By Robert B. Barnett Jr., J.D.
Previously dismissed suit against Quincy Bioscience survives second go-round after reversal by Second Circuit.
On remand from a Second Circuit decision overturning the dismissal of a false advertising suit involving the drug Prevagen, a complaint filed by the FTC and the State of New York was found to have adequately stated causes of action for deceptive advertising under the FTC Act and New York law against Quincy Bioscience and its president, the federal district court in New York City has ruled. The court however dismissed without prejudice the claims against Quincy’s CEO because the complaint failed to allege adequately that he actively participated in the alleged deceptive acts or had knowledge of them (FTC v. Quincy Bioscience Holding Co., Inc., July 24, 2019, Stanton, L.).
Background.Quincy Bioscience manufactures and sells Prevagen, a dietary supplement claiming to improve memory. Prevagen’s active ingredient is apoaequorin, a protein derived from jellyfish. In various ads on various platforms, Quincy claimed that Prevagen had been clinically shown to improve memory, a contention based in large part on a double-blind trial called the Madison Memory Study.
The FTC and the New York Attorney General filed suit in New York federal court against Quincy, its president Mark Underwood, and its CEO Michael Beaman, alleging violations of the FTC Act and the New York law for deceptive advertising. Their claim was based on the results of at least 30 analyses of the Madison Memory Study, all of which found no statistical differences between those who took Prevagen and those who took a placebo. Furthermore, Quincy had claimed that Prevagen works by entering the human brain and supplementing the proteins that are lost during aging. The medical research indicated, however, that Prevagen is rapidly digested in the stomach and is broken down into amino acids and small peptides, like all other dietary proteins. At no time does it enter into the brain.
Quincy filed a motion to dismiss, which the court granted, ruling that the claim failed to state a claim under the FTC Act. The court also refused to exercise supplemental jurisdiction over the New York law claims. The FTC appealed to the Second Circuit, which reversed on the ground that the allegations plausibly established claims for deceptive advertising. The Second Circuit also ordered the court to consider various arguments that Quincy had raised in its original motion to dismiss but that the court did not address. On remand, Quincy renewed its motion to dismiss, which raised three questions that were not originally considered: (1) whether the FTC had a sufficient quorum to implement its decision to file suit against Quincy, (2) whether the court had personal jurisdiction over the two individuals, and (3) whether the court could impose personal liability against those two individuals.
Quorum.Quincy’s quorum argument was based on the fact that, at the FTC meeting in which the decision to proceed with suit was made, only three of the five members were present. When the time came to vote, two of the three voted "yes" and one voted "not participating." Thus, Quincy contended, the action was invalid without a quorum because only two of the five members voted for it. The court, however, rejected the argument, noting that Quincy misapplied the term quorum in this context. The quorum is the minimum number of members who must be present to enact business. The FTC rules state that a quorum exists if a minimum of three members are present. Once three members are present, business can be conducted. Once business can be conducted, a majority of those present is necessary to approve a measure. Thus, a quorum existed at this meeting, and the decision to proceed with the suit was approved by a majority of those present (two of the three). Consequently, the court denied the motion to dismiss on the grounds of a lack of a quorum.
Personal jurisdiction.Quincy argued that the court lacked personal jurisdiction over the two individuals because they were not New York residents and had no personal transactions in New York. The court rejected that argument, noting that the FTC Act’s Section 13 empowers the court to grant relief wherever the defendant may be found. Under Red. R. Civ. P. 4(k)(1)(C), serving a summons establishes personal jurisdiction when authorized by federal statute. Analyzing the FTC Act, the court concluded that it was more similar to RICO than to the Clayton Act, which meant that venue did not have to be satisfied before service of process could be undertaken. As a result, the court concluded that the FTC Act permits nationwide service and nationwide personal jurisdiction. Thus, the inquiry was whether the two individuals had sufficient minimum contacts with the U.S. rather than with New York. Because they both clearly did, the court had personal jurisdiction over them both. As for personal jurisdiction over them for the New York claims, the court ruled under the doctrine of pendant jurisdiction that it could assert personal jurisdiction over them where the state law claims derived from a common nucleus of operative facts. Because the state law claims in his case met that test, the court had personal jurisdiction over both individuals, and the motion to dismiss on this ground was denied.
Individual liability.Quincy argued that the two individuals could not be held personally liable because only the corporation could be held liable for the allegedly deceptive advertising. The court rejected that argument, noting that the Second Circuit has held that an individual may be liable under the FTC Act for a corporation’s deceptive act if the individual, with knowledge of the deceptive nature of the scheme, either participated directly in the practice or had the authority to control it. The same held true under the New York deceptive practices law.
As for Underwood, the president, the complaint alleged that he co-founded the company, had final decision-making authority on all advertising, served on the marketing creative team, wrote advertising materials, directed the research, translated scientific data into marketing language, wrote a user guide, and even personally appeared in some advertisements. Those allegations were clearly enough to establish a valid claim for his personal liability under both the FTC Act and New York.
As for Beamon, the CEO and co-founder, the complaint’s allegations were more conclusory, stating merely that he had the authority to control Quincy’s advertising practices. The complaint stated only that he gave media interviews, signed research agreements, pre-approved research proposals, and reviewed Quincy’s advertising. The complaint contained no allegations that he participated in the alleged deceptive practices or had knowledge of them. As a result, the allegations were insufficient to establish his personal liability. The court, therefore, denied Quincy’s motion as it applied to Underwood but it granted Quincy’s motion as it applied to Beaman personally, with leave to amend.
The case is No. 17 Civ. 124 (LLS).
Attorneys: Annette Soberats for the FTC. Geoffrey White Castello, III (Kelley Drye & Warren, LLP) for Quincy Bioscience Holding Co., Inc., Quincy Bioscience, LLC and Prevagen, Inc. d/b/a Sugar River Supplements.
Companies: Quincy Bioscience Holding Co., Inc.; Quincy Bioscience, LLC; Prevagen, Inc.
MainStory: TopStory Advertising FederalTradeCommissionNews NewYorkNews ConsumerProtection
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