Federal Trade Commission v. Wellness Support Network, Inc., 2014 WL 644749, No. 10–cv–04879 (N.D. Cal. Feb. 19, 2014) (magistrate judge)
The FTC sued Wellness and its principals Robert Held and Robyn Held for false advertising and deceptive practices in the sale of their Diabetic Pack and Insulin Resistance Pack (the same product sold under two names). Diabetes is a debilitating disease affecting over 10% of US adults, and insulin resistance is a mechanism by which it does its damage by keeping blood glucose levels too high.
Defendants advertised the products as containing vitamins, minerals, and botanical extracts, formulated into three components: the Glucose Support Formula, the Vitamin-Mineral Formula, and the Calcium-Magnesium Formula. Wellness stopped using those names in 2011, but it continues to sell essentially the same products under similar names, including Glucose Support Formula and the other two combined under the name Life Support Formula. Wellness stopped advertising the Diabetic Pack as such, but still sells it, and continued to advertise the individual components, including “Glucose Support.”
Robert Held formulated the product “on the basis of scientific studies he found on the Internet.” Defendants claimed that the products assisted in the dietary or nutritional management of diabetes by providing nutrients which typical diabetics lack. After subtracting money returned to customers, Wellness’s sales revenue for the products between 2004 and 2012 was nearly $2.2 million. Robert and Robyn Held developed all the advertising and marketing, including the website, though verifying accuracy was Robert’s job.
Wellness used keywords, metatags, and AdWords to promote its website. Its keywords included “alternative diabetes,” “diabetes control,” “cure diabetes,” “cure for diabetes,” “diabetic cure,” “remedies diabetes,” “natural diabetes cure,” and “diabetes treatment.” Most of its ads were pay-per-click, a marketign campaign designed by Robert Held. Though outside contractors managed the campaigns, Robert chose the keywords and AdWords. Some of the more successful ads made claims such as:
Clinically Proven Natural Solution
To Diabetes With A 90% Success Rate…
Reverse the Effects of Diabetes
Money Back Guarantee
The website “consistently highlighted the Products’ ability to lower blood sugar levels and reduce dependency on medication and emphasized the existence of scientific proof demonstrating these benefits.” It also contained testimonials from putative customers claiming to have freed themselves from high blood sugar and insulin use. These testimonials also referred to a low carb diet recommended as part of the Diabetic Pack regimen. There were numerous references to science and scientific studies, such as the headline, “Nobel Prize Winning Technology Validates WSN Diabetic Pack Ingredients.” The Diabetic Pack allegedly worked because it “operate[d] at the cellular level.”
An online marketing survey conducted for defendants indicated that the main reason that consumers landed on the website was that they were looking for information about natural remedies for diabetes and about how to control their sugar levels.
Defendants never conducted scientific studies to establish the products’ effectiveness. Instead, their claims were based on studies about the individual ingredients. Robert Held also testified that he believed the products worked because people told him that the products worked for them, but he didn’t know how many had told him that. From 2004-2007, defendants received about 384 complaints: some said the product wasn’t working and others said their doctors didn’t support its use.
In 2005, the FDA sent a letter warning that it considered the Diabetic Pack to be a drug and that defendants’ claims didn’t comply with the FDCA. In 2006, the FDA sent another warning letter. In 2007, the FTC sent a Civil Investigation Demand, culminating in this case.
The FTC asserted two causes of action, one for the Diabetic Pack and one for the Insulin Resistance Pack. Diabetic Pack: Defendants deceptively claimed that the Pack was an effective treatment for diabetes; that it reduced or eliminated the need for insulin and other diabetes medications; that scientific studies proved that it was an effective treatment for diabetes; and that it was clinically proven to cause an average drop in blood glucose levels of 31.9%. Insulin Resistance Pack: defendants deceptively claimed that the Pack reversed insulin resistance, managed insulin resistance, and preventd diabetes; that scientific studies proved that it was an effective treatment for insulin resistance; and that it was clinically proven to cause an average drop in blood glucose levels of 31.9%.
