False Advertising

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The California Supreme Court has held that causes of action under two of the state’s most prominent consumer protection statutes—the unfair competition law (“UCL”) and the false advertising law (“FAL”)—are to be tried by the court rather than a jury. In doing so, the court affirmed decades of California Court of Appeal precedent and overturned a lower court’s ruling that a jury trial is required when civil penalties are sought in state court.

In Nationwide Biweekly Administration Inc. v. Superior Court, the district attorneys of four counties filed a complaint alleging that mortgage servicer Nationwide Biweekly, its subsidiary and its owner (collectively, “Nationwide”) had violated the UCL and FAL through false and misleading advertising practices and operating without a license, among other allegations. The government sought an injunction, restitution of all money wrongfully acquired by Nationwide from California consumers and civil penalties of up to $2,500 for each violation found.

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Last week, the FTC filed its first lawsuit involving COVID-19 disease claims, but the Commission took an approach it had largely abandoned in consumer protection cases, by filing for a temporary restraining order and preliminary injunction in federal court and simultaneously filing an administrative action. Although COVID-19 claims are new, the procedural approach taken by the FTC is one that it has not used in years.

On April 24, the FTC filed a Complaint for a Temporary Restraining Order and Preliminary Injunction in the United States District Court for the Central District of California, in FTC v. Marc Ching. The Complaint alleged that the defendant, Marc Ching doing business as Whole Leaf Organics, disseminated false or unsubstantiated advertisements that its product, Thrive, treated, prevented, or reduced the risk of COVID-19. In addition, the defendant marketed a cannabidiol (CBD) product that it claimed could treat cancer.

The defendant had been the recipient of a warning letter from the federal Food and Drug Administration in November 2019, which warned the defendant that it was making unapproved new drug claims in violation of the Federal Food, Drug, and Cosmetic Act by claiming that its CBD products are intended for use in the mitigation, treatment, or prevention of diseases. According to the complaint, the defendant did not remove the unapproved drug claims from its website.

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A recent decision involving both antitrust and Lanham Act claims sheds light on the risks of false advertising. On March 23, 2020, the District Court of Colorado granted and denied in part Johns Manville’s (“JM”) motion to dismiss Chase Manufacturing’s (“Chase”) complaint alleging that JM violated the Sherman Act by engaging in tying and monopolization and the Lanham Act for false advertising. Both JM and Chase sell calcium silicate, known as calsil, which insulates pipes, tanks, and other equipment in industrial facilities. JM accounts for the majority of the domestic calsil market.

According to Chase’s complaint, JM’s sales managers allegedly told customers that Chase’s calsil “may have asbestos and may put…customers and employees at risk,” was poor quality and could not be “trusted to meet specifications,” and was “Chinese” (meaning it was produced in China). A JM sales representative asked a purchaser why it would “risk buying an unproven product that may not meet specifications.” Chase alleged that that two of the five largest distributors heard these comments. JM’s sales managers also allegedly told a smaller distributor that JM never sold calsil that was made in China. Finally, JM’s website FAQ page stated “[w]hile we are aware of one other manufacturer in Asia that produces water resistant calcium silicate, it is an expensive, custom-order product that is not readily available.”

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When we think of superiority claims in advertising, we usually think of NAD or Lanham Act challenges.  When we think of brake pads, we usually think of Callaghan Auto Parts. Last  week, however, the FTC resolved an investigation regarding superiority claims for brake pads with Federal-Mogul Motorparts LLC (Federal-Mogul), a manufacturer and seller of after-market automotive parts.  According to the FTC, Federal-Mogul violated Section 5(a) of the FTC Act by disseminating a series of false and unsubstantiated advertisements concerning its Wagner OEX brake pads.   Specifically, Federal-Mogul claimed that (1) in an emergency Wagner OEX brake pads will stop a pickup truck, SUV, or crossover up to 50 feet sooner than competing brake pads; and (2) Wagner OEX brake pads would significantly reduce the risk of collisions compared with competing brake pads.…
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Growing concern over the coronavirus (COVID-19) has seeped into the regulatory and legal world. Agencies and plaintiffs’ attorneys are targeting companies that claim their products can treat or prevent COVID-19. As people search for health products to counter the growing threat of coronavirus, companies should keep in mind that any advertising claims made must be substantiated. Health claims trying to trade on the panic caused by the virus will be closely monitored and pursued by law enforcement and the plaintiffs’ bar.

A few days ago, the Federal Trade Commission (FTC) and U.S. Food and Drug Administration (FDA) issued seven joint warning letters to companies making allegedly unapproved and unsupported advertising claims related to their products’ ability to treat or prevent the coronavirus. The letters state that any advertising claims trumpeting a product’s ability to treat COVID-19 “are not supported by competent and reliable scientific evidence” — which is required under the FTC Act.

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With the arrival of 2020, many people have begun their New Year’s resolutions to get healthier and lose weight. Is “diet” soda the secret to weight loss success? Not according to the Ninth Circuit, which held last week that it is not reasonable to believe that drinking “diet” soda will help in efforts to lose weight and affirmed dismissal of a false advertising lawsuit.

