Since 2003, online marketers and merchants have been gathering twice a year to take part in the Affiliate Summit Conferences. In recent years, Ifrah Law has become a fixture at these shows, and our associate Rachel Hirsch is not only widely recognized as the face of the Ifrah Law Power Booth station, but also as a well-respected and preferred attorney counseling online advertisers on compliance-related matters and representing them in nationwide litigation.
After Rachel recently returned from this year’s Affiliate Summit East conference in Philadelphia, we interviewed her about new and emerging trends at this conference and in the industry.
Q. What struck you about the crowd at the conference this year?
A. In addition to the new venue, there were plenty of new faces at the conference this year. Surprisingly, however, despite the conference’s name, there weren’t as many affiliates there as there have been in the past. Traditionally, affiliates, sometimes known as “publishers,” are independent third-parties who generate or “publish” leads either directly for an advertiser or through an affiliate network. This year, with a reported crowd of about 4,000 people, the conference included more individuals representing networks, brokers, and online merchants than affiliates. (Official conference statistics bear this out. Only 29 percent of attendees were affiliates.)
Q. What about vendors?
A. According to the organizers, one out of every 10 people there was a vendor. The term “vendor,” however, is something of a misnomer. A vendor can be another term for an online merchant – someone who is actually selling a product on the market – or it can be a generic category for marketers who do not fit into the traditional categories of affiliates, merchants, or networks.
Q. What new industry trends did you notice?
At every conference, one or two markets always seem to have a dominant presence. At the Las Vegas conference in January, there was a large turnout of marketers in the online dating space. This year, two different markets emerged– diet/health and downloads.
Some of the exhibitors this year were manufacturers of neutraceuticals, which can include weight-loss products or testosterone-boosting products. The trend seems to be for online marketers to “white label” or “private label” neutraceuticals from bigger manufacturers. What this means is that online marketers or advertisers actually attach their brand names to a product and product label that they purchase from a manufacturer, either based on their own formulations or based on the manufacturer’s product specifications. Well-known products that would fall into this category include Raspberry Ketone, Green Coffee Bean, and Garcinia Cambogia.
There were also a lot of individuals and companies there in the so-called “download” space. This often means the use of browser plug-ins that the consumer can download himself or herself. These can install targeted advertising (often pop-ups or pop-under ads) on an existing web page.
Q. Are there any risks involved in private labeling?
A. Definitely. If your name is on the label, it doesn’t matter that you didn’t manufacture the product. Your company and your label are subject to FTC scrutiny to the extent that you make claims about the product that you cannot substantiate. And beyond that, the Food and Drug Administration will also flex its enforcement power to the extent you or your manufacturer fail to institute good manufacturing practices, or “GMPs.” While many companies claim that they are GMP-certified, many do not have practices and processes in place to account for defective product batches, serious adverse events resulting from product use, or product recalls.
Q. What are some other hot areas of enforcement by the federal government?
A. Well, how you market your product may be as closely scrutinized as the underlying message. Online marketers who make outbound calls to consumers, or who engage third-party vendors (such as call centers) to make these calls can run afoul of the Telephone Consumer Protection Act. Under the TCPA, anyone who calls customers without their express advance consent, or who hires anyone else to do so, can be hit with a $500 fine for each violation. That adds up, and the TCPA can be enforced by the Federal Communications Commission or by private plaintiffs. Upcoming changes in the TCPA, which will be effective in October 2013, make it even harder to stay on the right side of the law.
Q. How would you put it all together as far as the legal issues?
A. It’s not just the FTC any more. These days, online marketers need to be aware of other agencies with broad enforcement powers, such as the CFPB, the FDA, and the FCC. And don’t forget about the threat of private consumer litigation.
Kim Kardashian, the reality star, is accustomed to the public eye, but now she faces a lawsuit that may not bring her good publicity at all. Along with her sisters Khloe and Kourtney, Kim has been named as a defendant earlier this year in a class action over QuickTrim, a dietary supplement that they have been promoting.