The defendants offered several defenses, all of which the court rejected. First, the court accepted the FTC’s diabetes/insulin resistance expert, who testified about what experts would consider substantiation with respect to the claims at issue: sufficiently large, controlled, randomized, double-blind trials, using the same dosages and formulations in defendants’ products. The expert didn’t review defendants’ advertising or attempt to determine whether they actually made the challenged claims, but that wasn’t his job and didn’t make his opinions unreliable. Defendants’ expert, by contrast, didn’t address the claims the FTC challenged, so his opinions weren’t relevant, and his methodology wasn’t reliable. Defendants wanted the court to consider his opinions with respect to individual liability—since he testified that the products were useful, they weren’t trying to “hoodwink” customers. But his opinions still weren’t based on reliable scientific methodology, even if they were relevant to the Helds’ knowledge or belief (and of course intent isn’t required to violate the FTCA).
Defendants argued that the FTC’s claims needed to take into account the FDA’s regulations for medical foods. That wasn’t the issue in the case, though.
Defendants also argued that the FTC’s claims violated the First Amendment. Citing Pearson v. Shalala, 164 F.3d 650 (1999), defendants argued that Central Hudsonapplied. But Pearson was inapposite. There’s no right to make false or misleading advertising claims; Pearson is about “regulations that limit or ban whole categories of speech,” not enforcement actions against particular deceptive speech.
Defendants then tried the argument that the APA barred the FTC’s claims because the FTC is seeking to make new rules through adjudication rather than complying with the procedures that govern rulemaking under the APA. Nope. Agencies can have case by case enforcement policies. While an agency may abuse its discretion when it makes a “prospective pronouncement of a broad, generally applicable requirement [in an adjudication], without application of the requirement to the parties before the [agency],” here the FTC was relying on well-established rules and legal theories in suing based on Sections 5 and 12. It wasn’t trying to announce through adjudication any broad new rule.
Now, for the claims themselves: to show a claim has been made, the FTC must show either that it was explicitly stated, or that, from a reasonable consumer’s perspective, the ad gives the net impression that the claim has been made. A court can determine this net impression, and ads capable of being interpreted in a misleading way should be construed against the advertiser.
Under this standard, the court found that defendants made the challenged claims. As to “effective treatment for diabetes,” the court disagreed with defendants’ argument that their claims related only to the ingredients and not to Diabetic Pack. “Any reasonable consumer reading the description on Defendants’ website of how Diabetic Pack works would conclude that the scientific studies relating to the Foodform® ingredients also establish that Diabetic Pack is effective in treating diabetes.” Likewise, the ads claimed that Diabetic Pack reduced or eliminated the need for insulin and other diabetes medicine, “notwithstanding references to diet and exercise or disclaimers advising consumers that they should use the Diabetic Pack under medical supervision and should continue to take their prescribed medication.” The pay-per-click ads expressly promised a “drug-free” “solution” to diabetes, and the website stated that one of Diabetic Pack’s “breakthrough benefits” is “less dependency on medications.” This was reinforced by the testimonials.
The disclaimers warning consumers to continue to take their medications didn’t help. For example, the website had the following Q and A:
When starting on the WSN Insulin Resistance Pack can I stop using other medications I am taking for my insulin resistant condition?
You should continue to take any medications that have been prescribed by your physician. As your symptoms begin to reverse … you should inform your physician about what is happening and that you want to reduce the amount of medications you are taking accordingly. Working together with your physician, you can continue to reduce any medications you are taking, and in some cases, completely eliminate the use of all medications.
This was hardly a disclaimer: it gave “the strong impression that [consumers’] need for insulin or other diabetes medications will be reduced as a result of using the Diabetic Pack.”
Misleadingness: The FTC has the burden of showing inadequate substantiation, but doesn’t need to have clinical studies showing the product doesn’t work. Establishment claims have to be substantiated as claimed; the appropriate level of substantiation for non-establishment claims depends on context, including “1) the type of claim; (2) the product; (3) the consequences of a false claim; (4) the benefits of a truthful claim; (5) the cost of developing substantiation for the claim; and (6) the amount of substantiation experts in the field believe is reasonable.” The claims here were of both types; the court found all misleading because they lacked a reasonable basis, and the establishment claims were actually false.
The FTC’s expert used the same substantiation standard for both establishment and non-establishment claims, because experts in the field would require “consistent results from well-designed and well-conducted studies in representative human populations that directly assess the specific therapeutic effects at issue” in either case, because the claims were disease-specific treatment or prevention claims. Even when defendants didn’t directly say “studies prove,” they made claims about “treatment of a serious health condition where the consequences of adopting a particular course of treatment may be significant,” both in benefits and risks (for example, discontinuing diabetes medication). The evidence showed that the claims lacked adequate substantiation, and that defendants’ cited studies didn’t support the claims. Among other things, many of the studies were in vitro or in animals, not in humans; the single-ingredient studies had weaknesses such as insufficient size, lack of placebo or other controls, and testing of much larger doses than are found in defendants’ products; and other well-designed studies produced inconclusive or negative results.
