grant of class certification, the court observed.

The September 29 opinion in Lee v. Carter-Reed Co., LLC, will be reported at CCH Advertising Law Guide ¶64,004 and CCH State Unfair Trade Practices Law ¶32,144.