The complaint, filed in the U.S. District Court for the Southern District of New York, accuses the Kardashians (along with QuickTrim’s manufacturer, Windmill Health Products; the retailer GNC; and others in the sales and marketing chain) of false and deceptive marketing of the diet aid. The plaintiffs, hailing from several states, brought claims under their respective states’ consumer protection laws alleging false and deceptive advertising, as well as other claims under federal and state common law. The corporate defendants are represented by John Robert Vales of Riker Danzig Scherer Hyland Perretti of Morristown, N.J.
The basis for the suit appears to be the Food and Drug Administration’s findings on the use of caffeine in dietary supplements. According to the lawsuit, the FDA has determined that caffeine is not a safe or effective treatment for weight control. Since QuickTrim’s main ingredient, according to the plaintiffs’ complaint, is caffeine, QuickTrim is not a safe or effective treatment — and thus, QuickTrim consumers were sold an unsafe, ineffective treatment.
Where Kim & Ko fit in is that they are the product’s face, with their images plastered across QuickTrim’s labeling, packaging, and advertising. They have also actively promoted the QuickTrim product line on their Twitter and Facebook accounts and personal web pages. Their promotional activities include Twitter feeds like: “Hi dolls, have you seen the QuickTrim buy one get one free sale at GNC? Just in time for bikini season!” Or: “Aw thanks doll! I try 2 work out every morning in my Shapeups and I use QuickTrim. It’s important to stay in shape.” Plaintiffs allege that they were deceived into buying QuickTrim products – products that are “worthless” and of “no value” – by the sisters’ promotional activities.
The plaintiffs’ complaint is already in its third iteration. The latest version, filed July 2, 2012, is a clear response to the Kardashians’ Motion to Dismiss filed in June. The Kardashians moved to dismiss an earlier version of the plaintiffs’ complaint, arguing that there are no reported cases supporting a private right of action for spokesperson liability. They further argued that the Kardashians were not alleged to be sellers or merchants of QuickTrim, which is required to successfully assert breach of warranty and contract claims. Finally, they argued the plaintiffs’ state law claims of deceptive advertising failed because there are no allegations or proof (1) that the Kardashians were not bona fide users of QuickTrim products at the time they made public statements, (2) that the public statements did not reflect the Kardashians’ honest opinions, findings, beliefs or experiences, and (3) that the Kardashians knew, based upon their personal experiences, that the advertising claims of the manufacturer, which the sisters repeated, were false.
The July 2 amended complaint attempts to overcome these deficiencies by peppering the filing with allegations (1) that “[t]he Kardashian sisters deal in goods of this kind – weight loss and fitness products – and hold themselves out as having knowledge or skill peculiar to the weight loss field” and (2) that “the Kardashian sisters are not bona fide users of QuickTrim, and their public statements endorsing the products do not reflect their honest opinions, findings, beliefs and experiences.”
It will be interesting to see what the court does with the case and whether it will allow it to survive another likely round of dismissal requests. It is clear from the Federal Trade Commission’s 2009 revised guidelines on celebrity endorsements that a celebrity product sponsor may get into hot water for repeating unsubstantiated health claims about a product. But a possible enforcement action by the FTC does not translate into a private right of action for consumers. Celebrity endorsers should have some degree of immunity from these types of suits. Otherwise, they risk being beleaguered by consumer publicity-seekers. The more appropriate course of sanction for disgruntled consumers is the filing of an FTC complaint, which the FTC can review and determine whether there is a basis for action.
Pomegranate juice maker POM Wonderful has declared victory against the FTC . . . in spite of an administrative law judge’s ruling that upholds many claims in the agency’s complaint. But the California company has good reason to celebrate: certain FTC standards, the ones that POM cried foul on, were rejected by the court.
The epic battle between POM Wonderful and the FTC began roughly two years ago during an agency investigation of the company for false advertising. The FTC had approached POM with a proposed requirement of enhanced advertising standards for medical and health claims. These would have required the company to seek FDA approval before making certain claims; the standards would also have required more stringent research requirements for substantiation of such claims.
