Friday, September 13, 2019

ownership/control of whole company isn't enough for individual liability under FTCA

F.T.C. v. Quincy Bioscience Holding Co., 389 F. Supp. 3d 211 (S.D.N.Y. 2019)

On remand from the Second Circuit, which fixed the mistaken earlier dismissal of this claim against a supplement seller, a principal gets off the hook (for now) but otherwise the case continues.

Defendants Underwood and Beaman are Quincy’s co-founders and two largest shareholders; Underwood is Quincy’s President and Mr. Beaman is its CEO and former President. Each is also a director of related companies.  Prevagen allegedly falsely advertises that “Prevagen improves memory,” that it “has been clinically shown to improve memory,” and so on, in defiance of a placebo-controlled test that showed no such effects (but was subsequently p-hacked to suggest improvements in specific subgroups on specific tasks). In addition, the FTC alleged that defendants’ claims about Prevagen rely on the theory that its dietary protein enters the human brain to supplement proteins that are lost during the aging process. But the FTC alleged that defendants’ studies show that it is rapidly digested in the stomach and broken down into amino acids and small peptides like any other dietary protein.

“An individual may be held liable under the FTCA for a corporation’s deceptive acts or practices if, with knowledge of the deceptive nature of the scheme, he either participate[s] directly in the practices or acts or ha[s] authority to control them.” And under the relevant state consumer protection laws, NY Exec. Law § 63(12) and NYGBL §§ 349 and 350, “Officers and directors of a corporation may be held liable for fraud if they participate in it or have actual knowledge of it.”

The complaint adequately alleged that Underwood had the requisite involvement. Along with the previously cited facts, he is allegedly “the final decision maker on advertising claims across all channels of distribution and media platforms” and participated in other ways in disseminating the relevant claims, including by appearing in ads. “The statements that Mr. Underwood made final decisions on advertising claims, wrote advertising materials, and appeared in Prevagen advertisements sufficiently allege that Mr. Underwood participated directly in the alleged false advertising of Prevagen.”  In addition, allegations that he directed the research, translated scientific data into marketing language, and wrote a user guide explaining the science behind Prevagen “support an inference that he knew what the research and studies concluded and thus had knowledge of the deceptive nature of the advertisements.” The standard is “actual knowledge of material misrepresentations, reckless indifference to the truth or falsity of such misrepresentations, or an awareness of a high probability of fraud along with an intentional avoidance of the truth,” and that was satisfied.

By contrast, despite Beaman’s alleged central ownership/control interests, the complaint merely alleged that Beaman “has given media interviews, signed research agreements, pre-approved research proposals, and reviewed Defendants’ advertising.” That was insufficient to allege that he “knew the results of the research or participated in the false advertising,” though the governments were granted leave to amend.

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