Thursday, July 16, 2009

What standards govern the FTC in the courts?

Federal Trade Commission v. National Urological Group, --- F.Supp.2d ----, 2008 WL 2414317 (N.D. Ga.)

Westlaw just coughed up this case, and since I’ve been thinking a lot about commercial speech doctrine and false advertising law, I thought it worth an entry. The FTC sued the defendants for marketing weight loss and erectile performance dietary supplements under the names Thermalean, Lipodrene (which I could have sworn was a drug from the Colbert Report’s Prescott Pharmaceuticals), and Spontane-ES.

The defendants argued that the FTC’s standards for deceptiveness were unconstitutional under Central Hudson and unconstitutionally vague. The Central Hudson test allows regulation of truthful commercial speech concerning lawful activity if there’s a substantial government interest directly advanced by the regulation, and the regulation isn’t more extensive than necessary (though this isn’t a least restrictive means test). As you may have noticed, it appears that false and misleading commercial speech is outside this test from the beginning, and therefore may simply be banned; nonetheless, the defendants argued that the FTC violated these standards by (1) not considering intent to deceive or allowing a good faith defense; (2) relying on its own analysis of an ad, rather than extrinsic evidence of consumer perception; (3) not promulgating rules specifying what product claims or descriptions are misleading, particularly for ads with specific ingredients for which substantiation exists; and (4) requiring all supplement ad claims relating to health benefits to be substantiated by “competent and reliable scientific evidence,” but not defining that term.

The court concluded that the defendants “misapplied” Central Hudson, which was designed to determine whether a regulation that limits protected commercial speech is constitutional. Here, the FTC’s guidelines concern whether speech is protected at all. It would be circular to use Central Hudson to determine whether or not speech is protected. The court found this “confusing and illogical.”

Interlude: It is plainly a mistake to say that Central Hudson of its own terms has anything to say about FTC standards. However, the reasons for protecting truthful commercial speech definitely have relevance to the questions of who should be entitled to determine truth and what standards they should use, for the same general reasons that we scrutinize fact-finding and apply certain procedural protections in defamation cases. I don’t think defamation standards should apply to advertising law—far from it, I’m a supporter of strict liability and think an intent requirement would be a disaster for American consumers—but the basic argument is sound: if you have a sharp distinction in the standards applied to suppressing untruthful speech versus suppressing truthful speech, then it is also quite important to assess how “untruthful” is defined.

Anyway, the court held that whether ads are deceptive and thus unprotected is in “the sound discretion of the court.” Bottom line: The Constitution no more enacts the FJC’s manual on surveys than it does Mr. Herbert Spencer’s Social Statics.

The vagueness and overbreadth challenges also failed. Precedent squarely holds that overbreadth doctrine doesn’t apply to commercial speech regulation. On vagueness, defendants argued that the FTC’s criteria for scientific support were insufficient and didn’t define the necessary size, duration, or protocols of supporting studies. But the criteria neither failed to provide people of ordinary intelligence a reasonable opportunity to understand what conduct was prohibited nor authorized arbitrary and discriminatory enforcement, the two keystones of unconstitutional vagueness. “Competent and reliable scientific evidence” was sufficiently well-defined, and was also appropriately context-specific depending on what the relevant professionals would require for a particular claim. Difficult factual questions don’t make a statute void for vagueness.

On to the FTC’s side: the FTC asserted three categories of violation of the FTC Act: (1) false claims about the supplements, (2) unsubstantiated claims about the supplements, and (3) false claims about research and medical facilities. It also argued that one defendant, Dr. Wright, made false and unsubstantiated claims as an expert endorser.

Where claims are explicit or clearly and conspicuously implied, there’s no need for extrinsic evidence. If an ad only “faintly implies” a claim, however, a court “may” decline to find the claim made without extrinsic evidence of consumer perception. Only at the far end of the continuum from express to implicit, where claims are “barely discernable,” is extrinsic evidence “necessary.” The FTC didn’t present extrinsic evidence, so the court required that any actionable claims must be clear and conspicuous from the face of the ads. (Note that this description of the standard is at best confusing: “may” suggests that a court is authorized to find deception/defer to the FTC at the far end of the spectrum in the absence of extrinsic evidence. But more significantly, the spectrum surely has space in between “clear and conspicuous” and “faint implication”/“barely discernable”—what’s the role of extrinsic evidence in such cases? The court’s statement of the law suggests such evidence is helpful but unnecessary, but see below).

Claims that are likely to mislead can either be false or lack a reasonable basis (substantiation). Materiality, the final requirement, is readily found where claims are express or where they involve health and safety. Indeed, the court found it “hard to imagine” that any reasonable consumer would find health or safety claims immaterial, and particularly presumed that any nutritional supplement claims about health benefits and safety were material.

Applying the standards, the court found that the ads clearly implied that Thermalean was an effective treatment for obesity, but did not “clearly and conspicuously” imply that Thermalean was “clinically proven” to treat obesity, but only “heavily impl[ied]” that it was clinically proven to cause weight loss. The defendants presented evidence that obseity is a disease, different from weight loss, so the court refused to presume that a consumer would infer that Thermalean is clinically proven to treat obesity. Thus, the FTC’s obesity claims failed. I think the court got lost and sliced the salami a bit too fine in terms of what the FTC had to show.

