Fraudsters' liability upheld

Federal Trade Commission v. Direct Marketing Concepts, Inc., No. 09-2172 (1st Cir. Oct. 21, 2010)

“The Defendants in this case made millions off infomercials shilling purported panaceas, products that they claimed cured literally every disease, from cancer to Parkinson's to obesity.” The court of appeals was unimpressed by their challenges to the district court’s grant of summary judgment on liability for deceptive advertising and determination of damages after a bench trial.

The individual defendants Donald Barrett and Robert Maihos co-own ITV Direct, Inc. (ITV), which produces infomercials, and Direct Marketing Concepts, Inc. (DMC), which distributes them. BP International (BP) is a holding corporation “to which Barrett eventually (and secretly) transferred some of DMC's assets.” Barrett, Maihos, and DMC produced and distributed an infomercial marketing coral calcium. In the infomercial, a purported expert, Robert Barefoot, claimed that all diseases are caused by a condition called acidosis: “heart disease, cancer, lupus, fibromyalgia, multiple sclerosis. Name the disease, they're all caused by acidosis.” He then claimed that calcium derived from Okinawan coral cured these diseases: “[W]e've been studying the coral calcium and I can tell you there are tens of millions of people, millions of testimonials. I've had 1,000 people tell me how they've cured their cancer. I've witnessed people get out of wheelchairs with multiple sclerosis just by getting on the coral.” And so, depressingly, on. (Kevin Trudeau was also involved.) He claimed that “unspecified articles from the Journal of the American Medical Association and the New England Journal of Medicine ‘said that calcium supplements reverse cancer . . . that's a quote.’”

DMC-employed telemarketers were, among other things, directed to tell sick customers that they should take higher doses of Coral Calcium. From January 2002 to July 2003, the infomercial generated over $54 million in sales, of which approximately $575,000 were transferred to BP.

Defendants were similarly involved with an infomercial for “Supreme Greens,” AKA “Supreme Greens with MSM.” This one featured a “Dr.” Alejandro Guerrero, who claimed to be a “Doctor of Oriental Medicine” but had no such degree. It made similar claims about acidosis: “most chronic degenerative diseases – such as cancer, arthritis, diabetes, even the number one killer out there, heart disease – can and are being cured . . . .” He claimed to base his statements on clinical studies, and even claimed that Supreme Greens caused weight loss because "fat is your body's way of protecting itself from the acidic fluids." Telemarketers’ scripts directed them to ask potential customers about their health issues and tell them that Supreme Greens would help. “[I]f a customer said she had cancer, the telemarketer was supposed to respond that "cancer is acidosis of the body and Supreme Greens alkalizes the body, and that's what you need, so you really want to take this." From August 2003 to June 2004, Supreme Greens generated over $14.6 million in sales.

After the FTC sued in 2008, the district court granted summary judgment on liability, holding that the challenged infomercials were misleading as a matter of law. In August 2009, the court permanently enjoined the deceptive infomercials and ordered disgorgement from the Defendants (excluding BP) of over $48 million and from BP in the amount of nearly $575,000.

The defendants made a bunch of bad arguments. They first challenged the basic liability standard applied by the district court. The FTC argued that defendants lacked a reasonable basis for their claims. This requires the FTC to show what evidence would in fact establish such a claim, and to compare the advertisers’ substantiation to that required by the scientific community. When advertisers lack adequate substantiation, they necessarily lack a reasonable basis for their claims, making their ads deceptive as a matter of law. Defendants argued that the FTC should be required to prove that the infomercials were actually false. That is not the law. Despite defendants’ “smattering” of First Amendment and DSHEA references, the court found any constitutional or statutory argument waived for want of context or developed argument.

Applying the reasonable basis standard, defendants created no factual issue on substantiation. The FTC produced four expert declarations which demonstrated that the infomercials’ claims could be substantiated by double-blind, placebo-controlled human studies. The court noted that other scientific evidence could be sufficient, but “some” scientific evidence is required for substantiation. Defendants “neither produced nor pointed to any evidence to raise even the tiniest of fact issues” on the type of evidence required to substantiate the claims. Then, the declarations compared defendants’ evidence to the available literature and concluded that it was “woefully inadequate.” There’s some evidence that calcium is good for you in various ways, but none that it cures cancer or heart disease or has any effect on autoimmune disorders. The claimed JAMA/NEJM references didn’t exist, and there was no evidence that any kind of calcium is “100% absorbed,” as claimed. There’s no evidence that any disease is caused by “an overly acidic body” or that alkalinity cures cancer or heart disease, and there’s no evidence that any Supreme Greens ingredient can prevent, treat, or cure cancer, heart disease, or diabetes, or cause weight loss.

Barefoot’s books were full of extrapolations, distortions, and utter fabrications. The books, along with his deposition testimony, Guerrero’s deposition testimony, “a number of popular science and pseudoscientific articles, and one preliminary study” did not come close to establishing an issue of fact as to reasonable basis. “It appears to be no accident that neither Barefoot, nor any Defendant, nor any of the Defendants' attorneys has at any point in these proceedings identified any particular scientific study or studies to support the specific claims presented in the Coral Calcium infomercial.” The best they had was a “grossly insufficient” double-blind, controlled, but also unpublished and preliminary study of sixteen people, which found that one of the ingredients in Supreme Greens might relieve arthritis pain and was therefore worthy of further study. The court also pointed out that “even the abstracts and excerpts from pseudoscientific articles, published in journals such as the non-peer reviewed and now-defunct Healthy & Natural Journal and Natural Way for Better Health, do not support the specific claims made in either infomercial.”

