Hi-Tech Pharmaceuticals, FTC clash—yet again—over $40 million in sanctions

A manufacturer of dietary supplement products argued Tuesday that it’s unjust for a district court to enforce a $40 million judgment against the company in a long-running battle with the Federal Trade Commission.

In response, a panel of appellate court judges pushed back against arguments made by Robert Parsley, a lawyer representing Hi-Tech Pharmaceuticals and its owner Jared Wheat, who are both under criminal indictment in an unrelated case scheduled to go to trial in January.

In 2017, Senior U.S. District Court Judge Charles A. Pannell Jr. held Wheat, Hi-Tech and its sales executive Stephen Smith “jointly and severally liable” for $40 million in sanctions, following a determination that Hi-Tech violated a 2008 injunction that required substantiation—or “competent and reliable scientific evidence”—for its advertising claims.

During oral arguments Tuesday, July 18, Parsley argued the three-judge appellate panel should grant his clients relief from the $40 million judgment, based on a 2021 U.S. Supreme Court decision.

In AMG Capital Mgmt. LLC v. FTC, the Supreme Court found that under section 13(b) of the FTC Act—which grants FTC the right to seek a permanent injunction in district court—the agency is not authorized to seek equitable monetary relief, such as disgorgement or restitution. AMG Capital applies to his clients, Parsley argued, because the Supreme Court “said when the FTC files an enforcement action under section 13(b), it may not obtain or seek equitable monetary remedies without having first gone through an administrative procedure.”

AMG Capital “doesn’t say anything about contempt sanctions,” one of the three appellate judges countered. “AMG Capital … isn’t addressing what happens in contempt enforcement proceedings.”

FTC attorney Mariel Goetz agreed the holding in AMG Capital is distinguishable from a contempt judgment.

“Here, of course, we’re talking about a contempt judgment entered under the court’s broad authority to enforce its own orders,” she said during oral arguments.

History of bad blood between FTC, Hi-Tech

Georgia-based Hi-Tech and FTC, the more than a century-old agency responsible for policing deceptive advertising practices, have been at odds for two decades.

FTC in 2004 sued Hi-Tech, Wheat and others for false advertising of dietary supplement products, in violation of a federal statute (the “FTC Act”) that prohibits deceptive business practices and false advertisements.

In June 2008, in a 99-page order entered in the U.S. District Court for the Northern District of Georgia, Pannell found the defendants violated the law, and he held them “jointly and severally liable” for $15.9 million.

Later that same year, Pannell granted a permanent injunction against the corporate and individual defendants, prohibiting claims of rapid or substantial weight loss, for example, without competent and reliable scientific evidence.

Although the judgment was affirmed on appeal, the fight between Hi-Tech and the government did not end by any stretch of the imagination.

“Hi-Tech utterly failed to comply with any aspect of the district court’s 2008 injunction,” neither paying “the monetary judgment” nor stopping “its false advertising,” according to the government’s brief filed in May 2022 with the Eleventh Circuit. Instead of satisfying the judgment, which it had the resources to do, Hi-Tech “went on a spending spree, acquiring other dietary supplement companies, buying luxury goods, and otherwise dissipating millions of dollars,” the court filing alleged.

“It ultimately took the Commission nearly seven years—including dozens of garnishments and other judicial proceedings—to collect the full $15.9 million judgment,” FTC lawyers wrote in their brief. “In all that time, Hi-Tech made only one voluntary payment, in the amount of $150,000: less than 1% of the judgment.”

In 2011, FTC alleged in federal district court that Hi-Tech had violated the injunction and made unsubstantiated representations in connection with weight-loss products. For instance, one advertisement “labeled ‘WARNING!’ told consumers (in all caps) that Fastin is an ‘EXTREMELY POTENT DIET AID! DO NOT CONSUME UNLESS RAPID FAT AND WEIGHT LOSS ARE YOUR DESIRED RESULT,” according to a government court filing.

Pannell in 2014 ordered Smith, Wheat and Hi-Tech jointly and severally liable for roughly $40 million in compensatory sanctions after concluding the defendants made unsubstantiated advertising claims for four weight-loss products—Fastin, Lipodrene, Benzedrine, and Stimerex-ES—and neglected to carry a required health-risk warning for them.

The court order was vacated on appeal in 2015 when a panel of judges ruled Pannell improperly barred Hi-Tech and others from presenting evidence to prove compliance with the 2008 injunctions.

Hi-Tech’s victory would be short-lived. In 2017, Pannell reimposed $40 million in sanctions just a week after news broke that Wheat and his company had been indicted on criminal charges, including wire fraud and money laundering. The judge calculated compensatory sanctions based on gross receipts for sales of the violative weight-loss products.

After the indictment was made public, Wheat called the criminal charges “bogus" in an interview with Natural Products Insider. The criminal case is scheduled to go to trial on Jan. 9, 2024, in U.S. District Court in Atlanta.

AMG Capital

According to the Federal Trade Commission's 2022 brief submitted to the Eleventh Circuit, “over $37 million of the contempt judgment remains uncollected because of Hi-Tech’s contumacious refusal to pay.”

In the ongoing dispute over the sanctions, Hi-Tech, Wheat and Smith anticipated FTC would argue the defendants “deserve to be punished because, among other things, they sell weight-loss and erectile-dysfunction supplements and have not willingly paid the judgments,” their lawyers wrote in a 2022 brief submitted to the Eleventh Circuit. “But ad hominem rhetoric cannot overcome the sea change the Supreme Court brought about in AMG Capital. If it is inequitable to continue to subject Hi-Tech, Wheat and Smith to the contempt judgment—and it is—then this Court should grant relief.”

During oral arguments Tuesday, Parsley suggested an Eleventh Circuit decision in favor of the government would be contrary to the Supreme Court’s ruling in AMG Capital.

“But this is the next step of AMG Capital,” the lawyer asserted. “If this court rules the FTC’s way, it means that the FTC can continue to conduct its consumer redress program under section 13(b) in defiance of AMG Capital.”

Chief Judge William H. Pryor Jr. of the Eleventh Circuit didn’t seem persuaded that the ruling in AMG Capital means Hi-Tech should be relieved from its obligations to pay the $40 million in sanctions.

“Mr. Parsley,” Pryor concluded, “maybe you can convince the Supreme Court to tell us that that’s what AMG Capital means and to take the next step.”