Recent Enforcement Actions by FTC:

Recent Enforcement Actions by FTC:Size Does Matter
by Marc S. Ullman,Esq.

On Oct. 28, 2003, Howard Beales, former director of theFederal Trade Commission (FTC) Bureau of Consumer Protection, testified beforethe U.S. Senate Committee on Commerce, Science and Transportation that, Unfoundedand exaggerated claims for dietary supplements have proliferated. Beales wenton to inform the committee that FTC has a longstanding and active program tocombat fraudulent and deceptive advertising claims about the benefit and safetyof dietary supplements, and noted FTC had over 100 law enforcement actionschallenging false or unsubstantiated claims by supplement marketers over thepreceding decade. In particular, Beales noted FTCs focus on claims relatingto cancer, heart disease and weight loss, among other serious health issues.

Since that testimony, Beales has retired, but FTCs focus onthe dietary supplement industry has continued unabated. In fact, if anything,the scrutiny to which the industry is subjected has intensified. Commencing withthe much touted launch of FTCs Operation Big Fat Lie on Nov. 9, 2004,(following up on 1997s Operation Waistline and supporting the ongoingOperation Cure-All), through early July 2005, FTC has announced itsinvolvement in over a dozen enforcement actions against companies marketingdietary supplements or related products. Many of these actions have already beenresolved, with the targeted companies and their high ranking officers enteringinto agreements with FTC resulting in radically changed advertising, injunctiverelief governing ongoing and future marketing activity, and the payments ofsignificant amounts to the FTC as consumer restitution.

Given this ongoing focus on the marketing of dietarysupplements in the context of claims relating to serious health issues,one would suspect FTC would take a similar approach to any company making bogusweight loss claims for products like fried chicken, or unsupported claims thatclinical trials demonstrated orange juice can lower blood pressure, raise HDLcholesterol levels, and increase blood folate levels by 45 percent whilelowering blood homocysteine levels by 11 percent. A brief review of several FTCactions against supplement marketers and two major mainstream food companiesindicates that, in fact, the playing field may not be quite as equal as itshould be.

Recent Supplement Enforcement Actions

Selfworx Inc., Nov. 4, 2004. Complaint filed inU.S. District Court, District of Maine, alleging claims that LipoLean dietarysupplement can cause rapid and substantial weight loss by, among other things,absorbing 20 to 30 grams of fat per meal were false and unsubstantiated. Thiscomplaint also alleged claims that Gel-a-Thin topical gel dissolves and removescellulite were false and unsubstantiated. Various corporate officers were namedas defendants. On May 31, 2005, FTC announced the court had entered a StipulatedFinal Judgment for injunctive and other relief, which required the defendants topay $100,000 in consumer redress and contained an avalanche clause callingfor entry of a judgment of $20 million in the event the defendants failed tofully disclose the value of their assets.

New England Diet Center, Nov. 4, 2004. Complaintfiled in U.S. District Court of Connecticut alleging false and unsubstantiatedweight loss claims for Chinese Diet Tea and the Bio-Slim Patch. The complaintalso named the companys top executive as a defendant. On April 12, 2005, the complaint was amended to add theexecutives wife as a defendant.

Body Wise International Inc., Jan. 18, 2005.Complaint and consent decree filed in U.S. District Court, Central District ofCalifornia, against Body Wise and Dr. Jesse Stoff, one of the companysconsultants, resolving claims that the defendants violated an earlier FTCinjunction by making false and misleading claims that their AG-Immune dietarysupplement could cure numerous diseases. The defendants were permanentlyenjoined from making further false or unsubstantiated claims, and the companywas directed to pay FTC a $2 million civil penalty.

Hi-Health Supplement Corp., Feb. 15, 2005. Thecompany and its owner agreed to entry of an administrative consent decree basedupon allegedly false and misleading claims that the companys Ocular Nutritiondietary supplement can restore damage caused by macular degeneration. The decreeprohibits the defendants from making false or unsubstantiated claims in the future, and requires them tomake a $450,000 payment to FTC.

Following a brief lull after this flurry of enforcementactions, FTC activity in June 2005 appears to have reached new heights. BetweenJune 9 and July 13, FTC announced it had settled four more actions againstdietary supplement marketers. Each of these cases included company officers andexecutives as named defendants, and called for the payment of hundreds ofthousands, if not millions, of dollars to FTC as either consumer restitution ordisgorgement. Most notable amongst these agreements is the matter Great AmericanProducts Inc./Physicians Choice Inc., where the defendants settled a federaldistrict court complaint alleging false and unsubstantiated claims concerningHuman Growth Hormone stimulators by agreeing to turn over up to $20 million toFTC for consumer redress.

Size Does Matter

While FTC was actively seeking out cases against dietarysupplement companies and their executives, the agency was also bringing actionsagainst two major food companies concerning advertising claims for conventionalfoods. However, the manner in which these cases were handled appears to be quitedifferent from the flurry of cases that have been brought against the supplementindustry.

The first of these cases was announced in June 2004 againstthe national fast food chain KFC Corp.,makers of Kentucky Fried Chicken, in relation to claims that KFC is compatiblewith low carbohydrate weight loss programs, and that two KFC chicken breastshave less fat than a Burger King Whoppereven though two KFC chicken breastsalso have three times the trans fat and cholesterol, more than twice the sodiumand more calories than a Whopper. While these advertising claims wereshort-lived, they were broadcast nationwide through various media. In settling,KFC agreed to an administrative order prohibiting these specific claims unlessit possessed substantiation supporting them. No consumer restitution ordisgorgement was required, and no corporate officer was named as a defendant.

The second case involves claims made on behalf of TropicanaOrange Juice that two or three glasses a day ofTropicana Orange juice would lower systolic blood pressure by 10 points, raiseHDL cholesterol by 21 percent and improve the HDL/LDL ratio by 16 percent,increase blood folate levels by 45 percent, and lower blood homocysteine levelsby 11 percent. Tropicana ran these ads nationwide between 2002 and early 2004.On June 2, 2005, Tropicana settled FTC allegations that these claims were falseand unsubstantiated, agreeing to an administrative order prohibiting these andsimilar claims unless it possesses substantiation supporting them. No consumerrestitution or disgorgement was required, and no corporate officer was named asa defendant.

Thus, it appears if you want to avoid having corporateofficers named as defendants, or escape the payment of restitution ordisgorgement to the FTC, the size of your corporation really does matter.

Marc Ullman is a partner in New York Citys Ullman, Shapiro& Ullman LLP. His practice includes the counseling of clients in all areasrelating to the marketing of natural products. He can be reached at [email protected] or (212) 571-0068.