Tuesday, November 09, 2010

district court's failure to specify leads to remand of FTC case

Federal Trade Commission v. Lane Labs-Usa, Inc., No. 09-3909. (3d Cir. Oct. 26, 2010)

Lane Labs makes and sells specialty dietary supplements and cosmetic products. Individual defendants were its current president and sole shareholder, Andrew Lane, and Lane's father, I. William Lane, a consultant to the company. In 2000, the FTC charged them with violating §5 of the FTCA, focusing on unsubstantiated representations about BeneFin, a dietary supplement, and SkinAnswer, a cosmetic cream. The defendants agreed to a consent decree, and the district court found Lane Labs liable for $1 million.

The defendants agreed to refrain from “mak[ing] any representation, in any manner,… expressly or by implication, about the effect of [a covered] product on any disease or disorder, or the effect of such product on the structure or function of the human body, or about any other health benefits of such product, unless, at the time the representation is made, [they] possess[ed] and rel[ied] upon competent and reliable scientific evidence that substantiates the representation.” “Competent and reliable scientific evidence” was defined as “tests, analyses, research, studies, or other evidence based on the expertise of professionals in the relevant area, that have been conducted and evaluated in an objective manner by persons qualified to do so, using procedures generally accepted in the profession to yield accurate and reliable results.”

In addition, the order forbade express or implied misrepresentations regarding “the existence, contents, validity, results, conclusions, or interpretations of any test, study or research” in connection with “the manufacturing, labeling, advertising, promotion, offering for sale, sale, or distribution of any food, dietary supplement, or drug.” The defendants were also subject to record keeping and periodic reporting requirements.

The FTC challenged defendants’ advertising for AdvaCal, a calcium supplement, and Fertil Male, which “purports to improve male fertility.”

AdvaCal’s combination of active ingredients “purportedly yields a calcium hydroxide product that is significantly more absorbable by the human body than competing calcium supplements.” Since introducing the product in 2000, Lane Labs made a number of claims about AdvaCal’s efficacy and uniqueness. Lane Labs provided the FTC with compliance reports in 2001, 2004, and 2004, attaching copies of AdvaCal ads and scientific research on which Lane Labs relied. Many of the claims at issue now were disclosed in 2001.

Fertil Male supposedly improves sperm production and motility. One ad featured a customer who proclaimed that Fertil Male caused his sperm count to “skyrocket” in a months. Defendants’ compliance report disclosed its Fertil Male ads in 2006. (The opinion doesn’t explain why the product, which was introduced in 2003, wasn’t included in the 2004 report.)

In 2006, the FTC notified Lane Labs that certain Fertil Male ads contained misrepresentations in violation of the Final Order, then sent a similar notice about AdvaCal. In 2007, the FTC filed a motion to hold the defendants in contempt and requesting $24 million in damages.

The district court held a five-day evidentiary hearing. Two experts testified for each side; while the court found them all credible, it found defendants’ experts more impressive because their approach “seemed more reasonable.” The court also heard from Andrew Lane and Jennifer Morganti, a naturopathic doctor employed by Lane Labs from 2001 to 2004. Lane testified that he took the Final Order “extremely serious[ly].” The Final Order “was distributed to all senior management personnel; copies were sent to Lane Labs' customers; an outside company was retained to compile existing research and to monitor research updates; and Lane hired Morganti to serve as manager of nutritional research.” Morganti “testified that her primary responsibility was to scrutinize Lane Labs' marketing claims to ensure that each representation was supported by scientific research.” The court found Lane credible.

The district court found that the challenged marketing claims were supported by competent and reliable scientific evidence. Unfortunately, the district court didn’t examine the particular representations challenged in any detail. Instead, it focused on the fact that AdvaCal was “a good source of calcium,” and that there was “little to no evidence that either AdvaCal or Fertil Male was ineffective or potentially dangerous.” Lane Labs, it ruled, had acted in accordance with the “spirit” of the Final Order, and this was just a difference of opinion over good products.

