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Legal Review: A Busy Year for the FTC

1 Dec, 2011 By: Linda A. Goldstein, Kawana King, Manatt Phelps & Phillips LLP, Marc Roth Response

In 2011, the Federal Trade Commission (FTC) continued vigilant enforcement of product categories and sales channels that are of concern to DRTV marketers. The FTC brought several cases against companies selling dietary supplements and weight-loss products and was extremely active in pursuing aggressive affiliate marketing campaigns — investigating advertisers, affiliate networks and publishers.

Goldstein, Roth, KingThe FTC has become particularly aggressive in negotiating settlements with target companies, often seeking restitution for aggrieved consumers and full disgorgement of all revenues received as a result of the alleged violative acts. Further, for substantiating health-related claims, the FTC has signaled in recent cases its expectation that companies conduct and rely on actual clinical studies rather than
requiring them to have competent and
reliable evidence — a departure from
its traditional approach.

Dietary Supplements

In November, the FTC settled charges against a manufacturer and marketer of a supposed weight-loss supplement ingredient “hoodia.” Marketers claimed it was a derivative of the plant hoodia gordonii. According to the FTC’s complaint, the defendants supplied manufacturers of weight-loss supplements with the product, falsely claiming it was authentic, Food and Drug Administration (FDA) approved and effective in suppressing appetite. The settlement orders against the various defendants, which include two companies and three individuals, includes monetary judgments ranging from $4 million to $22.5 million, as well as a complete ban on involvement in the dietary supplement industry.

Weight-Loss and Other Health Claims

In January, the FTC settled an action against a subsidiary of Nestle S.A. for deceptive advertising claims it made about the health benefits of its children’s BOOST Kid Essentials. Although Nestle was not required to pay monetary restitution, it was ordered to refrain from asserting any product-related health claims unless approved by the FDA and backed by two well-designed human clinical studies.

This substantiation standard is consistent with the FTC’s settlement with Iovate Health Sciences in 2010, which also required two studies and payment of $5.5 million to settle false advertising claims. Theses cases are representative of the FTC’s shift from its traditional order requirement for health-related claims to a more definitive call for two clinical studies.

In September, Reebok Intl. Ltd. agreed to pay $25 million to resolve charges that the company deceptively advertised its “toning shoes.” The settlement order bars Reebok from purporting that its products provide muscle toning and strengthening benefits unless based on results produced by at least one adequate and well-controlled study.

Affiliate Marketing

In April, the FTC filed 10 complaints against affiliate marketers in six federal courts, claiming they’d engaged in deceptive tactics by using fake news websites to market acai berry weight-loss products. In these cases, the Commission sought, and in almost all instances, and has received temporary restraining orders against the various defendants to halt their allegedly deceptive tactics and freeze their assets pending trial.

The Commission also initiated actions against companies that allegedly failed to properly disclose material connections with affiliate marketers, in accordance with the FTC’s Endorsement and Testimonial Guidelines. In March, the FTC filed a complaint against Legacy Learning Systems Inc., charging that it represented that online endorsements written by affiliates reflected the views of ordinary consumers or “independent” reviewers. While the FTC noted that Legacy had developed a policy of requiring affiliates to disclose their connection to the company, the policy was effectively useless as it was never enforced.

Considering the high financial stakes for companies, as well as strict injunction provisions, it is important that companies follow and strictly adhere to FTC rules and guidelines in these areas in the coming year.

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