The Federal Trade Commission In Review

A Review of the FTC's Consent Decrees Related to Product Marketing During 1994 and 1995

by Kevin D. Grimes, Attorney at Law

^{Copyright © Grimes & Reese 1996}

Contents

Introduction

The Fines

An FTC Enforcement Overview

The Cases

Third Option Laboratories, Inc.

L&S Research Corporation

Nu Skin International Inc.

Nature's Bounty, Inc.

Live-Lee Productions, Inc.

Conclusion

Introduction

Throughout 1994 and 1995, the Federal Trade Commission pursued dozens of companies and individuals for product claims it concluded were unsubstantiated, deceptive or unfair. This newsletter will examine a few of the cases of particular significance to companies that manufacture or market a wide range of personal care items including weight-loss and body-building products, dietary supplements, and cosmetics.

The significance of these cases is manifold. First, they indicate the aspects of sales and marketing that are legally problematic for personal care products. Second, they send a very clear message that the FTC will also pursue the individuals who are involved in the corporate decision-making process, and hold them personally, and sometimes separately, liable for improper product claims. Third, the FTC is not only interested in multi-billion dollar wrongdoers, but also small, local "mom and pop" organizations.

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An FTC Enforcement Overview

The primary federal agency that regulates advertising is the Federal Trade Commission (FTC). Under the Federal Trade Commission Act (FTC Act), the FTC has broad authority to prevent individuals and businesses "from using unfair methods of competition . . . and unfair or deceptive acts or practices in or affecting Commerce." (FTC Act 5) The FTC's broad authority to prohibit deceptive acts or practices extends to prohibiting advertising that makes deceptive claims, fails to reveal relevant information, is unfair, or makes an objective claim for which the advertiser did not posses a reasonable basis before the claim was made. Included in the FTC's advertising jurisdiction are foods, over-the-counter (OTC) drugs, cosmetics, non-restricted medical devices and other products whose safety, efficacy and labeling are regulated by the Food and Drug Administration (FDA).

The FTC applies three general legal standards to its regulation of all advertising: substantiation, deception, and fairness. These legal standards are explained in three formal policy statements, each of which is applied to the regulation of advertising of foods, OTC drugs, non-restricted medical devices, and cosmetics.

The FTC's policy on substantiation stems from a July 2, 1984 document signed by the FTC Acting Secretary, which set forth several principles, including:

1. Advertisers and advertising agencies are responsible for substantiating objective claims in advertising before they are disseminated. The failure to have substantiation is a violation of the FTC Act;
2. The advertiser must have in its possession at least as much substantiation for claims as they say that they have in advertising statements; and
3. An "imprimatur" from a self-regulation group such as the National Advertising Review Board (NARB) will not automatically shield a company from FTC prosecution.

Over the years, the majority of cases that the FTC has brought against manufacturers and marketers of personal care products is that their claims are not substantiated by scientific evidence and should not be used in advertising. The FTC has established in numerous cases a general rule that a claim must be substantiated by at least two well-controlled clinical studies.

"Substantiation," as defined by the FTC means that an advertiser has "competent and reliable scientific evidence" for any representations it makes. "Competent and reliable scientific evidence" requires "tests, analyses, research, studies, or other evidence based on the expertise of professionals in the relevant area, that have been conducted and evaluated in an objective manner by persons qualified to do so, using procedures generally accepted in the profession to yield accurate and reliable results."

With regard to deception, the FTC set forth its policy in a letter dated October 14, 1983, to Congressman John Dingell. The letter stated three elements that undergird all deception cases:

1. "There must be a representation, omission or practice that is likely to mislead the public," such as false Representations or misleading price claims;
2. "We examine the practice from the perspective of a consumer acting reasonably in the circumstances;" and
3. "The representation, omission or practice must be a material one . . . (that) is likely to affect the consumer's conduct or decision with regard to a product or service."

