A recent ruling by a federal district court holding that Walmart, Target, and Walgreens could face liability for the sale of supplements manufactured by NBTY that allegedly did not contain the advertised ingredients could set some dangerous precedents for the direct response industry.
The ruling stems from a consumer class action filed against Walmart, Target, Walgreens, and NBTY on the heels of an investigation conducted by New York Attorney General Eric Schneiderman in which he determined that dietary supplements sold by these companies did not contain the herbal ingredient advertised on the label. Schneiderman detailed these finding in press releases and in letters sent to each of the companies and ordered that the products be removed from the stores.
The plaintiffs’ class action was based entirely on the results of the Schneiderman’s investigation. In particular, the plaintiffs did not conduct any independent analysis of the products but relied solely on the attorney general’s findings that the products did not contain the advertised ingredients. The defendant companies filed a motion to dismiss the complaint alleging that the plaintiff’s cannot base their entire case on the attorney general’s findings. The court disagreed.
In denying the defendants’ motion to dismiss, the court ruled emphatically that Schneiderman’s findings – which were based on DNA investigation of samples purchased at each of the stores – were reliable enough to support the consumers’ claims. The court further noted that there was no reason to believe that the attorney general did not accurately report the results of the testing and therefore could be taken as true and accurate without the need for the plaintiffs to conduct any independent testing.
While the ruling is a procedural one and no decision has yet been made on the merits of the case, the court’s analysis should send some shock waves through the direct response community for several reasons.
First, the ruling is likely to spur increased consumer class action litigation as a follow on to federal or state regulatory investigations and enforcement actions. While regulatory actions often increase the risk of class action litigation, this ruling is likely to be seen by plaintiffs’ lawyers as an open invitation to bring such actions.
Second, the case is an important reminder of the impact that state attorney general actions can have on our industry. While the industry tends to focus on the Federal Trade Commission (FTC), we cannot lose sight of the important role the states play regulating the direct response industry. Moreover, for those who believe that a Trump administration may lead to fewer FTC actions, it is worth noting that – historically – whenever there is less enforcement action at the federal level, we see an increased level of activity in the states to fill in the perceived gap. District attorneys in California, for example, have formed a task force dedicated entirely to the investigation of dietary supplements.
Third, and perhaps most alarmingly, the notion that a regulator’s finding in an investigation or enforcement action can provide the “sole” basis for a consumer class action is frightening. While, in this case, the facts at issue seem relatively black and white – i.e., whether the supplements contained the advertised ingredient – what if the underlying issue related to substantiation of advertising claims. Does that potentially mean that once a reputable regulatory agency determines that an advertisement is making certain claims and that those claims are not adequately substantiated, the plaintiffs’ bar can rely on that ruling as the sole basis for a massive class action? While, of course, it remains to be seen whether this ruling will stand – or will be subsequently interpreted as more limited to the facts of this case – for now, it has the potential to set a very dangerous precedent that the industry must closely watch.
Finally, in light of the potential liability faced by the retailers, supplement marketers can expect increased vigilance and due diligence on the part of retailers with regard to the products being sold in their stores. In its settlement with NBTY, Schneiderman’s office required that NBTY use barcoding to authenticate herbal ingredients; conduct testing to detect the presence of soy, peanuts, and other allergens; require ingredient suppliers to submit to third-party certification; and increase the frequency of third-party audits of ingredient suppliers. Schneiderman imposed similar requirements in previous actions brought against GNC and Nature’s Care. Supplement marketers would be well advised to adopt best practices consistent with such guidance to ensure the integrity of their products and reduce the risks of liability.