Judith L. Grubner

Infomercials are popular methods for selling nutritional supplements and other products. However, they must follow the same rules that govern other advertising. The Federal Trade Commission (FTC) has authority under the Federal Trade Commission Act to regulate unfair methods of competition and unfair or deceptive acts or practices in or affecting commerce. That includes the power to ban false advertisements, including infomercials. The FTC can sue to enjoin the false advertising and the offender can also be fined and/or imprisoned.

In 1998, the FTC charged Kevin Trudeau with falsely claiming in infomercials that certain products could cause significant weight loss, cure addictions to heroin, alcohol and cigarettes, and give users a photographic memory. He agreed to pay a $500,000 penalty and post a $500,000 performance bond. In 2003, the FTC charged him with violating the agreement by making cancer cure claims. In 2004, he agreed to pay a $2 million penalty and was banned from making infomercials except for publications where he truthfully represented the content.

In 2007, the FTC obtained a court order from the U.S. District Court for the Northern District of Illinois against Trudeau for misrepresentations he made on television about the content of his book, The Weight Loss Cure “They” Don’t Want You to Know About. In 2008, the judge ordered Trudeau to pay over $5 million and banned him for three years from making infomercials for products in which he had an interest. The FTC returned to court to have Trudeau held in contempt for violating that order in over 32,000 subsequent deceptive infomercials. In 2009, the court fined Trudeau $37.6 million and banned him from making infomercials for three years. On appeal from that order, the U.S. Court of Appeals for the Seventh Circuit required the judge to explain how he figured the fine and to modify the ban to allow Trudeau to make infomercials that did not misrepresent his book content.

The judge explained that the fine was calculated by multiplying the price of the book by the number of 800-number orders, plus the cost of shipping, minus any returns. The FTC was required to distribute the funds to anyone who bought the book using the 800 number and to return the remainder not used for administrative costs to Trudeau. The judge also required Trudeau to post a $2 million performance bond, effective for at least five years, to prevent further deceptive infomercials.

This time on appeal, the Seventh Circuit upheld the judge’s order as a “reliable and conservative” figure that compensated consumers for their losses incurred as a result of Trudeau’s contemptuous behavior. The judge was not limited to imposing relief based solely on Trudeau’s unjust profits. The fine could have been much higher, as the judge could have included bookstore as well as telephone sales because the books bore stickers saying “As Seen on TV.” The performance bond was also an appropriate remedy, as it would not be forfeited unless Trudeau makes more deceptive infomercials and the amount is low in light of Trudeau’s sales of thousands of books a day for many months. FTC v. Trudeau, No. 10-2418 (7th Cir. 11/29/11).

Last week, the Seventh Circuit issued its mandate after denying Trudeau’s motion for rehearing.  Trudeau now has 90 days to petition the U.S. Supreme Court to hear his case.  He tried that before and lost.  Expect him to try again.  But don’t expect much more than that.

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In a statement, commission chairman Jon Leibowitz said, “We expect more from a great American company than making dubious claims – not once, but twice – that its cereals improve children’s health. Next time, Kellogg needs to stop and think twice about the claims it’s making before rolling out a new ad campaign, so parents can make the best choices for their children.”

In a joint statement, Leibowitz and commissioner Julie  Brill used stronger language: “As a trusted, long-established company with a presence in millions of American homes, Kellogg must not shirk its responsibility to do the right thing when it advertises the food we feed our children.”

Kellog had a run-in with the FTC over its Frosted Mini-Wheats that resulted in the company’s admission that health claims made for the cereal were false and a settlement order in February 2009. Kellogg agreed not to claim “benefits to cognitive health, process, or function provided by any cereal or any morning food or snack food unless the claims were true and substantiated,” according to the statement on the Rice Krispies order.

Leibowitz and Brill said in their joint statement that even as Kellogg was pulling back on the Mini-Wheats claims, it must have been moving forward with health claims on the Krispies cereals.

“The company clearly has the means and ability to carefully test its children’s food products to determine if the products in fact provide health benefits for kids,” the commissioners said. “We are also confident that Kellogg has the wherewithal to carefully develop truthful and nonmisleading advertising about such health benefits.”

Kellogg responded with a statement saying that it stands behind the validity of product claims and research. “So we agreed to an order that covers those claims,” their statement said.

The expanded order now prohibits Kellogg from “making claims about any health benefit of any food unless the claims are backed by scientific evidence and not misleading.”

This is familiar ground for makers of nutritional supplements, but not so much for a manufacturer whose advertising icons include three guys in hats and a cuckoo bird. (Cocoa Puffs had the claim, too.) Kellogg, and General Mills whose Cheerios heart-health claims drew a warning letter from the Federal Drug Administration, are now learning what it’s like when you emblazon words like “immunity” and “antioxidants” on product packaging.

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In a year when initial public offerings and acquisitions were almost unheard of, the supplement business saw many go public and get bought.  Only iPhone apps fared better, and not by much.