As regards unfairness, the FTC stated its policy in a December 17, 1980, letter to U.S. Senators Wendell Ford and John Danforth. The letter explained that, when applying the prohibition against consumer unfairness, three factors are considered:

1. Whether the practice caused substantial injury to consumers;
2. Whether the practice violates established public policy; and
3. Whether the practice is unethical or unscrupulous.

An understanding of these policies is a necessary backdrop to appreciate the FTC's enforcement activities. The most common public resolution of an FTC investigation takes the form of formal consent orders that set forth the allegations and the remedies agreed to by the violating company or individuals. While the order applies only to the violators, the action is intended to have a broad deterrent effect. Once entered, FTC orders often extend to an entire class of a company's products, prohibiting not just the practice that triggered the investigation, but any of a broad range of similar practices.

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The Cases

In the Matter of: Third Option Laboratories, Inc., a corporation, and William J. McWilliams, Danny Bishop McWilliams, and Susan McWilliams Bolton, individually and as officers of said corporation. [File No. 942-3027; May 11, 1995]

Summary

This consent agreement required the company and its officers to pay $480,000 to be used either for refunds to consumers or as disgorgement to the U.S. Treasury and to send a notice to consumers advising them of the consent agreement, which set forth the FTC's allegations that the respondents made a number of deceptive health claims for their "Jogging in a Jug" beverage. In the future, advertisements for that beverage or similar products, the respondents would have to clearly and prominently state that there is no scientific evidence that the product provided any health benefits.

The Claims

The FTC alleged that advertisements for Jogging in a Jug, a juice and vinegar beverage marketed by Third Option, made false and unsubstantiated claims that the product would:

1. cure or alleviate heart disease and its symptoms, including arterial blockages;
2. substantially lower serum cholesterol and triglycerides;
3. cure or alleviate arthritis and its symptoms;
4. break down or eliminate calcium or other mineral or chemical deposits in the circulatory system;
5. improve the condition of the circulatory system;
6. clean internal organs;
7. prevent or reduce the risk of cancer, leukemia, heart disease, and arthritis;
8. provide the same health benefits as a jogging regimen;
9. cure or alleviate lethargy
10. cure or alleviate dysentery;
11. cure or alleviate constipation;
12. stabilize blood sugar levels in insulin-dependent diabetics;
13. aid in the recovery from viral infections; and
14. cure or alleviate swelling of the legs and muscle spasms. The proposed complaint also alleged that respondents falsely represented that they relied on a reasonable basis for these claims.

In addition, the proposed complaint alleged that respondents falsely represented that Jogging in a Jug was approved by the United States Department of Agriculture and that the testimonials or endorsements from consumers contained in the advertisements and promotional materials for Jogging in a Jug reflected the typical or ordinary experiences of members of the public who use the product. The proposed complaint further alleged that respondents falsely represented that they relied on a reasonable basis for these claims.

The Consequences

Among other things, the proposed consent order prohibited the respondents from:

1. making the representations challenged as false in the proposed complaint for Jogging in a Jug or any substantially similar product;
2. making any representation about the performance, safety, benefits, or efficacy of any food, food or dietary supplement, or drug, unless the representation is true and respondents possess competent and reliable scientific evidence that substantiates it; and
3. misrepresenting that any endorsement for any product reflects the typical or ordinary experience of members of the public who use the product.

The order also required that the respondents cease using the name "Jogging in a Jug" or any name that communicates the same or similar meaning unless the material containing such name clearly and prominently contains the disclosure "THERE IS NO SCIENTIFIC EVIDENCE THAT JOGGING IN A JUG [OR OTHER NAME] PROVIDES ANY HEALTH BENEFITS."

The order further required the respondents to send a letter describing the settlement to identifiable past purchasers of Jogging in a Jug, and also to send a similar letter to their purchasers for resale. The order also mandated that the respondents notify their purchasers for resale that if the purchasers for resale did not stop using promotional materials containing claims covered by the order, the respondents would be required to stop doing business with them.

