Friday, November 04, 2016

Florida man held liable for false green coffee claims

FTC v. NPB Advertising, Inc., No. 14-cv-1155, 2016 WL 6493923 (M.D. Fla. Nov. 2, 2016)

The FTC sued Nicholas Congleton and others under Section 5 of the FTC Act for engaging in false or deceptive advertising. Congleton received an email from a dietary-supplement manufacturer touting the efficacy of “green-coffee extract” as a weight-loss aid.  The e-mail linked to a three-minute clip from the television show “Dr. Oz,” describing a study that allegedly “showed women and men who took green-coffee extract lost an astounding amount of fat and weight, 17 pounds in 22 weeks by doing absolutely nothing extra....” After watching the clip and searching the Internet, Congleton, with co-defendants, founded a green-coffee extract business.

The FTC showed that defendants made false efficacy claims, unsubstantiated claims, and false establishment claims that were materially misleading.  Moreover, defendants prominently showed testimonials on their website without disclosing the material fact that the people shown were compensated for their testimonials. 

Defendants also published, which had a masthead for Women’s Health Journal, a navigation banner with several health- or fitness-related categories, and the text “AS SEEN ON” next to the logos of CBS, ABC, MSNBC, and CNN (“creating a false impression that these networks reported favorably on Pure Green Coffee”).  The court found that a viewer would see these as characteristic of a bona fide news outlet. “The presence of the word ‘Advertorial’ in small font at the top of the page fails to alter the overall impression.”  An article purportedly written by a Women’s Health Journal columnist claimed to report on an objective test of the product’s efficacy.  (Sample text: “[W]e here at Consumer Lifestyles were a little skeptical of this Green Coffee Bean Extract. Even after pouring through mountains of research. While I had an educated opinion, I still had no personal proof that the Green Coffee Bean was worth the time....”)  The court found that a reasonable consumer would be materially misled by the website, even though Congleton admitted that he and a co-defendant admitted that they just copied the article from another website. 

Congleton was individually liable for the corporate defendants’ false advertising.  The standard first required the FTC to show that the corporations operated as a “common enterprise,” which can happin if the structure, organization, and pattern of a business venture reveal a “maze” of integrated corporate entities.  Here, the corporations operated under common control, commingled funds, shared advertising, and retained the same employees, so the standard was satisfied.

The FTC also had to show that Congleton knew of the enterprise’s deceptive act and participated directly in, or had authority to control, the act. Knowledge can include reckless indifference to the falsity of the misrepresentation, even in the absence of intent to defraud.  That was present here: Congleton admited that he knew the efficacy claims lacked a scientific basis. (E.g., “I don’t know that there is a basis for [the claim of losing twenty pounds in four weeks.]”)  At a minimum, Congleton showed reckless indifference to the truth or falsity of the claims. Although he based the efficacy claims on the Dr. Oz. segment and the study reported therein, he said, “I’m not a medical doctor. I don’t know exactly that I understood everything that’s being said in here,” deferred blindly to Dr. Oz’s “expertise,” and admittedly copyied unverified claims from competitors’ ads or websites.  This was not good faith. Congleton participated directly in the deceptive advertising practices by running the ad program, and he also controlled the business.

Congleton claimed First Amendment protection, but there is no protection for false commercial statements of fact; here the claims were specific, objective, and falsifiable.  “Because Congleton knowingly misrepresented Pure Green Coffee’s efficacy, the First Amendment offers Congleton no protection from civil liability.”  [Actually, even lack of knowledge doesn’t defeat liability for misleading commercial speech.]  The FTC didn’t need to show that consumers were actually misled, only that his representations were likely to mislead a reasonable consumer.  An old DC Circuit case (Bork, J.) says that the FTC should introduce “empirical evidence of consumer perception” for an implied claim, but the claims here were both express and facially false, and even for an implied claim, no survey data is required.

Congleton challenged the constitutionality of the FTC’s presumption of materiality for express claims. Nope.

The court granted a permanent injunction against Congleton:

Because Congleton conducted a deceptive advertising campaign for years, because Congleton knew of the advertisements’ falsity, because Congleton failed to immediately discontinue the deceptive advertising after learning of the FTC’s demand, because another violation could seriously harm a consumer, because Congleton appears proficient in internet-advertising techniques, and because the barriers to entry in the dietary-supplement industry are low, the FTC proves a cognizable danger of a prospective violation. A permanent injunction that bars Congleton from conducting the same variety of deceptive advertising he undertook at Pure Green Coffee is warranted.

Congleton was required to disgorge a bit over $29,000,000, calculated by subtracting from the defendants’ $30 million in gross receipts customer refunds and disgorgements by other defendants. Congleton argued that profit, rather than net revenue, was the proper measure of disgorgement, but net revenue appropriately measures a defendant’s unjust gain under section 13(b).  Congleton’s brother also had to disgorge title to a property held in his name, but bought with money from a Pure Green Coffee bank account; the brother was an appropriate relief defendant who had no legitimate claim to defendants’ “ill-gotten” proceeds. 

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