FTC

How Not To Advertise Your Supplement

** FTC Claims Major Scalp in Fake News Case **                                                                                                                                                              

The recent political season has contributed new words to our lexicon — “alternative facts” (Thanks, Kellyanne!) and “fake news.”  While these terms may sound novel to us, the Federal Trade Commission has long taken action to curb such practices in commercial advertising under its mandate to enforce prohibitions on unfair or deceptive acts or practices (15 U.S.C. § 45(a)) and specifically false advertisements for food, drugs, devices, services, or cosmetics (15 U.S.C. § 52).

Recently, the FTC obtained a $29+ million personal judgment (ouch!) against a Tampa Bay businessman based on advertising the FTC claimed lacked scientific substantiation and misled consumers by using a fake news site and article.  Fed. Trade Comm’n v. NPB Advert., Inc., No. 8:14-CV-1155-T-23TGW, 2016 WL 6493923, at *9 (M.D. Fla. Nov. 2, 2016).  The case centered around one Nicholas Congleton, who — inspired by a clip from The Dr. Oz Show discussing a clinical study of the weight loss effects of green coffee extract (the Vinson Study) — founded Pure Green Coffee.  The business was largely operated online, relying on search engine and other digital advertisements (click bait) to the tune of $9.5 million.  This advertising investment proved to be money well spent.  From 2012 to 2014, Pure Green Coffee generated gross receipts just shy of $34 million.

Much of Pure Green Coffee’s advertising practices are standard grist for the FTC mill – inadequate substantiation for efficacy claims, unsupported establishment claims, and customer testimonials.  Pure Green Coffee promised consumers fabulous results – twenty-eight pounds in nine weeks or ten pounds and one-to-two inches of belly-fat in a month.  Although Mr. Congleton admitted in his deposition that he had no scientific basis for Pure Green Coffee’s weight loss claims, in opposition to the FTC’s motion for summary judgment he cited to “news articles, blog entries, and manufacturers’ brochures” (non-starters) as well as nine studies – chief among them, the Vinson Study Dr. Oz discussed on TV.  Unfortunately, most of the studies either did not involve green coffee extract or weight loss.  The Vinson Study was debunked by the FTC’s expert on several bases – but primarily because Dr. Vinson, himself, withdrew it.

The FTC based its argument that Pure Green Coffee made establishment claims in its ads in part on a photo —  a man wearing a white doctor’s coat and stethoscope holding a pill.   The Court found that this image implied that a physician or scientist had established Pure Green Coffee’s efficacy.   As for testimonials, Pure Green Coffee’s online ads committed the cardinal sin – they did not disclose that the participants were compensated.

Which brings us to fake news.  Pure Green Coffee purchased the domain “dailyconsumeralert.org” and loaded the page with a spoof banner for “Women’s Health Journal,” a list of several health- or fitness-related categories, and a fake article by a non-existent columnist that offered a purportedly unbiased test of the efficacy of green coffee extract that Mr. Congleton copied and pasted from another website.  The online ad also employed the ever popular “AS SEEN ON” advertising device next to the logos of CBS, ABC, MSNBC, and CNN – creating the impression that these networks reported favorably on Pure Green Coffee.  The court found that the webpage appeared as a bona fide news outlet and thus misled consumers — despite Mr. Congleton placing the word, “Advertorial” at the top.

Mr. Congleton’s case was not a particularly difficult one for the FTC.  But it nevertheless presents a cautionary tale to supplement sellers.  First, the more specific the claim, the closer the FTC will scrutinize the substantiation.  Depending on the nature of the claim the F.T.C. will require the study to include randomized clinical trials, human as opposed to animal proxy trials, and will take a hard look at the methodology and controls in the testing.  Second, images of folks in white coats or hospital scrubs in supplement ads are sure to grab the FTC’s attention.  Third, paid endorsers must be identified as such.  And finally, supplement makers must guard against intentionally or inadvertently creating fake news.