Of course the claims were material. They were express and health-related, both of which are presumptively material.
The court then found individual liability for Robert Held and Robyn Held. Injunctive relief against individuals on the basis of corporate acts or practices is available where: “1) [the] corporation committed misrepresentations or omissions of a kind usually relied on by a reasonably prudent person, resulting in consumer injury, and 2) [the individual] participated directly in the acts or practices or had authority to control them.” For restitution, the FTC must also show knowledge of the deception. This standard requires that the individual “had actual knowledge of material misrepresentations, [was] recklessly indifferent to the truth or falsity of a misrepresentation, or had an awareness of a high probability of fraud along with an intentional avoidance of the truth.” But it doesn’t require intent to defraud.
The only issue here was whether the Helds had the necessary knowledge. FTC v. Garvey, 383 F.3d 891 (9th Cir. 2004), found a spokesperson hired to appear in weight-loss infomercials not individually liable. He was given samples of the product a few weeks before filming, and his wife lost significant weight using the product, and he also received booklets about the product from the manufacturer. Because of his first-hand anecdotal evidence and the purported scientific evidence provided by the manufacturer, the 9th Circuit held that he lacked the requisite mental state, given that he was merely a hired spokesperson and thus should only be held to a duty to examine the material from the perspective of a reasonable layperson.
FTC v. Medlab, Inc., 615 F. Supp. 2d 1068 (N.D. Cal. 2009), reached the opposite result as to a different individual. There, the individual defendant also claimed to have personally used the product and lost 18 pounds. But he was “deeply involved in designing the composition of the products and composing the representations at issue” in the case. He continued to place misleading ads even after the FTC initiated a “red flag” campaign warning of “bogus claims” in his advertisements. And his own weight loss didn’t address whether one could, as the ads claimed, lose weight without dieting or exercising, or whether there were clinical studies showing that users could expect this result.
As in MedLab, there was “extensive and undisputed evidence that Robert Held was at least recklessly indifferent to the truth or falsity of the representations.” He wasn’t trained as a scientist or doctor but decided on the composition of the products based on internet research. He and Robyn Held developed all the ads together, including claims that scientific studies supported the products’ effectiveness, so he had sufficient knowledge to support individual liability.
Robyn Held argued that she justifiably relied on her father Robert’s conclusions, but “no reasonable fact finder could conclude that she was anything but reckless.” She wasn’t involved in formulating the products, but she was a co-owner of the company, played a significant role in running it, and was extensively involved in creating the deceptive ads. She was also aware that the composition of the products was based on Robert’s internet research, that Robert had no formal medical or scientific training that qualified him as an expert on the treatment of diabetes, and that the products were never scientifically tested. Thus, both were personally liable.
The district court had broad discretion to order restitution and/or a permanent injunction where a violation of the FTC Act has been established. Courts often award the full amount lost by consumers, not just defendants’ profits. The court found that the FTC was entitled to nearly $2.2 million in restitution, based on Wellness’s net sales.
The court declined to exclude reorders from its calculation, though defendants argued that these consumers were obviously satisfied. “A presumption of actual reliance arises once the Commission has proved that the defendant made material misrepresentations, that they were widely disseminated, and that consumers purchased the defendant’s product.” Reorders don’t negate reliance on misrepresentations, absent evidence that repeat customers didn’t rely on the ads, of which there was none.
The court also agreed with the FTC’s proposed reporting requirements, despite defendants’ argument that they had no history of regulatory violations. Nonetheless, the reporting requirements were reasonable. The FTC “is not limited to prohibiting the illegal practice in the precise form’ existing in the past.” Rather, the FTC may “fashion its relief to restrain other like or related unlawful acts.” “These fencing in’ provisions are needed to prevent similar and related violations from occurring in the future,” as long as they have a reasonable relationship to the actual unlawful practices. Reasonability requires consideration of “(1) the seriousness and deliberateness of the violation; (2) [the] ease with which the violative claim may be transferred to other products; and (3) whether the respondent has a history of prior violations.”
Here, both defendants were personally involved in serious violations of the law over many years. The reporting—here, changes in title or role in the business, for 20 years—was necessary to monitor their compliance. The actually proscribed conduct was limited to representations related to the violations established by the FTC.