To support these new standards, the FTC showed POM consent orders it had recently entered into with Nestle U.S.A. and Iovate Health Systems, Inc. That’s when POM cried foul. It saw the FTC’s moves – shifting and enhancing standards through consent orders with other companies, as opposed to traditional notice and hearing procedures – as a major overstepping and defiance of the rulemaking process. The company took its complaint to court, filing a lawsuit in U.S. District Court for D.C. against the FTC for violating its First and Fifth Amendment rights. The FTC within two weeks issued its administrative complaint against POM for false advertising.
Now, two years later, after a voluminous hearing record in the administrative proceeding, the administrative law judge in the FTC’s action has issued an opinion upholding certain false advertising allegations in the FTC’s complaint – based on implied as opposed to express claims – but also siding with POM on the company’s major issues of contention. (Note that POM’s action in the U.S. District Court appears to still be pending as of May 23, 2012.)
POM is touting victory based on rulings by the judge that (1) any FDA pre-approval requirement “would constitute unnecessary overreaching” and that (2) more stringent double-blind, randomized, placebo-controlled studies were not necessary. It appears that these rulings effectively put the kibosh on the FTC’s sliding scale of regulation through settlement agreements … at least in this instance.
An important holding from the court that POM has cited in its press release is that “[t]he greater weight of the persuasive expert testimony in this case leads to the conclusion that where the product is absolutely safe, like POM Products, and where the claim or advertisement does not suggest that the product be used as a substitute for conventional medical care or treatment, then it is appropriate to favor disclosure.”
The court thus addressed some of POM’s concerns over a chilling effect on free speech that could have resulted from the FTC’s attempts to require FDA preapproval for certain health claims. This is a concern we had identified in an earlier post on the matter. While many articles published on the judge’s opinion to date have been headlining POM’s losses, the more important aspect may be the judge’s findings in favor of the company.
The world is full of surprises, like the fact that Nutella chocolate spread is loaded with saturated fat and sugar and is not itself healthy.
Ferrero USA, Inc., the company that makes Nutella, learned the hard way that many American parents could not survive (nor perhaps could their children) without the aid and intervention of Captain Obvious. And so, following a recent settlement agreement with some confused parents, the maker of Nutella will modify its labeling, advertising, and website to clarify its nutritional value.
The problems arose from a line of advertisements and website content suggesting that Nutella could be part of a healthy breakfast. While many of us might understand that Nutella’s contributions to a healthy breakfast are the equivalent of Cheez Whiz’s contributions to a healthy side of broccoli, a couple of California moms said they were duped. They were surprised to learn that it was other elements of a breakfast – like a glass of milk, or the whole-grain bread the Nutella would top – that were healthy and that all Nutella did was to get children to the table.
The SoCal gals took their stupefaction to court, filing a class action for violations of state consumer protection laws in the U.S. District Court for the Southern District of California in early 2011. A literal reading of the advertisements (samples of which can be found on pages 19-27 of the complaint) should make it reasonably clear that Nutella, in and of itself, is not a nutritionist’s top pick. The ads qualify Nutella as a way to get children to eat healthy foods (see again, Cheez Whiz). But those qualifications were not clear enough to the plaintiffs, who were “shocked” that Nutella had the nutritional value of a candy bar.
Ferrero attempted to get the class action transferred to U.S. District Court in New Jersey, where a follow-on suit was filed, and also attempted to get the actions dismissed. The company’s tactics failed, leaving it with little choice but to pursue costly defense or to settle. The company chose the latter course and entered into a $3million-plus settlement for both cases. While the sum may seem staggering in comparison to the allegations, most of the settlement ($2.5 million) is dedicated to reimbursing consumers, in $4/purchase increments. The company has also agreed to clarify its nutritional value in its labeling, advertising and website.
What’s troubling is that Ferrero’s advertising was full of qualifications about the role Nutella can play in nutrition. It’s only the careless or dismissive or naïve parent who could have been “duped.” In the end, this appears to be yet another example of our system protecting willful blindness.
The FTC is building up its army of watchdogs to police online marketing content and practices. Who those watchdogs are – and their relationship to the industry – might surprise you.
