Health Law Daily 5-Hour ENERGY® loses its steam on appeal, $2M penalty affirmed
Wednesday, March 20, 2019

5-Hour ENERGY® loses its steam on appeal, $2M penalty affirmed

By Victoria Moran, J.D., M.H.A.

The 5-Hour ENERGY® advertisements at issue lacked scientific evidence and were therefore materially misleading and in violation of the Washington Consumer Protection Act (CPA). The trial court’s misstatement of the applicable FTC standard, while an error, did not mandate reversal.

The Washington State Court of Appeals upheld a lower state court decision that Living Essentials, LLP, and Innovative Ventures, LLP violated the CPA through deceptive advertising claims about its product, 5-Hour ENERGY®. The appellate court agreed that the three claims at issue were deceptive and violated the CPA, upholding the civil penalty and attorney fees and costs. Despite arguments by the Company, the trial court did not adopt the prior substantiation doctrine as a new per se unfair trade practice. Rather, the trial court correctly concluded that the claims were materially misleading, unsubstantiated, and deceptive. In addition, the trial court was correct in following FTC guidance regarding requirements for "competent and reliable scientific evidence" and the prior substantiation doctrine is not unconstitutional. The Company’s claims were also factual representations and not puffery. Despite applying the wrong FTC standard, there was substantial evidence that the ads violated the CPA and reversal was not mandated. The civil penalty for 24,213 individual violations of the CPA was not an abuse of discretion and there is no basis to reduce attorney fees and costs (State ofWashington v. Living Essentials, LLC, March 1, 2019, Mann, D.).

Living Essentials, LLP, and Innovative Ventures, LLP (collectively, the Company) produce and market the product, 5-Hour ENERGY®. During its advertising campaign it made three claims relevant to this appeal:

  1. 5-Hour Energy® was "Superior to Coffee." "[T]he key vitamins and nutrients work synergistically with caffeine to make the biochemical or physiological effects last longer than caffeine alone." (Superior to Coffee claim).
  2. The decaf version "provided energy, alertness, and focus ‘for hours.’" (Decaf claim).
  3. The Company implied that 73 percent of the 3,000 doctors surveyed would recommend 5-Hour ENERGY®. (Ask Your Doctor claim).

The State of Washington filed suit against the Company alleging violations of the CPA for making deceptive advertising claims about the product. After a bench trial, the court found that the claims were deceptive and violated the CPA. Specifically, there were 24,213 individual violations of the CPA. The court imposed civil penalties of $1.9 million for the Ask Your Doctor claim; $201,500 penalty for the Superior to Coffee claim; and $10,647 penalty for the Decaf claim. The court also awarded the State $1,886,866.71 in attorney fees and $209,125.92 in costs. The Company appealed.

Prior substantiation doctrine. The Company’s primary argument is that the trial court erred in relying on the FTC’s prior substantiation doctrine. The Washington Court of Appeals disagreed finding that the trial court did not adopt the prior substantiation doctrine as a new per se unfair trade practice, and rather, declined to rely only on prior substantiation. When a violator’s conduct constitutes deception based on the facts, a decision does not risk creating a new per se unfair trade practice. On appeal, the court reviewed the trial court’s findings of fact, which clearly showed there was insufficient evidence to support the Company’s claims and the ads were materially misleading and violated the CPA since they lacked scientific evidence.

The Company attempted to argue that applying the prior substantiation doctrine was contrary to the Washington constitution and the First Amendment. The court disagreed finding that the phrase "competent and reliable scientific evidence" is not vague and "has been a benchmark for determining whether ad claims have a reasonable basis since at least 1984." There was no err in following FTC guidance.

The Company also argued, unsuccessfully, that article I, section 5 of the Washington Constitution provider greater protection of commercial speech than the First Amendment, requiring the application of strict scrutiny. The appellate court noted that the Supreme Court answered this question and the four-part test from Central Hudson Gas & Elec. Corp. v. Pub. Serv. Comm’n of New York, 447 U.S. 557 (1980) is binding authority. Under Central Hudson, the Company’s argument that the prior substantiation doctrine is unconstitutional fails since commercial speech cannot be misleading and must concern lawful activity.

Puffery. The Company argued that substantiation was not necessary because the Superior to Coffee and Decaf claims were "mere puffery" and not actionable under the CPA. The appellate court was not persuaded by the Company’s attempt to highlight the use of the word "feeling." Rather, the Company made factual representations and any FTC policy concerns do not apply.

Wrong FTC substantiation standard but no reversal. The appellate court agreed with the Company that the trial court erred in applying the FTC substantiation standard for claims that "relate to consumer health." However, the error did not mandate reversal because there was substantial evidence that the ads violated the CPA. The product is marketed and advertised as a dietary supplement, so it was not required to establish scientific facts to substantiate its claims. Rather, it must have a reasonable basis for the claim—"some recognizable substantiation for the representation" before advertising it. Based on its independent review of the record, the appellate court declined reversal. The Company failed to present any evidence that its claims were assessed by anyone with science training; there is no evidence supporting the Superior to Coffee claim; the studies cited by the Company were not sufficiently relevant; and testimony related to the Decaf claim was not credible. There was no substantiation for the Superior to Coffee or Decaf claims.

Ask Your Doctor ad was deceptive. The court found that there was sufficient evidence in the record to support the trial court’s conclusion that a reasonable consumer would have been misled by the Company’s Ask Your Doctor claim. While the literal words of the ad were true (that 73 percent of doctors would recommend the product), the net impression from the ad was deceptive. The State’s expert witness testified that the "survey questions were biased, leading, and designed to elicit a limited response." Moreover, the text of the ad itself presented the statistics in such a way that would lead a person to believe that 73 percent of 3,000 doctors would recommend the product, when it was actually 73 percent of 503 doctors.

$2 million in penalties. The court disagreed that the penalty violated the excessive fines clause of the U.S. Constitution noting that the Company was only assessed $100 per violation despite statutory authorization to assess up to $2000 for each violation. The fine did not violate the Due Process Clause and the penalty was significantly higher than fines cited in other cases because the Company violated the CPA over 24,000 times.

Attorney fees. The Company did not dispute that the prevailing party in a CPA action is entitled to attorney fees but argued for reduction of the award because the State only prevailed on some of its claims. The appellate court found no basis to reduce to award since the trial court had already reduced the amount and taken that factor into account.

The case is No. 76463-2-1.

Attorneys: Trisha L. McArdle (Trisha L. McArdle, Attorney at Law) for State of Washington. Michael Barr King (Carney Badley Spellman PS) and Jill Diane Bowman (Stoel Rives LLP) for Living Essentials, LLC and Innovation Ventures, LLC.

Companies: State of Washington; Living Essentials, LLC; Innovation Ventures, LLC.

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