U.S. Court of Appeals Upholds $48 Million Judgment

For people with an ailment, Direct Marketing Concepts and ITV Direct had the answer: Coral Calcium or Supreme Greens. But according to a recent decision by the U.S. Court of Appeals for the First Circuit, the companies, their corporate officers, and related entities lacked scientific proof for claims that their products could cure or prevent diseases like cancer, arthritis, lupus, Parkinson’s, and MS. The upshot? A judgment upholding the trial court's order of $48 million.

The First Circuit’s opinion is a must-read for marketers of health-related products.  It reaffirms key principles about the FTC’s requirement that advertisers substantiate the claims consumers take from their ads.

The “reasonable basis” test is the appropriate standard for deceptive advertising claims.  As the First Circuit put it, “When the FTC brings an action based on the theory that advertising is deceptive because the advertisers lacked a reasonable basis for their claims, the FTC must: (1) demonstrate what evidence would in fact establish such a claim in the relevant scientific community; and (2) compare [] the advertisers’ substantiation evidence to that required by the scientific community to see if the claims have been established."

Companies need sound science to back up health claims.  The First Circuit evaluated – and rejected – the materials the advertisers said they relied on, including books by one of the infomercial hosts (who was also a co-owner of Direct Marketing Concepts and ITV Direct); the opinions of a purported “expert” (As the First Circuit noted, “The infomercial presented [him] as a ‘Doctor of Oriental Medicine,’ but [he] did not have any such degree.”); “a number of popular science and pseudoscientific articles,” and one preliminary study.  Although the 16-person study suggested that a certain ingredient might be worthy of further research, the First Circuit characterized it as “on its face [] grossly insufficient to support the Defendants’ claims of Supreme Greens’ efficacy in treating all diseases.”  The Court concluded that "it is clear that none of this material comes close to establishing an issue of fact regarding the Defendants’ woefully inadequate substantiation evidence."

The FTC generally is not required to establish that the claims in question are false.  As the Court noted, “The Defendants argue that there is a third prong to a deceptive advertising claim, asserting that the FTC was required – and failed – to prove that the infomercials were actually false.”  The Court dismissed that argument as at odds with established caselaw.

Don’t count on general disclaimers to qualify health claims.  The Defendants argued that their ads made no health claims and rather were mere puffery further qualified by disclaimers.  The First Circuit rejected that defense, describing the purported qualifying statements as “do-nothing disclaimers.”  As the Court held, “Disclaimers or qualifications in any particular ad are not adequate to avoid liability unless they are sufficiently prominent and unambiguous to change the apparent meaning of the claims and to leave an accurate impression. Anything less is only likely to cause confusion by creating contradictory double meanings."

Corporate officers may be held individually liable.  The Defendants also disputed the trial judge’s decision regarding individual liability.  The Court upheld a finding of liability for the corporate officer in question, observing “there is no question that [he] knew that the infomercials’ claims lacked substantiation, that he had the authority to control [the companies], and, nevertheless, that he did little or nothing.”

Later:  More on the Court’s decision regarding damages.