Earlier this month, the agency entered into a settlement agreement with Central Coast Nutraceuticals, an Internet marketer of weight-loss and health products. The agreement settles charges that were initiated against the company in 2010. The company is one of the many marketers targeted by the FTC for its tactics in selling acai berry diet products. Like more recent FTC targets, Central Coast was charged with deceptive advertising and unfair billing. The deceptive advertising allegations were based on (1) the marketer’s use of phony endorsements by Rachael Ray and Oprah Winfrey and (2) the marketer’s unsubstantiated claims about the benefits of its products. The unfair billing allegations were based on the marketer’s “free trial” scheme that baited consumers into pricy negative continuity programs.
Those tracking the FTC’s enforcement actions against online diet marketers are familiar with these allegations. Last spring, the FTC halted the sites of 10 operators who marketed acai berry diet pills for alleged fake endorsements from major media networks and unsubstantiated claims about the pills’ efficacy. An eleventh operator was slapped with an action last December for the same issues, including the use of negative continuity programs.
Since Central Coast was the first of these marketers to come under the agency’s fire, and the first to enter into a settlement agreement (the actions of the other 12 operators are still pending), it is likely that the Central Coast settlement agreement will be the template for the suits to follow. (The FTC uses its settlement agreements to establish its legal standards.)
A term in the settlement agreement that caught our attention is a requirement that the company monitor affiliate marketers it does business with in the future. This obligation includes reviewing marketing materials to make sure that those materials comply with the provisions of the settlement agreement. Again, the Central Coast agreement likely will be the standard for subsequent enforcement actions, so these monitoring duties likely will be included in future agreements with other companies.
There have been a few FTC actions in the past that have imposed monitoring duties on companies who find themselves in hot water with the agency. In March of last year, a seller of instructional DVDs entered into an agreement with the FTC that requires the company to periodically monitor and review affiliates’ representations and disclosures. That includes monthly visits to top affiliate websites “done in a way designed not to disclose to the affiliates that they’re being monitored.”
What does this mean? Corporate spying has taken on new meaning, thanks to FTC sanctions. Affiliate marketers have their business partners as their proverbial Gladys Kravitz. It is likely that this type of government-imposed self-regulation will become increasingly the norm. The FTC doesn’t like affiliate marketers or the layers of puffery they create between advertiser and consumer. Policing for free through private companies is a win-win for the agency.
Putting a snag in New Year’s resolutions for pound-shedding, the FDA and the FTC recently sent out warning letters to several companies that sell HCG-based diet products online. (These companies include Nutri-Fusion Systems LLC, Natural Medical Supply, HCG Platinum, LLC, theoriginalhcgdrops.com, HCG Diet Direct, LLC, and Hcg-miracleweightloss.com.)
The warning letters, which came at the outset of the holiday season (and just before the January windfall for the diet industry, which the government may or may not have had in mind), allege that the companies are in violation of federal law (1) for selling unapproved and misbranded new drugs and (2) for advertising the health benefits of products without sufficient back-up research.
The products at issue, generally liquid drops, contain the human chorionic gonadotropin (HCG) hormone, which comes from human placenta and is extracted from pregnant women’s urine. HCG has been popular for weight loss since the 1950s, when a British doctor published a study that the hormone aided dramatic weight loss (of up to a pound a day) by mobilizing fat stores without affecting muscle or normal/structural fat. The popularity of HCG-based diet products escalated in 2007 when the notorious infomercial man, Kevin Trudeau, published a diet book on HCG.
Responding to the increased demand, in came many enterprising online marketers. But there’s an issue with selling these products – government regulation. HCG is FDA-approved, but only as a prescription drug and only for certain medical conditions, which do not include weight loss.
To get around this government roadblock, companies have marketed their HCG products as “homeopathic.” The FDA allows for the manufacture and distribution – without FDA approval – of homeopathic drugs provided those drugs meet criteria set out in the agency’s Compliance Policy Guide under “Conditions Under Which Homeopathic Drugs May be Marketed (CPG 7132.15).”