Even if the defendants violated the Final Order, the district court continued, they were entitled to a defense of substantial compliance, even if the materials they relied on were not perfect. The FTC dragged its feet in notifying the defendants of potential violations, which raised an issue of fundamental fairness. The defendants attempted to comply with the Final Order, believed that they had succeeded, and heard nothing to the contrary from the FTC.

The FTC appealed.

Contempt requires that the defendants knew about and disobeyed a valid court order; this must be proven by clear and convincing evidence, but disobedience need not be willful. Good faith is not a defense to civil contempt. The only issue was disobedience.

The FTC challenged four AdvaCal claims: (1) Only AdvaCal can increase bone density; (2) AdvaCal has been shown in clinical tests to increase bone density in the hip; (3) AdvaCal is three to four times more absorbable than other calcium supplements; and (4) AdvaCal is comparable or superior to prescription osteoporosis drugs. It also challenged the one-month “skyrocketing” sperm claim for Fertil Male. It also argued that Lane Labs distorted research regarding AdvaCal and other forms of calcium.

The court of appeals easily found that the defendants falsely claimed that AdvaCal had a unique ability to increase bone density, which other supplements couldn’t. The FTC presented evidence demonstrating that the claims were unsupported by competent and reliable scientific research, because nearly all calcium supplements increase bone density. Even defendants’ witness Morganti stated, “[t]o say that no other calciums can build bone is probably not true.” There was no credible evidence in the record supporting defendants’ claims; Lane’s lay speculation was not credible.

The district court nonetheless ruled that the defendants “offered support and substantiation” for the uniqueness claim. This was clearly erroneous.

Bone density: Defendants touted clinical research showing AdvaCal’s ability to increase bone density in the hip. It was undisputed that no such clinical research exists, though defendants did produce animal studies. However, the district court didn’t clearly err in finding compliance with the Final Order. Two clinical studies in peer-reviewed journals showed that calcium increased bone density in the human hip, and reasonable testimony explained that this could be generalized or “extrapolated” to AdvaCal. The district court’s finding was thus affirmed.

Absorbability: Defendants claimed that AdvaCal was three to four times more absorbable than other calcium supplements. The FTC’s expert stated that this was “not physically possible,” given that the typical calcium carbonate supplement is absorbed at a rate of 30-35%. One hundred and twenty percent absorption “is physiologically--and mathematically—unattainable,” and 60% is highly unusual. The defendants argued that AdvaCal wasn’t marketed to the average individual, but to elderly women, a substantial number of whom suffer from achlorhydria and osteoporosis. Achlorhydric individuals absorb calcium at a rate significantly below average, sometimes as low as 4%. Lane’s witness testified that it would not be unusual for such an individual to absorb AdvaCal three to four times more effectively than calcium carbonate.

However, this argument failed to account for the ads’ actual language, which was not limited to elderly women suffering achlorhydria. For example: “Osteoporosis now strikes women and men of all ages, races and nationalities. But osteoporosis can be prevented. A key is taking the right calcium and the right calcium supplement is AdvaCal․ AdvaCal has been clinically shown to be three times more absorbable than other calciums.” The district court failed to grapple with this incongruity. However, the record contained some evidence that AdvaCal was marketed to individuals at risk of, or suffering from, achlorhydria. The court of appeals determined that it couldn’t review the district court’s factual findings because there was no indication that court considered the factual dispute over whether the ads promised results that were unattainable for “large segments” of their audience. This issue was remanded.

In 1999, Lane told the Health Sciences Institute newsletter that AdvaCal was “a revolutionary calcium supplement… that has been clinically shown to actually build postmenopausal bone density, without the side effects of hormonal drugs or supplements.” HSI then published an article claiming that AdvaCal “works as well or better than [leading prescription drugs], and without the substantial side effects and risks.” But AdvaCal has never been tested in comparison to any prescription drug, and there was no evidence to substantiate this equivalence/superiority claim. The defendants argued that they weren’t responsible for HIS’s representation. The court of appeals concluded that this was “more than a stretch,” given that Lane paid for the right to distribute the article, and did so extensively. The defendants adopted HIS’s characterization by “aggressively promoting” the content, including through direct mail and retail store displays. “They cannot run from the representation now that its veracity has been subjected to the spotlight.”