Lastly, the order required the company and its officers to pay to the Commission the sum of $480,000 to be used either for refunds to consumers or as disgorgement to the U.S. Treasury.

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In the matter of L&S Research Corporation, a corporation, and Scott Chinery, individually and as an officer of said corporation. [File No. 912-3004; July 27, 1994]

Summary

This proposed consent agreement required the corporation and one of its officers to pay $1.45 million to the United States Treasury. The agreement also prohibited them from making misrepresentations regarding the efficacy of their bodybuilding and weight loss products, and would require them to possess competent and reliable scientific evidence to substantiate future bodybuilding and weight loss claims.

The Claims

Body Building Products

The Commission's complaint charged that the respondents deceptively advertised Cybergenics Total Body Building System and Cybergenics for Hard Gainers, two body building products. According to the complaint, the respondents' advertisements made false and/or unsubstantiated representations that either or both body building products:

1. cause users to lose more body fat and gain more muscle than non-users;
2. cause users to lose body fat and gain muscle more rapidly than non- users;
3. cause users to gain more muscle than users of other body building products;
4. have been demonstrated by scientific research to cause users to gain more muscle than non-users;
5. work for all people; and
6. are new and unique.

Weight Loss Products

The Commission's complaint also charged that the respondents deceptively advertised their weight loss products, Cybergenics CyberTrim, Cybergenics Mega-Fat Burner, and Cybergenics QuickTrim. According to the complaint, the respondents' advertisements made false and/or unsubstantiated representations that one or more of the wright loss products:

1. cause users to lose body fat and weight more rapidly than non-users;
2. cause users to lose weight and lose or burn more body fat than non-users;
3. cause users to lose more body fat and weight than users of all other weight loss products;
4. cause users to lose weight more rapidly than the users of all other weight loss products;
5. are superior to other appetite suppressants;
6. suppress hunger and the biochemical message stimulated by the catabolism of fat;
7. cause users to gain more muscle than non-users;
8. contain an ingredient, chromium picolinate, that has been clinically proven to reduce fat and lower cholesterol;
9. are new and unique;
10. cause users to maintain weight loss longer than non-users;
11. cause maturing women to lose more weight than non-users of the product;
12. are easy to use; and
13. have been demonstrated by scientific evidence to cause users to lose more fat and weight, and to gain more muscle, than non-users.

Use of Testimonials

The Commission's complaint further alleged that statements and depictions, including "before" and "after" pictures, in the respondents' advertisements for their body building and weight loss products, represented that the testimonials from consumers who used the advertised product reflected the typical or ordinary experience of members of the public who used the products. According to the complaint, the respondents did not have a reasonable basis for this representation. In addition, the complaint alleged that the use of a picture of a man in an advertisement for Cybergenics Total Body Building System "before" and "after" he used the product for six months was false and misleading. The man pictured in the advertisement, according to the complaint, was a champion body builder prior to the time when the "before" picture was taken and, therefore, was not typical of users of the product, and his results as shown in the "after" picture were not typical of the experience of ordinary members of the public who used the product.

The Consequences

The proposed order prohibited representations that the product component of either of the body building products, or any substantially similar product:

1. caused users to achieve greater or more rapid loss of fat or gain of muscle than non-users of the product; or
2. worked for all users.

The order also prohibited representations that the product component of any of the three weight loss products named in the complaint, or any substantially similar product:

• caused users to maintain weight loss longer than non-users; or
• caused maturing women to lose more weight than non-users.

Similarly, the order proscribed representing that scientific evidence established that the product component of any of the body building and weight loss products caused users to lose more fat or weight, or gain more muscle, than non-users.

The order further forbad the respondents from making a number of representations about any product or program unless they have substantiation consisting of competent and reliable scientific evidence. The claims that were prohibited unless substantiated included:

1. that any product or program causes or assists users to lose fat or weight or to maintain weight loss, or suppresses hunger or appetite;
2. that any product or program causes or assists in muscle gain or development;
3. that any product or program works for all users;
4. that chromium picolinate in any product or used in conjunction with any program builds muscle, reduces fat, or lowers cholesterol; and
5. that any product or program intended for body building, weight loss, or fat loss is more effective than other products or programs intended for similar purposes.