On this last point, it is critical that supplement companies (and any company engaged in internet marketing for that matter) familiarize themselves with the FTC’s December 2015 Native Advertising Guidelines.  These guidelines were developed to advise businesses on how to advertise online without running afoul of the FTC’s prohibition of fake news.  While a business might believe its online advertisement clearly appears as such when a consumer views it and, therefore, is not deceptive, the FTC’s position is that “advertisers cannot use ‘deceptive door openers’ to induce consumers to view advertising content.  Thus, advertisers are responsible for ensuring that native ads are identifiable as advertising before consumers arrive at the main advertising page.”  (Emphasis added.)  This is no easy task — as shown by the Guidelines, themselves — which contain 17 different examples of online advertisements and how each should be treated.  Suffice it to say, native advertising is a hot button issue for the FTC, and enforcement actions against businesses who ignore the Agency’s guidelines are a growth industry for advertising defense lawyers.

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Say It Like You Don’t Mean It

Washington, DC - October 11, 2009: An entrance to the Federal Trade Commission office building in downtown Washington, DC. The doorway features an ornate bronze grillwork depicting various commercial trade conveyances. This is one of the smaller side entrances. The FTC is a government agency that regulates consumer protection laws, antitrust laws, trademark registration, antitrust laws, and other trade and commerce issues.

** The FTC Weighs In On OTC Homeopathic Drugs With New Disclosure Requirements **                                                                                                                                                                                                                                                                                                                                                                                                                                           

This past Tuesday, the FTC issued its brand new Enforcement Policy Statement on Marketing Claims for OTC Homeopathic Drugs.  In sum, the FTC is fine with homeopathic drug makers advertising and labeling their products as effective in treating certain conditions – as long as they prominently disclose that their products don’t really work.

As we’ve blogged about recently, homeopathy is the brainchild of  the German physician, Samuel Hahnemann (1755-1843), who divined the concept of “like cures like.”  As the FTC explains, “Homeopathy . . . is based on the view that disease symptoms can be treated by minute doses of substances that produce similar symptoms when provided in larger doses to healthy people.”  In what has become the subject of much controversy over time, homeopathy made its way into the Food Drug and Cosmetic Act of 1938.  The FDCA defines drugs to include “articles recognized in the . . . official Homeopathic Pharmacopoeia of the United States.  (‘HPUS’)”  21 U.S.C. § 321(g)(1)(A).  The HPUS is a weighty tome first published in 1897 that sets forth standards for manufacturing homeopathic drugs as dictated by the Homeopathic Pharmacopoeia Convention of the United States.  Just how homeopathic remedies became “drugs” under the FDCA is shrouded in the mists of time, but it is generally accepted that New York Senator Royal Copeland, a homeopath, family physician, and sponsor of the FDCA, had a hand in it.

In 1988, the FDA issued its Compliance Policy Guide (CPG) for homeopathic drugs titled, “Conditions Under Which Homeopathic Drugs May be Marketed.”  The CPG allows homeopathic drug makers to sell OTC products without demonstrating their efficacy.  CPG Sec. 400.400.  This allowance, however, applies only to homeopathic products intended for “self-limiting disease conditions” (i.e., medical problems that will go away on their own anyway) that are amenable to self-diagnosis and treatment.  The CPG mandates that OTC homeopathic drugs are labeled as “homeopathic” and that the labels display at least one major OTC indication for use.

The sale of homeopathic remedies has grown hand-in-hand with nutritional supplements over the past two decades.  Unlike supplements making nutritional deficiency, structure/function, or general well-being claims, however, the FDA does not require OTC homeopathic products to carry a disclaimer such as, “This statement has not been evaluated by the Food and Drug Administration.  This product is not intended to diagnose, treat, cure, or prevent any disease.”  So, in the world of OTC homeopathic drugs, the FDA actually requires a use indication but doesn’t require substantiation or a disclaimer.

Enter the FTC.  Responding to pressure from consumer advocacy groups and, particular to this case, the Center for Inquiry (an organization that aims “to foster a secular society based on science, reason, freedom of inquiry, and humanist values”), the FTC issued its Enforcement Policy.  In it, the FTC impliedly acknowledges that, even though it has always had enforcement authority over homeopathic OTC drug makers, it has generally chosen not to police false or misleading advertising or labeling of their products due to the FDA’s 1988 CPG.  But no more!  Directly contradicting the CPG’s requirement of usage indications without the need to demonstrate efficacy, the FTC is announcing to homeopathic product makers everywhere that their products are not exempt “from the general requirement that objective product claims be truthful and substantiated.”