But according to the FDA’s warning letters such as this one, the HCG products marketed by these companies don’t meet the Compliance Policy Guide criteria. The biggest issue, which companies are going to have a hard (read impossible) time getting around is that HCG is not an established homeopathic active ingredient. And if a product has any non-homeopathic active ingredients, it falls out of the homeopathic exceptions under the CPG. Since HCG is a regulated drug (several states, including California and New York, list it as a Schedule III controlled substance) and can’t fall under the homeopathic exception, companies marketing HCG-based products are subject to a host of FDA regulations that require FDA involvement and approval. As these companies operated outside the FDA’s purview, they now find themselves in hot water.
The FDA isn’t the only government agency barking up these marketers’ money trees. The FTC joined the investigation and incorporated their allegations into the warning letters. The letters note that the companies’ websites make a host of claims that the government alleges are unsubstantiated. Any advertisement that includes health claims requires “competent and reliable scientific evidence,” such as human clinical studies.
The letters give the companies 15 days to take corrective measures and notify the government of those measures. If you go on these companies’ sites today, you’ll notice a lot of “coming soon” and “products currently being improved”-type language. And this all takes place during the New Year’s resolution timeframe, when these companies could be raking it in.
A few takeaways from the warning letters: (1) If you are going to invest time and money into a product being marketed purely through a regulatory loophole, make sure you satisfy all the criteria to meet that exception. (2) Don’t go where Kevin Trudeau has gone. This is meant to be partially glib, but the fact of the matter is that Trudeau is an FTC pet peeve. You can be sure of FTC involvement if you trek the same path he has. (3) Disclaimers are not enough to avoid the FDA. A couple of the HCG marketers to whom warning letters were issued had included disclaimers on their websites that the products are not intended to treat, cure or prevent disease. Such disclaimers, according to the FDA, could not overcome other health claims and language on the sites. (4) At the end of the day, if the government wants to give you a hard time, there is little you can do about it. Other warning letters issued by the FDA regarding homeopathic products noted that “that there may be circumstances where a product that otherwise may meet the conditions set forth in the CPG may nevertheless be subject to enforcement action.” With this last pointer, all we can say is, do a cost-benefit risk analysis.
October is Breast Cancer Awareness month. And pink is everywhere – all over the shelves of retail stores like Wal-Mart and adorning the backs of NFL linemen. We’ve been trained to know that the color pink represents a supporter of breast cancer awareness or research. So sporting a pink ribbon, jersey, or band should demonstrate that you have put some of your dollars toward the cause.
“Not necessarily so,” say the Better Business Bureau and other consumer groups. It should come as no surprise that many an enterprising social deviant has jumped on the pink bandwagon to profit from people’s assumptions that purchasing pink means supporting the cure. What has become known as “pinkwashing” is a growing problem that has been highlighted in the media – from Reuters, to Marie Claire (yes, a fashion magazine, but nonetheless they wrote a substantive article on pinkwashing!) to Fox News. Consumers have been urged to inquire about where proceeds go before they purchase a pink product.
With all this attention being placed on the pink ne’er-do-wells (including the recent documentary, Pink Ribbon, Inc.), you can expect the FTC to start looking into these companies for false and deceptive practices. The FTC regularly picks up issues exposed by consumer advocacy groups and news reports. Indeed, some FTC staffers have the task of reviewing such reports and researching the underlying issues. Those companies that are holding themselves out as anti-cancer champions by donning pink should be on the lookout for some regulatory attention.
It seems pretty likely that a few of the companies profiled by the Marie Claire piece may be in for a thorough FTC review. One company’s website, with lots of “Donate Now” pink hyperlinks, has cleverly identified itself with established breast cancer foundations like the Susan G. Komen Foundation under its “History” tab or celebrity advocates under its “Ambassadors” tab. But a careful review of the vague representations on the site seems to indicate the organization itself is not directly affiliated with any of them.
State attorneys general are already looking into some of these breast cancer foundations. New York Attorney General Eric Schneiderman filed suit in June against Long Island-based Coalition Against Breast Cancer. That group allegedly solicited some $9.1 million over five years while spending virtually no money on breast cancer programs.
No surprises that some people want to take advantage of people’s soft and charitable spots. Pink profiteers should not be surprised if their acts result in a knock on the door from a federal or state agent who is not trick-or-treating this Halloween.
