If someone tried to sell you a product that supposedly cured every ailment, would you believe the salesman?
A set of TV infomercials produced about 10 years ago made that very claim. The ads said Coral Calcium, a supplement harvested from coral skeletons near Okinawa, Japan, and Supreme Greens, a concentration of grasses, vegetables, herbs and sprouted grains, cured every illness from Parkinson's to obesity to cancer.
In addition to the infomercials, telemarketers told potential customers who called the products' 800 numbers that the supplements would combat degenerative diseases. Telemarketers also told sick customers that they should take up to three times the standard dose of Coral Calcium.
Did they make an unlikely claim? Yes, but the makers of the infomercials made more than $40 million in sales between January 2002 and February 2003.
The Federal Trade Commission, however, didn't buy the ads' assertion that sickness is caused by acidosis, a condition curable by rendering the body more alkaline with supplements. It sued the companies that produced and distributed the ads for deceptive advertising. It also named as defendants company executives, "experts" from the videos and a business that processed product orders.
The FTC won on summary judgment, and a judge ordered defendants to pay damages of all their gross sales receipts. Some of the defendants--Direct Marketing Concepts, ITV Direct and their CEOs--appealed the ruling.
On Oct. 21, 2010, a 1st Circuit panel rejected the appeal in FTC v. Direct Marketing Concepts. The unanimous decision is a reminder of the government's increasing aggressiveness in prosecuting false advertising claims at every level of business involvement, particularly regarding health claims.
"The FTC is trying to reach out and bring in more and more companies that are less directly involved with the allegedly wrongful conduct," says John Roberti, a partner at Mayer Brown.
Often, more flagrant false advertising happens at lower levels of the business world, at organizations that can avoid regulators' radars or have empty pockets, Roberti says. Going after "enablers"--such as Triad ML Marketing, the order-processor defendant in Direct Marketing Concepts--who are sometimes more influential, can force companies to better regulate themselves and their business partners.
It's a wake-up call to companies that rely on those creating the advertising to verify the claims, says Ivan Wasserman, a partner at Manatt, Phelps & Phillips.
"It's really important that they undertake their own due diligence to protect themselves," he says.
Counsel need to go over claims made in ads before the last minute, so it's not just a rubber-stamp approval. Claims relating to health are a particularly hot area of enforcement these days, experts say, because they pose tangible, immediate public safety concerns. The defendants in Direct Marketing Concepts had no evidence to substantiate their claims, even though several FTC expert witnesses provided ideas for the types of scientific tests that could substantiate--or disprove--a "reasonable basis" for their claims.
"Clearly the FTC is feeling more aggressive," says Rebecca Tushnet, a professor at Georgetown Law. "What they're looking for is substantiation. Good faith goes a long way."
Substantiation by respected industry sources should take place before commercials air. Verifying claims after the FTC files a complaint might not be enough to avoid liability, Wasserman says.
Moreover, a company making dubious assertions faces risk not only from the FTC but entities such as state attorney generals and corporate competitors.
"If the government doesn't see it on [its] own, competitors will make sure the government sees it," says Wasserman. "We're definitely seeing an uptick of enforcement at every level
Wielding Sharp Swords
Often a company will get a preliminary warning before facing prosecution. Working fast to fix the situation can significantly help the outcome. However, the FTC goes particularly hard after recidivists and companies that don't comply after being warned, Roberti says, with a high rate of success.
"When it prosecutes these things, it has a lot of very strong case law on its side," he says.
In Direct Marketing Concepts, the FTC forced the defendants to pay back not just profits but all gross receipts. The court said the defendants' books were so messy and the offense so egregious that it was unnecessary to dig through financial records for a more specific penalty.
"[The court said,] 'Every penny that consumers gave to you, we're going to get back,'" Wasserman says. "That is not unprecedented by any means, but it's a pretty big number."
Direct Marketing Concepts falls on the more extreme side of the deceptive advertising spectrum, but a greater theme is widely applicable, Tushnet says. Whether you are a shady supplement provider or a major company, everyone is still subject to the rules. The FTC is not afraid to take on the big boys. For example, in 2009 it settled with Kellogg's, the cereal giant, over false children's health claims it made about Frosted Mini-Wheats.
"Even if companies are up on a higher level of distribution, they have to be aware of the representations people who are lower down the distribution chain are making, because the FTC does take a broad view and could pull them in," Roberti says. "The sword that the FTC wields in this area is very sharp."