Even under the most lax standard of scientific reliability, defendants would lose, but the FTC’s evidence established a rigorous standard. This was deceptive advertising as a matter of law.

Defendants argued that their infomercials contained puffery, not specific health claims, and that general disclaimers prevented any deceptiveness. But specific and measurable claims aren’t puffery. The defendants made definite statements that coral calcium and Supreme Greens cured cancer, etc.—“far beyond puffery as a matter of law.” Disclaimers didn’t work either. Disclaimers or qualifications are inadequate unless they’re sufficiently prominent and unambiguous to change the apparent meaning of the claims. Anything less will just cause confusion by creating contradictions. Here, the disclaimers weren’t even sufficient to cause confusion, given how clear and concrete the claims were. The only disclaimers in the transcripts were that the infomercials were paid advertising. Defendants claimed that the infomercials said that the shows only expressed speakers’ “opinions,” and that the products weren’t intended to diagnose, treat, or cure any disease. The factual record did not support this, but even assuming those statements were present, they would only have caused confusion, not fixed the problem. “A statement that studies prove a product cures a certain disease, followed by adisclaimer that the statement is opinion and the product actually does not cure the disease, leaves an overall impression of nonsense, not clarity.” “[D]o-nothing disclaimers” couldn’t make a dent in the “bold and straightforward” health claims “presented by supposed
experts as testable observations backed up by clinical trials and studies.”

The court of appeals also affirmed individual liability for Maihos, a corporate officer with the capacity to make decisions regarding the challenged conduct who knew or should have known that there was no reasonable basis for the deceptive claims. Though he didn’t edit the content of the ads, that’s irrelevant: “The question is whether he could have nipped the offending infomercials in the bud; the FTC produced evidence that he could, and he has produced no evidence — even his own testimony — to indicate that he couldn't.”

He admitted in deposition that he knew that DMC lacked substantiation, and an email from his then-girlfriend, a registered dietitian even told him, apparently in response to his request, that "[c]alcium from anything cannot be 100 percent bioavailable" and that "[t]here's no evidence at all that Coral Calcium is better than ordinary calcium or has any special health-boosting properties." The girlfriend also asked Maihos, "do you think there is a product ([over the counter] no less) that can prevent heart disease, diabetes, arthritis AND cancer?" Plus, along with other indicators that the infomercials were deceptive, an attorney told him in October 2003 that the Supreme Greens infomercial made “BS” claims and required rigorous substantiation.

Maihos testified that he sincerely believed in the health claims, but even sincere belief was not sufficient to overcome the overwhelming evidence that Maihos knew or, at the very least, should have known that the infomercials lacked any reasonable basis in scientific fact. “This is particularly so given that the patent ridiculousness of the infomercials' health claims was presented multiple times by multiple people to Maihos, who chose to remain willfully blind.”

On to damages: the court of appeals approved gross receipts as a basis for calculating damages, despite defendants’ arguments that the award should have been limited to actual profits. The law allows broad discretion in remedies for deceptive advertising, including recission or restitution. Consumer loss, as represented by gross receipts, is an appropriate measure of damages.

In FTC v. Verity Int'l, Ltd., 443 F.3d 48 (2d Cir. 2006), a series of unrelated, non-party middlemen partook of the proceeds from the defendants' scheme before the defendants themselves got a bite. The court fashioned an exception to the general rule, limiting disgorgement to the defendant’s profits. But this was just an exception for an unusual multitiered structure with lots of non-party middlemen, not present here. Defendants took in proceeds directly, except for roughly one year when a fellow defendant, but non-appellant, Triad, processed coral calcium orders. The FTC introduced “ample” evidence of the overall proceeds from coral calcium during this period, but the parties’ records were in such disarray that the split among them couldn’t be determined, and the fault for that was primarily defendants’. Defendants claimed on appeal that Triad siphoned off the vast majority of the proceeds, but the court of appeals couldn’t verify this. Because every entity that had received consumers’ money was a defendant, gross receipts were an appropriate measure of damages, and because the records were unclear, the district court split the total receipts evenly between DMC and Triad for the relevant period, which was within the bounds of its remedial discretion.

Finally, the FTC presented sufficient evidence of a reasonable approximation of damages. Such a showing shifts to defendants the burden of demonstrating that the FTC’s figures are inaccurate, but their own bad bookkeeping can’t meet that burden. Among other things, defendants argued that their records were in such disarray that the FTC couldn’t connect the Supreme Greens receipts from August 2003 to June 2004 to the particular version of the infomercial that the FTC proved to be deceptive, because numerous other versions of the infomercial were supposedly aired at various times and places, “although no one knows which version was aired at what time in any given place.” The district court’s determinations were not erroneous.

Defendants “could not or would not produce an accounting that suggested even a rough approximation of what percentage of their Supreme Greens proceeds were based on the offending infomercial.” Instead, they told the FTC in response to an interrogatory that it was “impossible” to determine what sales were attributable to any specific version of the infomercial. The court commented that the FTC perhaps should have filed a motion to compel, but, in the “one hitch in an otherwise well-conducted case,” instead allowed the records on which version aired where and when to remain in disarray. But in the end, DMC’s own record-keeping caused the uncertainty; there was no clear error in estimating damages broadly based on the available information.