State Little FTC Acts still have teeth, as Georgia's proves

Federal Trade Commission v. Peyroux, --- F.Supp.3d ----, 2024 WL 1283344, No. 1:21-cv-3329-AT (N.D. Ga. Mar. 11, 2024)

The FTC and the state of Georgia sued three corporate defendants and two individual defendants, Peyroux and Detelich. The underlying acts carried out by various defendants involved promoting stem cell therapy, which “involves the injection of shots with products containing cells or growth factors derived from birth tissue, including amniotic tissue or fluid, placenta, Wharton’s jelly, umbilical cord blood, adipose tissue, and bone marrow.” To get a sense of the costs at issue, over 2017-2019, at least 485 consumers purchased stem cell therapy injections from one defendant, Superior, at a total cost of $3,350,416. Many patients were seniors.

The other corporate defendants were consulting services that advised chiropractors and healthcare clinics on how to increase revenue by offering additional services to patients. They provided “resources — marketing manuals, flyers, lectures, sample emails ads, and PowerPoints — and a procedure to launch advertising campaigns.” They provided coaching on how to deliver PowerPoint presentations to potential patients, including on “handling objections” and arranging financing; offered medical training for clinics; ordered supplies for the stem cell injections, and provided other sales training, for example, on how to track patients and potential patient responses to marketing campaigns. Defendant Stem Cell Institute of America (SCIA) also “advertised stem cell therapy directly to consumers through lectures, postcards, emails, its website, YouTube, a documentary, and more.”

Peyroux was the 100% owner of all three corporate defendants; Detelich was, among other things, a co-founder, officer, and director of SCIA, and directly involved in developing, marketing, and delivering consulting services about stem cell therapy for the other two corporate defendants. Superior and SCIA filed for bankruptcy in 2019 (this proceeding continues as an exercise of the police power, despite the automatic bankruptcy stay).

The ads at issue misrepresented the efficacy of stem cell therapy, e.g., “stem cells can be used to treat nearly any type of condition caused by injury or degeneration” and specifically claimed the ability to treat, inter alia, COPD, Parkinson’s disease, multiple sclerosis, and congestive heart failure. The ads offered to “reduce and even eliminate your pain without surgery or additive medications.” Some of the ads claimed FDA approval. One of the training videos included a role-play about how to respond to customer resistance: “Over the past few years that we’ve done this, we have treated hundreds of patients with knee conditions with amazing results. So the level of degeneration you have in your knee makes you a really good candidate for this procedure. And I feel very confident in telling you that this is going to be a positive outcome for you as far as improving your range of motion, quality of life, and decreasing pain.”

The court granted summary judgment to the FTC and the State on many issues, including that the corporate defendants engaged in a common enterprise and that the individual defendants were liable for the corporate defendants’ acts. In addition, they made false or unsubstantiated efficacy claims; false claims of FDA and FTC approval; and supplied their client clinics with false/unsubstantiated ads and so provided clients with the means and instrumentalities to commit further deceptive acts and practices.

Both the false efficacy claims and the false FDA/FTC approval claims related to health and thus were presumptively material. And the defendants supplied the means and instrumentalities of deception to clinics through their extensive provision of ads and related services.

As to individual liability, this requires (1) control of the corporation’s relevant acts and (2) some level of knowledge. Where a defendant is a corporate officer of a small, closely-held corporation, “the individual’s status gives rise to a presumption of ability to control the corporation.” Knowledge means that the individual had “ ‘actual knowledge of the [unlawful] conduct, was recklessly indifferent to its [unlawfulness], or had an awareness of a high probability of [unlawfulness] and intentionally avoided learning of the truth.’ ” Furthermore, “[a]n individual’s degree of participation in the business is probative of knowledge.” Both of the individual defendants here directly participated in the unlawful acts and advertising—they even delivered seminars for the scheme—and also had authority to control the acts.

Georgia’s little FTC law, the GFBPA, outlaws “[u]nfair or deceptive acts or practices in the conduct of consumer transactions and consumer acts or practices in trade or commerce.” Examples of such unfair or deceptive acts and practices include “[r]epresenting that goods or services have sponsorship, approval, characteristics, ingredients, uses, benefits, or quantities that they do not have.” It also bars using “a computer or computer network” to “[e]ngage in any act, practice, or course or business that operates ... as a fraud or deceit upon a person.” “[T]he legislative intent and interpretation provision of the GFBPA makes clear that the Act should be interpreted broadly to end deceptive practices, and that the Act should be interpreted as coterminous with the FTC Act.” The court therefore rejected defendants’ arguments that joint GFBPA liability could only be imposed if the corporate veil could be pierced under Georgia law, noting that courts applying the laws of several other states have found similarly.

On remedies, Detelich argued that there should be no injunctive relief against him because there was no risk that he will engage in similar conduct again. In determining whether there is “some cognizable danger of a recurrent violation,” courts consider “the egregiousness of the defendant’s actions; the isolated or recurrent nature of the actions; the degree of scienter involved; the sincerity of the defendant’s assurances against future violations; the defendant’s recognition of the wrongful nature of his conduct; and the likelihood that the defendant’s occupation will present opportunities for future violations....”

Using this standard, injunctive relief was appropriate as to all existing defendants, who engaged in  “a comprehensive campaign to develop and disseminate misleading advertisements about the efficacy and approval of stem cell therapy on a massive scale.” The ads were the focus of their business, and they profited massively therefrom. The degree of scienter was high, and the individual defendants currently held interests in many other healthcare companies.

The State also sought monetary relief in the form of civil penalties and restitution under the GFBPA, which allows civil penalties up to $5000 per violation (without specifying a method for identifying how many violations occurred). There are additional penalties for targeting elderly and disabled people online, up to $10,000 per violation.

Georgia sought $5000/day for misrepresentations on Superior’s website ($6,650,000), $10,000/violation for 59 online advertising campaigns, 161 brochures downloaded online, 148 seminars delivered, and 335 elderly consumer purchases of stem cell shots ($7,030,000); $5000 for each individual consumer who purchased a stem cell shot who was not elderly ($750,000); and (4) restitution for the 485 customers who purchased stem cell injections from Superior ($3,350,416).

The court declined to decide on an amount at this time and noted the additional information it sought, but rejected some defense challenges to the availability of monetary relief. First, civil penalties under state law can be obtained in federal court, given an amendment specifying that “the Attorney General is authorized to initiate ... or otherwise appear in any federal court or administrative agency to implement the provisions of this article.”

Nor was the civil penalty provision unconstitutionally vague, even though defendants argued that it had no specific method for calculating the number of violations or setting an amount within the range. The per-violation language should be interpreted in concert with the rest of the statute, suggesting that “each unfair or deceptive act or practice, or consumer transaction, serves as a separate violation of the statute.” Courts interpreting similar statutes have assessed per violation penalties “based on the number of ads published, transactions completed, consumer purchases, or a mix of these measures.”