Once again, the district court didn’t address the comparability/superiority claim or its responsibility for using the HIS article. Any implicit finding of lack of responsibility or substantiation was clearly erroneous.

Fertil Male: The defendants did better with the claim about “skyrocketing” sperm in one month. The court credited the testimony of defendant’s expert, who stated that there was competent or reliable scientific evidence suggesting that Fertil Male improves male fertility parameters such as sperm count, sperm motility, and sperm production. The FTC argued that it would be impossible for a supplement to increase sperm count in one month, but there was little testimony on this. Spermatogenesis requires at least three months, but the testimony didn’t explain the relationship between spermatogenesis and sperm count and “appears to imply” that there is some positive change within the first month. The court of appeals relied on this colloquy:

THE COURT: Could a male's sperm count increase in the first month, or is that something that just couldn't happen?

THE WITNESS: It could have happened as part of the regression to the mean. It could have happened because the sperm--the maca had some effect inside the testes in a way I don't understand.

But in general, it's a--it's a three-month window.

I have to admit, I don’t see anything there that counts as even implying positive change—the witness just says that it’s possible that something unexpected/unexplained could occur, which is not substantiation but the lack thereof. But the court of appeals found that the FTC didn’t examine the subject further when it had the opportunity, and the record testimony was ambiguous at best, allowing the district court’s finding to stand.

Finally, the FTC argued that the defendants violated the Final Order provision barring express or implied misrepresentations regarding “the existence, contents, validity, results, conclusions, or interpretations of any test, study or research” pertaining to “the manufacturing, labeling, advertising, promotion, offering for sale, sale, or distribution of any food, dietary supplement, or drug.” The district court held that some of the ad claims were “incorrect,” and “errors were made over a number of years,” but didn’t identify the misstatements and errors at issue. Instead, it focused on AdvaCal’s general efficacy as “a good source of calcium” that would “most likely help the people who take [it].” Thus, the FTC failed to show that the ad claims made false representations.

This was a problematic analysis. The Final Order prohibited misrepresenting research and data; “it is simply unconcerned with a product's overall salutary effects.” A product that effectively delivers calcium to the body can still be falsely advertised. The district court should have made particularized findings of fact about the alleged misrepresentations. Many of the claims at issue “appear misleading on their face,” such as an ad claiming that clinical tests showed AdvaCal to increase bone density, including in the hip, when it was undisputed that no such clinical research exists. But the court of appeals couldn’t tell whether the district court even considered this claim, and, if it had done so, how it could have concluded that this claim didn’t violate the Final Order. Remand for more specific findings was required.

Finally, the district court held that, even if the defendants violated the Final Order, they were entitled to a defense of substantial compliance. Such a defense requires a party to show that
it (1) has taken all reasonable steps to comply with the valid court order, and (2) has violated the order in a manner that is merely “technical” or “inadvertent.” The district court focused on defendants’ “considerable” compliance efforts, including timely compliance reports. The FTC didn’t respond, and the district court concluded that “to tell Defendants that their efforts were not good enough years after not advising them of any compliance issues is disingenuous and is highly relevant to the inquiry into whether Defendants should have done something different in the first instance.”

However, the district court did not address prong (2), whether these violations were merely technical or inadvertent. The entirety of its analysis was directed at reasonableness: its submission of compliance reports; its retention of additional compliance personnel; and the government's delay in commencing an enforcement proceeding. (Considering delay was not a laches defense, but does reflect on the reasonableness of defendants’ conduct. “After providing the government with its advertising and the research relevant thereto, the Lane defendants heard nothing for a period of years. To construe the FTC's silence as approval was technically mistaken, but it was not unreasonable. We are, of course, sympathetic to the FTC's significant regulatory and enforcement responsibilities, but delays of this extraordinary length are inordinate.”) None of this does much to illuminate question (2), even though the court implicitly recognized that violations did occur. Thus, the court of appeals was unable to conduct meaningful appellate review and remanded.

Ultimately, it was insufficient to conclude that the defendants complied with the “spirit” of the Final Order. The district court wasn’t asked to decide whether AdvaCal and Fertil Male were generally efficacious, but whether specific marketing claims violated consent decrees.

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