The order also required respondents to have substantiation, which when appropriate must consist of competent and reliable scientific evidence, for believing that endorsements, including "before" and "after" pictures, represent the typical or ordinary experience of users of any product or program. However, the respondents may use an endorsement if they disclose clearly and prominently in close proximity to the endorsement what the generally expected performance would be in the depicted circumstances, or that consumers should not expect to achieve results similar to those of the endorser.

Lastly, the respondents were required to pay $1,450,000 to the United States Treasury.

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In the Matter of Nu Skin International Inc., CJM, Inc., CST Management, Inc., and CK&C, Inc., corporations, Clara McDermott, individually and as an officer and director of CJM, Inc., Craig Tillotson, individually and as an officer and director of CST Management, Inc., and Craig Bryson, individually and as an officer and director of CK&C, Inc. [File No. 912 3071; January 25, 1994]

Summary

In settlement of alleged violations of federal law prohibiting unfair acts and practices and unfair methods of competition, the respondents were prohibited from making deceptive claims about their products or similar products, and were required to possess competent and reliable scientific evidence to substantiate hair growth, wrinkle removal and burn claims, and performance, benefits, efficacy or safety claims of any food, drug, device or cosmetic they offer in the future. The respondents were also required to make certain disclosures regarding future earnings claims to prospective distributors and pay a total of $1.225 million.

The Claims

This case involved advertisements and promotional practices for three Nu Skin International, Inc. products: Nutriol Hair Fitness Preparation ("Nutriol"), Face Lift with Activator ("Face Lift"), and Celltrex. Parenthetically, the case also entailed certain advertisements and promotional practices used for the recruitment of individuals to be Nu Skin distributors.

First, the Commission alleged that Nu Skin's advertisements expressly or impliedly claimed that Nutriol would stop hair loss, stimulate hair growth, and was as effective as, or more effective than, the prescription drug Minoxidil in the treatment of hair loss. Secondly, the Commission also alleged that Nu Skin's ads expressly or impliedly claimed that Face Lift would permanently remove facial wrinkles and was as effective as, or more effective than, the prescription drug trentinoin (commonly known as Retin-A) in the removal of facial wrinkles. Thirdly, the Commission asserted that Nu Skin expressly or impliedly claimed that Celltrex would promote the healing of third degree burns. Finally, the Commission alleged that Nu Skin's ads expressly or impliedly claimed that using Nutriol, Face Lift, and Celltrex will result in physiological changes in the body, as well as cosmetic changes in appearance.

The Consequences

The Consent Order prohibited the respondents from representing, directly or by implication, that:

1. Nutriol, or any substantially similar product or service,
   1. could or would stop, prevent, cure, relieve, reverse or reduce hair loss;
   2. could or would promote the growth of hair where hair has already been lost; or
   3. was as effective as, or more effective than, the prescription drug Minoxidil in the treatment of hair loss;
2. competent and reliable data show that Nutriol, or any substantially similar product or service, is effective in stopping hair loss and promoting hair growth;
3. Face Lift, or any substantially similar product or service,
   1. (a) can or will permanently remove facial wrinkles; or
      (b) is as effective as, or more effective than, the prescription drug Tretinoin (Retin-A) in the removal of facial wrinkles;
4. Celltrex, or any substantially similar product or service, can or will promote the healing of third degree burns.

The order also proscribed the making of representations for these and any other of the company's products or services, unless the representations are true and at the time of making such representations, and Nu Skin possesses and relies upon competent and reliable scientific evidence that substantiates the representations.