In the case, Becerra v. Dr. Pepper/Seven-Up, the plaintiff alleged that the word “diet” in Diet Dr Pepper’s brand name violated various California laws, including the state’s False Advertising Law, because it falsely promised that the product would assist in weight loss or healthy weight management. The plaintiff alleged that this was false because an ingredient in the diet soda, aspartame, causes weight gain.

The district court granted defendant’s motion to dismiss without any discovery. In granting the defendant’s motion to dismiss, the district court held that no reasonable consumer would believe that the word “diet” in a soft drink’s brand name promises weight loss or healthy weight management. And, the district court held, even if a reasonable consumer would believe that, the plaintiff had not sufficiently alleged that any such promise was false or that aspartame consumption causes weight gain.

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On December 20, 2019, the Federal Trade Commission (FTC) sued FleetCor Technologies, Inc., a fuel card marketer, and Ronald Clark, its CEO, in the Northern District of Georgia. The FTC lawsuit alleges that FleetCor charged customers hundreds of millions of dollars in hidden fees, making its promises about helping customers save on fuel costs false. The Defendants market various payment cards, including fuel cards, to companies in the trucking and commercial fleet industry. While the FTC interprets its authority to cover businesses, as it chose to do here, it does not often do so. The FTC’s vote to authorize the filing of the complaint was 4-1, with Commissioner Wilson voting no, and Commissioner Philips voting yes, but dissenting on the inclusion of Clarke as an individual defendant. In its complaint, the FTC cited numerous actions of the CEO that allegedly showed his awareness of FleetCor’s deceptive practices. FleetCor issued its own press release in response to the FTC’s suit denying the allegations.

According to the FTC, FleetCor made three main claims to customers: (1) its customers will save money; (2) the fuel cards utilize fraud controls to protect against unauthorized transactions; and (3) the cards have no set-up, transaction, or membership fees. Despite these promises, FleetCor allegedly charged customers hundreds of millions of dollars for unexpected fees and recurring fees for programs its customers never ordered.

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On September 18, 2019, the FTC prevailed in its long-waged battle against Hi-Tech Pharmaceuticals. In a per curiam opinion, the Eleventh Circuit affirmed the district court’s decision, holding the defendants in contempt for violating the court’s prior order, which enjoined the defendants from making certain claims about health products without “competent and reliable scientific evidence.” Fed. Trade Comm’n v. Nat’l Urological Grp., Inc., No. 17-15695, 2019 WL 4463503, at *1 (11th Cir. Sept. 18, 2019). The Eleventh Circuit also upheld a $40 million sanction for the defendants’ violation of the order. The case provides a good example of how the FTC views substantiation for dietary supplement claims and the consequences of lacking that substantiation.

In its ruling, the Eleventh Circuit affirmed the district court’s stringent interpretation of “competent and reliable scientific evidence” to mean randomized controlled trials (“RCTs”) because the defendants had fair (and repeated) notice for nearly a decade that the FTC and the district court interpreted “competent and reliable scientific evidence” to mean RCTs.

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The advertised-discount provision of California’s False Advertising Law, California Business and Professions Code § 17501, lives to fight another day. A coalition of national department stores, having found themselves brought together by the regulatory lasso of the Los Angeles City Attorney, recently took a big swing at the validity of that statute by objecting to its constitutionality on vagueness and free-speech grounds. The stores’ argument connected with the district court, but was ultimately thrown out by the California Court of Appeals.

The statute at issue is undoubtedly wonky:

For the purpose of this article the worth or value of any thing advertised is the prevailing market price, wholesale if the offer is at wholesale, retail if the offer is at retail, at the time of publication of such advertisement in the locality wherein the advertisement is published.

No price shall be advertised as a former price of any advertised thing, unless the alleged former price was the prevailing market price as above defined within three months next immediately preceding the publication of the advertisement or unless the date when the alleged former price did prevail is clearly, exactly and conspicuously stated in the advertisement.

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Consumers over 50 are on an endless quest for things that make us feel, look, or perform like younger versions of ourselves. Marketers aware of how aging demographics are tuned into this quest. The FTC has been especially vigilant in policing claims that dietary supplements, especially in the cognitive and memory space, can turn back the clock (for additional reading on the FTC’s history with unsubstantiated cognitive claims, check out our previous blog posts on Prevagen, 5-Hour ENERGY®, Brain Training, Lumosity, Word Smart, and Your Baby Can Read). Last week, the FTC reached a $25 million settlement with four individuals and their companies that sold supplements touted as “Viagra for the Brain” and promising to increase users’ cognitive abilities (see the settlement orders here and here). The case provides a guide of what not to do in selling dietary supplements.

In its complaint, the FTC argued that the defendants falsely claimed that their supplements Geniux, Xcel, EVO, and Ion-Z could enhance users’ focus by as much as 300 percent; concentration, memory recall, and IQ by as much as 100 percent; and brainpower by as much as 89.2 percent. The advertisements claimed that scientists were declaring the defendants’ “Smart Pill” to be “Viagra for the Brain,” and that the supplements should be “taken as directed for extreme IQ effects.” The supplements were sold for between $47 and $57 per bottle.

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