Antitrust Law Daily Supplement marketers ordered to pay $40 million to FTC for violating injunctions
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Thursday, October 12, 2017

Supplement marketers ordered to pay $40 million to FTC for violating injunctions

By Jody Coultas, J.D.

A dietary supplement manufacturer and three individuals have been ordered to pay disgorgement of more than $40 million in compensatory sanctions in a false advertising suit initiated by the FTC. The federal district court in Atlanta found that the FTC established by clear and convincing evidence that both the injunctions at issue were valid and lawful, clear and unambiguous, and that the defendants had the ability to comply with those respective provisions but did not. The defendants failed to satisfy the "competent and reliable scientific evidence" standard of the injunctions, which authorized a finding of contempt (FTC v. National Urological Group, Inc., October 10, 2017, Pannell, C.).

National Urological Group, Inc., National Institute for Clinical Weight Loss, Inc., and Hi-Tech Pharmaceuticals, Inc. manufactured and marketed dietary supplements, Fastin, Lipodrene, Benzedrine, and Stimerex-ES. In 2004, the FTC filed a complaint against the companies and several individuals, including sole owner, President, Chief Executive Officer, Secretary, and Treasurer of Hi-Tech Jared Wheat; senior vice-president in charge of sales Sean Smith; and Dr. Mark Wright. The agency alleged that the defendants deceptively advertised the supplements by making false and unsubstantiated claims. Final judgments and permanent injunctions were entered against the defendants, enjoining them from advertising the products using claims that the products cause rapid and substantial weight loss unless the claims were substantiated with competent and reliable scientific evidence.

In 2008, final judgments and permanent injunctions were entered against the defendants, enjoining them from advertising that any product is an effective treatment for obesity, causes rapid or substantial loss of weight or fat, causes a specified loss of weight or fat, affects human metabolism, appetite, or body fat, is safe, has virtually no side effects, or is equivalent or superior to any drug that the Food and Drug Administration has approved for sale in the United States for the purpose of treating obesity or causing weight loss, unless they had competent and reliable scientific evidence that substantiates the representation. Competent and reliable scientific evidence is "independent, well-designed, well-conducted, randomized, doubleblind, placebo-controlled clinical trials, given at the recommended dosage involving an appropriate sample population in which reliable data on appropriate end points are collected over an appropriate period of time . . . conducted on the product itself" (hereinafter "RCTs").

In 2013, the court found the defendants in civil contempt for violating the injunction relating to the advertising of dietary supplements and, in 2014, ordered compensatory sanctions of approximately $40 million and a product recall as an appropriate remedy for civil contempt. On appeal, the U.S. Court of Appeals in Atlanta vacated the contempt order, finding that the doctrine of collateral estoppel was misapplied to deny the defendants the opportunity to offer evidence of substantiation to refute the contempt claims. On remand, defendants moved for summary judgment.

A finding of civil contempt must be supported by clear and convincing evidence that (1) the allegedly violated order was valid and lawful, (2) the order was clear and unambiguous, and (3) the alleged violator had the ability to comply with the order but did not. For an injunction to be sufficiently clear and unambiguous, the injunction must to "state its terms specifically; and . . . describe in reasonable detail—and not by referring to the complaint or other document—the act or acts restrained or required." The clear and unambiguous inquiry can be satisfied "if it is clear from the totality of the language in the various documents that the contemnors understood their obligations under the injunction."

Valid and enforceable. The imposition of injunctive relief and the injunctions themselves were valid and lawful orders, according to the court. When the defendants filed their appeal, they never challenged the imposition of injunctive relief. Thus, even assuming that the defendants impliedly challenged the appropriateness of the injunctions by appealing the 2008 summary judgment order, the Eleventh Circuit disposed of that challenge when it affirmed this court’s final judgment and order.

Clear and unambiguous. It was clear that the defendants understood their obligations under the injunctions and, thus, the injunctions were clear and unambiguous, according to the court. The FTC submitted voluminous documentary evidence demonstrating that both Wheat and Smith understood that in order for their advertising claims to be substantiated by "competent and reliable scientific evidence," the injunction required RCTs of the products. Also, the injunctions provided for ongoing compliance monitoring and the record shows that such monitoring took place. If the Hi-Tech defendants were unsure of what constituted "competent and reliable scientific" evidence, they could have asked, but did not. The defendants were also given an opportunity to object to the scope of the injunctions before they were entered, but they did not object. Given the defendants’ lack of opposition to the RCT substantiation standard, the court’s adoption of that standard, and the court’s statement of its intention that injunctive relief might be broader than the precise violations alleged, the court interpreted the injunctions’ substantiation requirement precisely the same way the court interpreted it weeks earlier at summary judgment.