The FTC believes this will be no easy feat:  “For the vast majority of OTC homeopathic drugs, the case for efficacy is based solely on traditional homeopathic theories and there are no valid studies using current scientific methods showing the product’s efficacy.”  So what’s a homeopathic OTC drug manufacturer to do?  Just add to your product’s label (in close proximity to the FDA’s required efficacy indication or incorporated into it) that “(1) there is no scientific evidence that the product works and (2) the product’s claims are based only on theories of homeopathy from the 1700s that are not accepted by most modern medical experts.”  Simple enough (although try fitting it on a label).  But the FTC further warns, “In light of the inherent contradiction in asserting that a product is effective (the FDA’s requirement) and also disclosing that there is no scientific evidence for such an assertion, it is possible that depending on how they are presented many of these disclosures will be insufficient to prevent consumer deception.”  The FTC recommends that marketers conduct consumer surveys “to determine the net impressions communicated by their marketing materials.”  And to make sure there is no possible avenue of escape, the FTC includes this flourish:  “Marketers should not undercut such qualifications with additional positive statements or consumer endorsements reinforcing a product’s efficacy.”  In short, if you can’t say something bad about the product, say nothing at all.

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Lumosity Tagged for $2 million by FTC

234** Maker of “Brain Training” Subscription Service Settles with FTC on Allegations that it did not Have the Science to Back Up its Claims of Cognitive Benefit ** . . .                                                                                                                                                                                                                                                                The Federal Trade Commission has agreed to a settlement with Lumosity Inc., with respect to the company’s well known and widely advertised “brain training” program – after the FTC filed a complaint alleging Lumosity’s ads touting the cognitive benefits associated with the products were scientifically unfounded.  Federal Trade Commission v. Lumos Labs, Inc., No 3:16-cv-00001-SK (N.D Cal. Jan. 4, 2016) at ECF No. 1 (Compl.).  The settlement terms include a payment by Lumosity of $ 2 million and a requirement to notify customers who signed up on an auto-renewal plan between January 1, 2009 and December 31, 2014 about their ability to cancel their subscription.  Id. at ECF No. 10 (Order).  The FTC has issued a public statement about the settlement stating, in part: “Lumosity preyed on consumers’ fears about age-related cognitive decline, suggesting their games could stave off memory loss, dementia, and even Alzheimer’s disease . . . [but]. . .  simply did not have the science to back up its ads.”  The FTC complaint also alleges that Lumosity’s consumer testimonials featured on its website had been, in some cases, pay-to-play – i.e., were solicited through contests that promised significant prizes, including a free iPad, a lifetime Lumosity subscription, and a round-trip to San Francisco.  Id. at ECF No. 1 (Compl.) ¶¶ 19 – 21.  The settlement order requires the company and its officers to have competent and reliable scientific evidence before making future claims about any benefits for real-world performance, age-related decline, or other health conditions.  Id. at ECF No. 10 (Order) at 7 – 9.  The order also imposes a $50 million judgment against Lumosity – suspended upon payment of $2 million to the FTC.  Id. at 10 – 12.

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“Virtually All” Made in The USA Guidance

made-in-usa-2

**Federal Trade Commission Staff Provide Guidance on Regulations Proscribing the “All or Virtually All” Standard for Made in the USA labeling** . . .                                                                                                                                                                                         

The Federal Trade Commission (FTC) has a role in regulating “Made in the USA” labeling.  15 U.S.C. § 45aSee prior post.  Under FTC regulation if “virtually all” of a product is made in the United States, then it is permissible to use the Made in the USA label.  62 FR 63756-01 at pp. 63757, 63764–65.  Unfortunately, this “virtually all standard” is vague – and the FTC has declined to come up with a bright line test for manufacturers.  Id.  The FTC’s Enforcement Policy Statement informs that in making a “virtually all” determination, the FTC will look at factors such as:  (1) the portion of manufacturing costs attributable to foreign parts and processing; (2) whether the foreign parts and processing are significant to the final product; and (3) how far back in the manufacturing process the foreign content is.  Even with this broad guidance, a case by case analysis is needed on “Made in the USA” labeling.