In an unusual and little-noticed recent settlement, Google Inc. has agreed to pay a forfeiture of $500 million because it permitted Canadian pharmacies to advertise to United States consumers on its site using Google AdWords, resulting in the illegal sale of prescription drugs through online channels into the United States between 2003 and 2009.
The U.S. Department of Justice announced this agreement on August 24, 2011, in conjunction with the Food and Drug Administration’s Office of Criminal Investigations and the Attorney General of Rhode Island.
The government said that this forfeiture represents the gross revenue received by Google as a result of Canadian pharmacies advertising through Google’s AdWords program, plus the gross revenue made by Canadian pharmacies from their sales to U.S. consumers.
Although Canada has its own system of regulation of pharmaceuticals, Canadian pharmacies that ship drugs outside that nation are not subject to that system, and the U.S. Food and Drug Administration regards those shipments into the United States as generally illegal since they don’t comply with its regulations regarding labeling, distribution, and the use of a valid prescription.
What is most unusual here is that Google agreed to pay the forfeiture – even though its role was simply to accept advertising by Canadian pharmacies and to turn a blind eye to the legal problems. According to the government, Google did so from 2003 through 2009, when it learned of the investigation and took a number of steps to prevent the unlawful sale of prescription drugs by online pharmacies, including Canadian pharmacies, to U.S. consumers.
Last March, we asked the question, “Does Google Need to Police Its Ads for Fraud?” when Consumer Watchdog asked whether Google should be held legally responsible for deceptive advertisements placed on its site by mortgage rescue companies. This forfeiture agreement puts Google – and others in its position – on notice that they may need to account for their actions in connection with potentially illegal advertising.
It may go even further. A blog that covers the affiliate marketing community has noted: “For affiliate marketers, the Google and Justice Department settlement has serious consequences. There are many opportunities to partner with products or services online that may or may not be entirely legal.”
In fact, this settlement may have significant effects on the affiliate marketing community. Does each affiliate marketer that places an ad on a website, or simply permits an ad to go on a website, need to check the accuracy and truthfulness of the ad, or risk a major fine? This is at the very least a question that affiliate marketers need to concern themselves with.
The companies behind the ubiquitous “1 Tip for a Tiny Belly” ads are the most recent targets of a new FTC crackdown on online weight-loss ads that have conned millions of people. The ad seems innocent enough; it promises “1 Tip” to a svelte stomach. But this ad is actually the tip of something much larger: a scheme by the promoters and sellers of a host of diet pills and weight loss products to grab consumer credit card information and pile on additional, unapproved charges.
The headline typically reads: “1 Tip for a Tiny Belly,” in what appears to be hand-lettered type and positioned above a crudely animated drawing of a woman’s bare midriff, which shrinks and reinflates — flabby to svelte, svelte to flabby. Versions of these ads appear just about everywhere, including Facebook and the home pages of major news organizations. The government estimates that the accumulated number of “impressions”—the number of times it has flashed by a viewer on the Internet over the past 18 months — runs into “the tens of billions.”
In April, the FTC filed ten lawsuits against some of the companies and individuals behind these ads, but the “1 Tip” ads continued. The ads are the work of an army of affiliate marketers who place them on various websites on behalf of diet product sellers with such names as HCG Ultra Lean Plus. The promoters make money every time someone clicks through to the product seller’s site and orders a “free” sample. The samples, however, are not always free. The government estimates that the affiliate companies sued by the FTC spent more than $10 million buying Internet ads to push products such as acai berry diet products. One of the companies the government sued, IMM Interactive of Long Island, spent more than $1.3 million last year to place “flat belly” ads, which generated more than a billion impressions.
The FTC contends that almost everything about these ads is bogus. According to the FTC, these ads are part of a three-part scheme to obtain consumers’ credit card information and pile on additional, unapproved charges, which have led to thousands of consumer complaints. The “1 Tip” ad is the first step in this scheme, meant to lure consumers into the process. Consumers who click on the ad are directed to a second site, which looks like a diet or health-news page that seems to carry positive information about the products supposedly from credible news sources like CNN, USA Today, or ABC and to include brief “reader comments” extolling the virtues of the product. The pages then link to a third site, where consumers can use a credit or debit card to order “trial” samples of the featured products. But people who order the free sample find out later that they have actually agreed to pay $79.99 for an additional shipment of the product two weeks later, and another $79.99 for a shipment six weeks later, and so on until the consumer cancels the product, which is not always that easy.