Meanwhile, the regulatory landscape tightened, but not as much as expected under a Democratic administration.  While both foods and drugs had their shares of scandals, supplement makers passed their early cGMP inspections and emerged unscathed.

Looking ahead to 2010 we envision many new challenges and opportunities for the supplement business.  In no particular order, here’s what to look for in the year ahead:

Sports supplements face stiffer regulation. Under several proposals currently being circulated in Congress, the Drug Enforcement Administration would be given increased powers to schedule substances that are chemically similar to or precursors of human growth hormone effectively banning them from use without a prescription.  Some sports supplement makers will need to reformulate their products or face enforcement action from DEA, an agency far more aggressive than the FDA supplement companies are used to.

CGMP regulations impact small supplement businesses. In June companies with 20 and fewer employees become subject to the FDA’s dietary supplement CGMP regulations.  Companies that rely on contract manufacturing will receive a rude awakening as they are subject to regulatory scrutiny they have never previously experienced.  Small supplement makers should begin to prepare themselves by implementing standard operating procedures to comply with the new cGMP rules.  Many will fail to do so and by year’s end fewer small supplement companies will be around to see 2011 as a result.

Investors get serious about supplements. Expect more merger and acquisition activity in 2010 with special emphasis on venture capital firms seeking new opportunities for profit in the supplement space.  Ingredient suppliers, contract manufacturers, marketers and retailers are all in play.

Regulators take aim at Internet supplement businesses. Armed with new rules and increased funding, regulators at the Federal Trade Commission, Food and Drug Administration and state attorneys general will step up their attack on supplements sold as drugs and deceptive and unfair sales practices.  The FTC endorsement rule will be used against bloggers and the companies that sponsor them.  Learn and follow the rules now or get caught violating them later.

By all accounts 2010 will be a great year to not just survive but thrive.  We hope to be there with you and look forward to your comments in the year ahead.

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The Feds are again looking at how companies market foods to kids. Concerned by reports on child obesity, the FTC in 2010 will take a look at what the food companies sell for kids and how those products are marketed. Makers of healthful foods would be wise to contribute to the testimony in advance of possible congressional action that could give their products a competitive advantage.

David C. Vladeck, director of the FTC’s consumer protection bureau, told the Wall Street Journal that the proposals would not be regulations and that Congress may ultimately write the new rules.The Journal says the recommendations will be sent to Congress after a public comment period.

The food industry seems to be taking the possibility of legislation seriously. General Mills has announced plans to reduce sugar content in three cereals, Trix, Cocoa Puffs, and Lucky Charms. Campbell Soup Co. says it will cut the amount of sodium in canned SpaghettiOs by up to 35 percent.

That begins to address one-half of the equation. University of Arizona professor Dale Kunkel has found in a study that children would have to watch 10 hours of television aimed at audiences 11 years and younger to see one commercial for healthful food. During that time, they would see 55 commercials for junk food. He took the results of his study to Washington and testified before the FTC on Dec. 15.

After the study was released, Sen. Tom Harkin, D-Iowa, expressed disappointment in the food industry’s efforts to self-regulate.

“When private interests work against the public good, government is obliged to act,” he said in a statement. “We need to examine this issue more closely and figure what needs to be done to achieve balance on the airwaves so that we can improve the health and wellness of our children.”

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David Frum

David Frum recently laid into the nutritional supplement industry with a guest commentary on CNN.com. The resident fellow at the American Enterprise Institute and one-time special assistant to President George W. Bush lashed out with the classic invectives against supplement makers and marketers. He wrote that any “snake oil flim-flam can be huckstered in the most truth-defying way” using that most evil of laws, the Dietary Supplement Health and Education Act of 1994.

Frum could have lowered his rhetorical blood pressure, without the help of a supplement, by reading the FTC regulations that go into effect on Tuesday. His column then would have begun: The party is over Dec. 1.

And the party — or at least marketing as it has been done for many years — does come to an end. Frum’s arguments against vague product claims no longer hold when the FTC — not the FDA — is watching what is said. The effects of the new rules are worth noting again: no more CYA disclaimers such as “results not typical” language; closer scrutiny of expert and celebrity endorsements; and careful review of consumer testimonials.

All the people who try a supplement and blog about it or are paid to write online reviews also have to disclose their relationships with those who supply them with products.

Frum can argue for repeal of the DHSEA, but he would be better off passing along tips of deceptive advertising to contacts he has at the FTC. That would produce more effective results than spouting off about his distaste for the supplement industry and its marketing practices.

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Should there be a language standard in Google ads for supplements? Drug marketers may adopt rules given the close scrutiny that the FDA is giving search-generated ads for pharmaceuticals. The Interactive Advertising Bureau is asking the feds to endorse the use of standard formats online for drugs.