As regards Nu Skin's distributors, the Order required Nu Skin to discontinue dealing with any person who made any of the prohibited representations, and to discontinue dealing with any person who Nu Skin knows is engaged in any other acts or practices prohibited by the Order, unless the person immediately ceased such acts or practices. Also of significance, the Order mandated the distribution of the Order or a summary of the Order to all current and future officers, agents, representatives, employees, and distributors of the proposed respondents.

Finally, the Order required Nu Skin International, Inc., to pay the Federal Trade Commission $1,000,000, and the individual respondents to pay $225,000.

Other Notable Cases

In the matter of Nature's Bounty, Inc., a corporation, Puritan's Pride, Inc., a corporation, and Vitamin World, Inc., a corporation. [File No. 932-3224; May 11, 1995]

The Commission's complaint alleged that respondents manufactured, advertised, offered for sale, sold or distributed a variety of products, for which they made the following representations:

1. Sleeper's Diet promotes weight loss during sleep.
2. L-Arginine stimulates the release of human growth hormone which increases muscle mass while decreasing body fat.
3. L-Ornithine stimulates the release of human growth hormone which increases muscle mass while decreasing body fat.
4. Prostex relieves the symptoms of benign prostatic hypertrophy.
5. L-Cysteine (1)
   1. increases hair growth,
   2. prevents hangovers and brain and liver damage from alcohol, and
   3. helps prevent harm caused by cigarette smoke.
6. L-Lysine improves stress tolerance and reduces fatigue.
7. L-Methionine prevents premature hair loss.
8. Octacosanol increases stamina, vigor, and endurance, improves reaction time, lowers cholesterol levels and strengthens muscles.
9. New Zealand Green Lipped Mussel Extract prevents arthritis and relieves its symptoms.
10. KLB6 causes weight loss and reduces cholesterol levels.
11. Glucomannan causes weight loss by suppressing appetite and allowing calories to pass through the body undigested.
12. Sugar Blocker prevents weight gain by impeding the body's absorption of sugar.
13. Spirulina 500 mg. tablets suppress the appetite, enabling adherence to a diet.
14. KLB6 Grapefruit Diet causes weight loss by stimulating metabolism and suppressing appetite.
15. Herbal Cellulex Formula causes weight loss by eliminating body fat.
16. Memory Booster improves memory retention and mental alertness.
17. Ginsana helps build physical endurance and mental alertness.
18. Fatbuster Diet Tea causes weight loss by eliminating fatty substances from the body.
19. Shake-A-Weigh reduces the body's absorption of calories from food.
20. Dark Circle Eye Treatment removes dark circles from under the eyes.
21. Natural Sterol Complex promotes growth in muscle mass and improves strength.
22. Super Fat Burners reduces body fat, thereby promoting muscle definition.
23. Super Cut reduces body fat, thereby promoting muscle definition.
24. Papaya Enzyme Tablets aid digestion and promote greater absorption of nutrients from food.
25. Calmtabs relieves stress and promotes relaxation.

The Commission's complaint alleged that the representations for Sleeper's Diet, L-Arginine, L-Ornithine, L-Cysteine, and L- Methionine were false and misleading. Further, the Commission alleged that respondents did not possess and rely upon a reasonable basis that substantiated any of the representations in (1) through (25). In addition, the Commission claimed that respondents falsely and in a misleading manner represented that scientific research, including scientific papers and/or studies, prove that:

1. Octacosanol may improve reaction time, lower cholesterol levels and strengthen muscles;
2. New Zealand Green Lipped Mussel Extract prevents arthritis and relieves its symptoms;
3. as to Eye-Vites, also sold as CATA-RX, patients undergoing antioxidant therapy such as that provided by Eye- Vites and CATA-RX are 70% less likely to develop cataracts; and
4. Ginsana improves physical endurance and mental alertness.

The complaint also alleged that through the use of trade names, respondents falsely and misleadingly represented that

1. "Sleeper's Diet" promotes weight loss during sleep;
2. "Memory Booster" improves memory retention; (3) "Dark Circle Eye Treatment" removes dark circles from under the eyes; and
3. "Super Fat Burners" reduces body fat.