The law of case doctrine provided a separate and distinct basis to conclude that the substantiation standard was clear and unambiguous, according to the court. While the products and claims at issue in the 2008 proceedings were different from those in the instant contempt proceedings, the court had already resolved the issue of what type of "evidence [is] required to substantiate weight loss claims for any product, including a dietary supplement" in this case. The defendants had a full and complete opportunity to challenge the substantiation standard before the summary judgment stage, but they did not.

The court already expressly rejected the defendants’ arguments that the injunctions were invalid "obey-the-law" injunctions, and failed to point to any change in authority or circumstances to warrant a departure from the earlier findings, according to the court. An injunction that requires someone to simply obey the law fails to meet the specificity requirement because those enjoined must know what conduct the court has prohibited. Because the defendants clearly understood their obligations under the injunctions, the argument failed.

Ability to comply. The Hi-Tech defendants had the ability to comply with the injunctions by refraining from selling the products altogether, conducting RCTs on the products to substantiate the existing claims, or advertising by means other than asserting causal efficacy claims, according to the court.

Injunction violations. Advertising for the dietary supplements at issue triggered the substantiation requirements of the injunctions and the defendants failed to produce competent and reliable scientific evidence to support the advertising, according to the court. Wheat commissioned three RCTs on behalf of Hi-Tech, but they were done on variants of Fastin and failed to satisfy the RCT requirement for this case because they were not done on the Fastin product itself or an exact duplicate. Commissioning those RCTs contradicted the defendants’ argument that RCTs are fiscally and temporally unviable and not necessary to substantiate efficacy claims.

Wright injunction required that, in addition to possessing competent and reliable scientific evidence when endorsing any Hi-Tech product, he also rely on "an actual exercise of his represented expertise, in the form of an examination or testing of the product." Wright did not point to any evidence showing he tested Fastin before endorsing it. Wright attempt at excusing his noncompliance—that his endorsement was puffery—was unsupported and rejected.

Even if the court were to assume that the Hi-Tech defendants did not know RCTs of the products were required under the injunction, and assumed that the evidence the defendants claim to have relied upon constituted "competent and reliable scientific evidence," the defendants’ claims were not substantiated, according to the court. The FTC clearly and convincingly established that the defendants did not possess "competent and reliable scientific evidence that substantiates the representation[s]" when they were made.

The court also found that the Hi-Tech defendants violated Section VI of the Hi-Tech injunction by not placing the required yohimbine warning on the four products. The advertising and/or promotional material for Fastin, Lipodrene, Benzedrine, and Stimerex-ES all make efficacy claims and each of the products contains yohimbine, thus triggering the warning requirement. More than a year after Wheat claims to have placed the warning on the products, it was still absent from some of the products.

Noncompliance. The Hi-Tech defendants failed to explain their noncompliance, according to the court. Wheat argued he could not comply with the injunctions because the FTC’s expert, Dr. Louis Aronne, provided conflicting RCT standards. The argument was unsupported by the record. Had Hi-Tech completed RCTs on the four products and the FTC’s experts challenged the veracity of those clinical trials, the court would likely agree with the defendants that this case amounted to a battle of the experts. But, those are not the facts. Smith’s argument that he could not effectuate compliance with the injunction because he did not have the requisite control was also rejected.

Sanctions. Due to the conduct of Hi-Tech, Wheat, and Smith in violating the injunctions from January 1, 2009, through at least August 31, 2013, the court ordered consumer redress in the amount of the gross receipts for the four products is appropriate. The gross receipts for the sale of the violative products—Fastin, Lipodrene, Benzedrine, and Stimerex-ES—during this period of time totaled $40,120,950. However, the court declined the FTC’s request that the court impose a separate sanction of $34,441,227.34 to compensate consumers for the Hi-Tech defendants’ violation of yohimbine warning requirement. Wright must pay compensatory sanctions of $120,000, the amount he was paid by Hi- Tech in 2010, 2011, and 2012, combined.

The case is No. 1:04-CV-3294-CAP.

Attorneys: Alejandro G. Rosenberg for the FTC. Edmund J. Novotny (Delong Caldwell Bridgers Fitzpatrick & Benjamin, LLC) for National Urological Group, Inc. d/b/a Warner Laboratories. Charles Ronald Bridgers (Delong Caldwell Bridgers Fitzpatrick & Benjamin, LLC) for National Institute for Clinical Weight Loss, Inc. and Hi-Tech Pharmaceuticals, Inc.

Companies: Hi-Tech Pharmaceuticals, Inc.

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