These ads undoubtedly have power to attract the unwitting consumer in search of weight loss secrets. Some of this drawing power can be attributed to their appearance on websites belonging to real news organizations. In all of these cases, the credible news sites appear to be passive hosts of the ads. The ads are “served” to the news sites and thousands of others by ad networks, including those operated by Google and Pulse360, based in New York. The “host” sites, in turn, receive a commission for being part of the network or when their visitors click on one of the network-fed ads. If these ads continue, perhaps the the FTC will decide to investigate hosts of these ads, such as Google, for promoting these deceptive ads, as the Consumer Watchdog group encouraged the FTC to do in the case of mortgage scammers.
The Federal Trade Commission has been clamping down on several major food companies regarding health claims in their advertising. Iovate Health Sciences USA and Nestle S.A. subsidiary, Nestle Healthcare Nutrition, Inc., were the first to come under FTC fire, both entering into settlement agreements last summer. Dannon Company, Inc. and POM Wonderful LLC were next. Dannon settled in December, while POM opted to fight the government for imposing what it sees as unreasonably burdensome new standards.
The FTC argued that the companies have not been able to sufficiently substantiate health claims regarding their products, such as reduction in likelihood of cold and flu, digestive improvement, and weight loss. The FTC argued the companies’ ads therefore were deceptive in violation of the Federal Trade Commission Act.
The three companies that settled with the FTC are now subject to new stringent advertising standards that significantly raise the bar on what companies must be able to prove before making health claims. There is some debate whether the settlement agreements are binding on the whole industry. In a lawsuit filed against the FTC last September, POM argues that they are and that this is unreasonable. In fact, a later FTC complaint and proposed consent order against POM support POM’s contentions as the FTC indeed suggests that the same standards should apply to POM.
The three new standards in the agreements between the FTC and Nestle, Iovate and Dannon are problematic in many ways.
First, each of the agreements provides that the companies must obtain approval from the Food and Drug Administration before making certain claims in advertising. This additional hurdle is something that the FTC acknowledges is not required of advertisers under the act governing FTC powers.
Second, each of the agreements provides that the companies have two clinical studies to back certain other health claims. As developed by the FTC, such studies must be adequate and well-controlled human clinical studies conforming to acceptable designs and protocols with results sufficient to substantiate that the representation is true.
Third, for all remaining or new health claims made by the companies, the companies must be able to back those claims by nonspecific competent and reliable evidence, i.e. evidence that is sufficient in quality and quantity based on standards generally accepted in the relevant scientific fields, when considered in light of the entire body of relevant and reliable scientific evidence, to substantiate that the representation is true.
These standards are both difficult to comply with and unclear. For a given product, there are different standards for different prospective health claims. For instance, if Dannon wants to claim that its Activia product helps reduce the risk of cold and flu, it must seek FDA approval first. If Dannon wants to claim that Activia improves intestinal tract functions, it needs to pass the two clinical studies requirement. Any other claims for Activia must pass the wordy “nonspecific competent and reliable evidence” requirement. The existence of multiple standards for various claims (and on various products) makes it very difficult for a company to establish a clear FTC compliance policy.
The FTC has done little to clarify these matters. So companies looking to avoid FTC action are left wondering: How can they anticipate what claims they can make? How can they determine what standards to use? How can they establish an efficient and effective compliance policy?
Some companies have expressed legitimate concerns that concerns that excessively stringent standards will limit their commercial speech rights. In POM’s September 2010 suit, in which it requests the court declare that the FTC acted outside its authority in establishing new standards, POM alleges the standards breach First and Fifth Amendment principles of free speech and impose significant new burdens and risks on advertisers.
The more hoops a company has to jump through before it can make a claim, the less likely the company will be to provide information. Ultimately, we run a significant risk that consumers will end up learning less rather than more about the health benefits of a product.