The consent agreement required respondents to stop the above-mentioned claims, and misrepresentations regarding the existence, contents, validity, results, conclusions, or interpretations of any test, study, research article, or any other scientific opinion or data. As regards the products "Sleeper's Diet," "L-Arginine," or "L- Ornithine," or any other substantially similar amino acid product, respondents were ordered to stop representing that

1. any such product stimulates greater production or release of human growth hormone in a user than a non-user of such product;
2. any such product promotes muscular development; or
3. any such product burns fat or otherwise alters human metabolism to use up or burn stored fat, or promotes weight loss.

In connection with the products L-Cysteine, L-Methionine, or any other substantially similar hair care product, respondents were prohibited from representing that any such product will prevent or retard hair loss or promote hair growth where hair has already been lost. As to any hair care product or service, respondents are to cease and desist from representing that

1. the use of the product or service will prevent, cure, relieve, reverse, or reduce hair loss; or
2. the use of the product or service will promote the growth of hair where hair already has been lost, unless, at the time of making such representation, respondents possess and rely upon competent and reliable scientific evidence that substantiates the representation.

Respondents were also required to possess and rely upon competent and reliable scientific evidence as substantiation for any representation regarding any product.

Lastly, although not insignificantly, the respondents were ordered to pay $250,000.00 to the Federal Trade Commission.

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In the Matter of: Live-Lee Productions, Inc., a corporation, and Ruta Lee, individually and as an officer and director of said corporation [File No. 942-3058; July 3, 1995]

This case involved alleged deceptive representations for three spray vitamin products and a spray smoking cessation product. The products at issue were Life Way Vitamin C and Zinc Spray, Life Way Antioxidant Spray, Life Way Vitamin B-12 Spray, and Life Way Smoke-Less Nutrient Spray. Claims related to the products were made on television advertisements called "Spotlight on Ruta Lee," which were broadcast on the Home Shopping Club, a commercial programming shown on the Home Shopping Network.

According to the FTC complaint, Lee made claims that the vitamins in the spray products are more fully absorbed by the human body than vitamins taken in pill form; and that the vitamins would heal mouth lesions, cold sores, and cracking of the corners of the lips; prevent common colds; treat hangover symptoms; increase users' energy; ensure the proper functioning of the immune system; reduce the risk of contracting infectious diseases; and prevent facial lines. The complaint also alleged that Lee made claims that the smoking cessation spray would enable smokers, regardless of how long they have smoked or how much they smoke, to stop smoking easily; and would satisfy the physiological urge to smoke a cigarette and eliminate the quivering, anxiety and weight gain that go along with quitting smoking. The FTC further contended that the respondents did not have substantiation for these representations at the time they were made, and that the respondents knew or should have known that the representations were not substantiated.

While no fines were imposed, the consent order contained provisions:

1. preventing the respondents from engaging in similar acts and practices in the future;
2. prohibiting the respondents from representing that any food, food or dietary supplement, or drug can or will have any effect on the user's health, or on the structure or function of the human body, unless, at the time they make the representation, they possess and rely upon competent and reliable scientific evidence that substantiates the representation;
3. prohibiting respondents from making any representation about the performance, benefits, efficacy, or safety of any smoking cessation product, program, or service, unless they have competent and reliable scientific evidence that substantiates the representation.

The Commission also issued a complaint against Home Shopping Network, Inc., Home Shopping Club, Inc., and HSN Lifeway Health Products, Inc. for their role in making and disseminating the same allegedly deceptive representations (Docket No. 9272), which, at the time of the issue of the order, was pending before an Administrative Law Judge.

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Conclusion

The lessons to be learned from these cases are several. First, in addition to rules of sales and marketing, the game of advertising has myriad legal rules--among them, substantiation, truthfulness, and fairness. Second, the FTC can and will pursue the decision-making individuals involved in improper product promotional activities. Third, companies that believe they will not be targets of FTC enforcement action because of their small size are mistaken.