The court then found that the ads represented, among other things, that Thermalean caused rapid and substantial weight loss, including as much as 30 pounds in 2 months; that it was clinically proven to do so; that it was safe; and that it was superior to several named prescription weight-loss drugs. Defendants argued that their substantiation was based on evidence about their “proprietary ingredients,” and yet the claims were made about the Thermalean product.

Defendants made similar claims about Lipodrene, including that it was clinically proven to be safe and effective. And they claimed clinically proven safety and efficacy (of a different sort) for Spontan-ES, their erectile dysfunction supplement.

The FTC alleged that these claims for clinical support lacked a reasonable basis. The FTC’s expert testified about the characteristics of well-designed, randomized, double-blind, etc. studies that would be needed for substantiation of claims of this type; among other things, one would need to test the product itself, not its ingredients, especially not if the dosages in the studies varied from the dose in the final product. Because defendants had no studies at all on the products themselves, the claims were unsubstantiated and likely to mislead.

Likewise, the (clearly and conspicuously implied) ad claims that the products had been clinically tested were false, because the products hadn’t been clinically tested, only the individual ingredients. In addition, the specific claims that Thermalean and Lipodrene could cause substantial weight loss (30 pounds in 2 months/up to 125 pounds) were false because the only evidence was that the active ingredients could generate 2 pounds per month weight loss.

The defendants were left trying to contest materiality. Courts generally presume materiality in these types of cases, but are rarely confronted with any evidence purporting to rebut the presumption. (Indeed, I don’t offhand recall another court indicating that the presumption is rebuttable, since it just doesn’t come up.) Here, the defendants submitted two surveys on the Thermalean and Lipodrene ads. The surveys concluded that the ads as a whole were ineffective in promoting the products, and that most of the claims wouldn’t significantly impact a purchasing decision.

The court found this evidence insufficient to create an issue of fact. The ads at issue in this case generated over $10 million in sales between 2001 and 2004. Clearly, the ads worked on enough people. Moreover, the survey didn’t test the ad claims at issue in the case; it tested small portions, misstatements, or irrelevant claims. Example: participants mildly agreed with the following statements: (1) “I am able to think systematically about information that is given to me about a product, and make my own judgments about the effectiveness of a product”; and (2) “I believe that information about the components of a product is useful to me when deciding whether or not to purchase the product.”

Finally, the FTC alleged that defendants falsely represented that its facilities, “Warner Laboratories” and “National Institute for Clinical Weight Loss,” were bona fide research/medical facilities that engaged in scientific medical research and product testing at on-site facilities. Not only did the names imply this, but the ads used phrases such as “At the National Institute for Clinical Weight Loss, [o]ur research and development team has developed a non-prescription formulation .…”; “With five years worth of research and development in each component going into Spontane-ES by the pharmacological staff at WARNER LABORATORIES we have not experienced any harmful side effects to date”; and “the professional staff and Medical Board at WARNER Laboratories aligned with one of the nation's largest manufacturing facilities to begin Phase I testing of Lipodrene ….” Even without the implications of the names, the court found, the ads represented that NICWL and Warner were research facilities. And, the court further concluded, these claims are false; they didn’t perform any clinical tests themselves or conduct independent research. Because these claims “convey[ed]” that the products were safe, the court also presumed materiality.

The defendants argued that most of the claims were puffery. The court noted that the ads at issue were “indisputably riddled with puffery,” but the proper focus was on the claims derived from the ads as a whole. All the claims the FTC challenged were phrased as verifiable factual statements; even puffing language supporting those claims did not take away their factual nature.

Dr. Wright was held individually liable both for his participation in the marketing and for false expert endorsement. FTC guidelines require that an expert endorsement must be supported by actual exercise of the relevant expertise, including examination or testing at least as extensive as someone with the same degree of expertise would normally require. The FTC presented evidence that a physician would require scientific evidence regarding a product itself, not its individual components, before making the claims Dr. Wright made; he admitted that he didn’t rely on scientific studies of Thermalean when making his endorsement.

The court found injunctive relief and consumer redress appropriate. Defendants made $15 million in sales. Defendants argued, among other things, that they should get to reduce this amount by sales to customers who reordered the product, who were obviously motivated by actual experience with the product. The court disagreed. There was no evidence of what motivated reordering decisions, and the fact that experience may have played some role doesn’t mean that the ads weren’t also material.

Finally, defendants proposed to pay redress directly to purchasers, contacting customers and providing or offering a complete refund. The FTC wanted redress to be deposited into a fund in its name; after consumers were redressed, the FTC would use remaining funds for further equitable relief or pay them into the Treasury as disgorgement. The court had “ample discretion” to go the FTC’s way, and saw no reason to charge “the purveyors of the deception” with competently and honestly reimbursing consumers.

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