Fortunately, when the FTC closes an enforcement proceeding on a case, it often provides a closing letter to the target.  Such a closing letter may contain an explanation of the findings of the investigation and the rationale for why the case was closed.  A number of these FTC Closing Letters are available on the FTC website: https://www.ftc.gov/enforcement/cases-proceedings/closing-letters-and-other-public-statements/staff-closing-letters.  Recent  FTC Closing Letters regarding “Made in the USA” labeling have highlighted the importance of the second factor (see above) — whether foreign parts and processing are significant to the final product.  With respect to Loctite glue made by the German multinational Henkel, the FTC looked at the cost and function of cyanoacrylate (an ingredient imported and added to the U.S. manufacturing of the glue).  Because both the cost and function of cyanoacrylate were significant in the glue, the FTC decided that it was inappropriate for Henkel to use an unqualified “Made in the USA” label.  A similar finding was made with respect to Gorilla Glue earlier this year.  In another recent closing letter concerning the product Spray Pal (a cloth diaper cleaning device) that included a foreign-made clip used to fasten the diaper to the device, the FTC determined that, while the cost of the clip may be small relative to overall manufacturing costs, it nevertheless was essential to the function of the product.  As such, an unqualified claim of “Made in USA” was not permissible.  Companies need to be mindful that the FTC is not looking merely at the cost factor.  If an inexpensive foreign component is integral to the design and function of the product, it may be significant enough to  negate a claim of “Made in the USA.”

 

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Made in the USA: In California

**California re-casts its labeling standards for “Made in the USA” labels – bringing it closer in line with Federal Trade Commission Regulations and the “Virtually All Standard” ** . . .                                                                                                                                                                                                                                                                                                                                                                    

The California legislature has not been shy in being the outlier in consumer protection law. It’s Made in the USA statute is no exception.  Since 1961, California has expressly prohibited the designation of products as “Made in the USA” or “Made in America” when the product or “any article, unit, or part thereof, has been entirely or substantially made, manufactured, or produced outside of the United States.” Cal. Bus. & Prof. Code § 17533.7 (emphasis added).  Accordingly, to comply with California law, companies have had to ensure that every component of their products be made domestically – “down to the last screw.”  Benson v. Kwikset Corp., 152 Cal. App. 4th 1254, 1285 (2007) (dissenting opinion).  With diversified and international supply chains the norm, complying with this standard has been problematic if not impossible.

Under Federal law, the Federal Trade Commission (FTC) has power to regulate Made in the USA labeling.  15 U.S.C. § 45a.  Notably, the FTC’s standard is not as strict as the California standard. Under FTC regulations, under the “virtually all standard” if almost all of the product is made in the United States, then it complies.  62 FR 63756-01 at pp. 63757, 63764–65.  That is, negligible or early stage components of products assembled or processed in the United States do not offend the law.  Id.  California’s law had no similar latitude, meaning a product could comply with FTC regulations but still run afoul of California law.

This has been a significant irritant for consumer companies, requiring them to create multiple sets of labels – or more commonly – having to apply the higher California standard across all of their U.S. marketing and labeling.  California courts have not been particularly sympathetic to this dissonance finding that at least hypothetically it is possible to comply with both laws simultaneously and, therefore, there is no federal preemption.  See Clark v. Citizens of Humanity, LLC, No. 14-CV-1404 JLS WVG, 2015 WL 1600679, at *5 (S.D. Cal. Apr. 8, 2015).  A bill currently before Congress, S. 1518., the “Reinforcing American-Made Products Act of 2015” proposes to clarify the impasse by specifically articulating that the federal government has complete control over country-of-origin labels and would specifically preempt all conflicting state standards.

California legislators have spoken first.  Taking effect January 1, 2016, Senate Bill 633, will allow manufacturers to label a product as “Made in the USA” if the foreign made parts do not constitute more than 5% of the final value of the product (or 10% if the foreign parts are not available from a domestic source).  Senate Bill 633, introduced by Senator Jerry Hill, a San Mateo Democrat, was signed into law on September 1, 2015.  This change shifts California from its unique position on labeling and more closely aligns it with the labeling standards used by the Federal Trade Commission (“FTC”).  There is not perfect alignment, however, and marketers selling products in California will still have to deal with different standards.  Nevertheless, the California bright line test provides some welcome clarity.

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