Has FTC Lost its Legal Mojo?

Wonders never cease. The seemingly invincible Federal Trade Commission (FTC), so used to having its way with federal judges, now appears to find itself on a bit of a losing streak – if not in an outright slump. I reported last month (FTC Claim Against Commerce Planet ‘Discharged’ in Bankruptcy) on a federal district judge’s reversal of a bankruptcy court decision that had declared an FTC judgment non-dischargeable, holding that the bankruptcy judge erred in failing to require the FTC to prove the defendant had an “intent to deceive” consumers, an essential element of the fraud predicate for non-dischargeability.

Following this loss, the FTC suffered another setback last month in the 11th Circuit Court of Appeals in a contempt proceeding in FTC v. Hi-Tech Pharmaceuticals, in which the FTC is arguing that Hi-Tech is violating an order requiring it to have “competent and reliable scientific evidence” for weight-loss claims. The company proffered scientific evidence and an expert opinion but not a clinical trial. While the order doesn’t define “competent and reliable scientific evidence” to mean only a clinical trial, the judge had earlier ruled that some form of a clinical study was required for weight-loss claims. Based on this ruling, he said Hi-Tech was “collaterally estopped,” or precluded, from offering any other kind of substantiation, held it in contempt for not having a clinical trial, and ordered it to disgorge $40 million in sales.

However, the 11th Circuit reversed, holding that the district court had misapplied collateral estoppel when it refused to consider Hi-Tech’s evidence of substantiation. Collateral estoppel is appropriate, among other factors, only where the issue at stake is identical to the one involved in the prior litigation. The court found the issue in the contempt proceeding was not “identical” because the products and claims were different from the ones before and thus were not necessarily subject to the same interpretation of “competent and reliable scientific evidence” as the one the district court had used before.

The appellate court took note that the trial court itself had earlier explained that the “competent and reliable scientific evidence” standard is “context specific” and “permits different variations. … depending on what pertinent professionals would require for the particular claim made.” Thus, under the district court’s own understanding of the standard, Hi-Tech deserved an opportunity to show that the weight-loss claims in the contempt proceeding could be substantiated by scientific evidence other than clinical studies.

While technically decided on a procedural ground, Hi-Tech is significant because it is the second appeals court recently to overturn or cast doubt on the legality of a rigid requirement of clinical human trials to substantiate health claims. POM Wonderful, of course, is the other one, in which the D.C. Circuit Court of Appeals struck down an FTC requirement that POM support “disease treatment” claims with at least two randomized controlled human trials (RCTs).

The court said such a burdensome requirement could suppress accurate consumer information in violation of advertisers’ First Amendment rights to truthfully promote their products. (For more onPOM, see my earlier articles: FTC Commissioners Fight Over Free Speech and Dr. Oz, as Court Settles RCT Debate, February 2015; POM Wonderful, Round 3: ‘Disclosure’ vs. ‘Outright Suppression’, March 2013; Judge Zaps FTC for ‘Unnecessary Overreaching’ Against POM Wonderful, June 2012).

The FTC also is facing a stiff challenge to a strict, “one-size-fits-all” clinical study requirement for health claims in another pending contempt action, this one against Bayer Corp. in New Jersey for allegedly making unsubstantiated digestive health and other claims for its probiotics in violation of an FTC order. As in Hi-Tech, the FTC is seeking to penalize Bayer for failing to have RCTs even though the “competent and reliable scientific evidence” standard in its order also does not specifically require RCTs or any form of clinical trial.

Supported by amicus briefs from several trade groups, including the Natural Products Association and Council for Responsible Nutrition, Bayer is arguing that it can’t be held in contempt for failing to have a specific kind of evidence that is not clearly and unambiguously required by its order. In support, it citesBasic Research v. FTC, a November 2014 federal district court decision in Utah that blocked another FTC attempt to redefine “competent and reliable scientific evidence” in a contempt proceeding to mean an RCT and nothing else.

More broadly, Bayer is arguing that an inflexible “drug-level” RCT requirement is inconsistent with both the Dietary Supplement Health and Education Act (DSHEA), which was intended to establish more flexible regulatory standards for supplements than for drugs, and with the FTC’s own dietary supplement guidelines, which do not mandate RCTs as the sole allowable form of substantiation. Bayer and its industry allies warn that if an RCT standard becomes law, DSHEA would be eviscerated and the dietary supplement industry would be all but wiped out by prohibitive compliance costs.

A decision in Bayer on this critical substantiation issue is pending and is almost certain to be appealed by the losing side. Will the FTC’s losing streak continue? Stay tuned.

Talking about Direct Response, FTC, Online Marketing

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