Why? Because seemingly harmless statements are incurring the FDA’s wrath. Case in point: A search for the pain medication Fentora generated this sponsored message from its maker, Cephalon: “Learn about treating breakthrough pain in patients with cancer.”

Harmless, right? No, said the FDA. According to a MediaPost report, the FDA deemed “such ad copy was deficient because it implied that all cancer patients with breakthrough pain could use Fentora.” The agency also said that the “implication was misleading because the drug is only indicated for people who can already tolerate around-the-click opioid therapy.”

The FDA warned a host of the world’s largest drugmakers that they too were running misleading ads. Unsure of how to act, the companies cut back on search-generated ads, with volume falling by about half. Now, the IAB wants a set of clear rules so that the drugmakers can resume online advertising without getting into trouble.

Standards may also help marketers of nutritional supplements. While drugmakers have a higher standard for publishing warnings and limitations on their products (see any Cialis ad), makers and marketers of nutraceuticals operate at their peril in making claims for ingredients. And sponsored links on Google could be one place they find trouble.

For example, a search on antioxidant produced this language in a sponsored link:

Get Healthy w/Natural Antioxidants
One Year Money Back Guarantee!”

Similarly, a search on glucosamine chondritin produced this ad language:

Drink Joint Juice and Leap More.
The 30-Day Joint Health Challenge!

How would the FDA or FTC view these claims getting healthy or jumping higher if they were made for drugs? The supplement industry may want an answer before agencies go on the offensive.

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David Vladeck - FTC Director of Consumer Protection

David Vladeck, Director of the Federal Trade Commission Bureau of Consumer Protection spoke at the Council for Responsible Nutrition Conference on the FTC’s “active” dietary supplement enforcement agenda.

Dir. Vladeck began by highlighting recent FTC enforcement actions against bogus cancer cures, Airborne generics,  fake hoodia, and peddlers of H1N1 flu cures.  Vladeck noted that FTC has begun sending joint warning letters with FDA to marketers of bogus H1N1 flu products.

Vladeck had good words to say about the NAD as well. Though Vladeck observed that FTC did not always agree with NAD, which is a departure from the attitude taken by prior Consumer Protection Division directors.

Then Vladeck turned to the new FTC Endorsement Guides.  Everyone held their breath.

Before I go further it is important to remember that Vladeck comes from a consumer protection background.   He led the Public Citizen Litigation Group for 20+ years.

On the endorsement guides Vladeck’s message was clear:

1. Disclaimers like “results not typical” are useless and will be attacked by FTC.

2. Advertisers who make claims “will be held responsible for their claims.”

3. If your promotion relies only on testimonials “you will have a problem with us.”

Vladeck described this area for the FTC as a “target rich enviornment” in which they intend to pursue violators using all the resources at their disposal.  And when the 1000+ enforcement personnel at the FTC run out, FTC plans to call on the state attorneys’ general.  When the AG’s are too busy, Vladeck says that they will do as the FDA does and publish warning letters on the internet in order to “bully companies into compliance.”

Despite the backpeddling FTC has done in the media recently, Vladeck made it clear that he will enforce Section 5 of the Federal Trade Commission Act and the endorsement guides.  It was as if Vladeck was drawing imaginary targets on foreheads around the room…

I spoke to several attorneys and CEOs at the reception that evening about the regulatory problem the enforcement guides present and everyone agreed that the problem is very serious.  One observed, candidly, that the problem was that “you never know what marketing is doing until it is too late.”

After all, lawyers and regulatory execs are considered “sales killers.”  We are never consulted by marketing in advance of a promotion for fear we will put the kibosh on the latest profitable social media marketing strategy.

So what’s next from the FTC?  Who knows.  After all, it’s a “target rich environment.”

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New Rules: Endorsements & Testimonials in Marketing (The Business of Marketing)

“Those were the days – the days when a marketer could use an actual quote from a real person that has used your product as a marketing endorsement or testimonial to capture the aspirations of your potential customers. As of December 1, 2009, those days are gone.”

What You Need to Know About the New FTC Endorsement Rules — and Why (Ad Age)

“Revlon won’t be able to give away its product to mommy bloggers without asking them to disclose it in their writings. And if Jennifer Love Hewitt claims her blemish-free skin is the result of Proactiv, she had better be telling the truth.”

FTC Wants To Clarify: Bloggers Probably Won’t Get Dinged $11,000 (Washington Post)

“…the FTC would most likely send an [sic] warning letter to a blogger who pitches for Jiffy but doesn’t disclose receiving funds from Virginia peanut farmers.”

Do the FTC’s New Endorsement/Testimonial Rules Violate 47 USC 230? (Technology & Marketing Law blog)

“…the FTC apparently has made the same analytical error that the SEC recently made in the SEC’s proposal to hold securities issuers liable for third party content they link to.”

FTC Orders More Disclosure in Consumer Testimonials, Celebrity Endorsements (National Law Journal)

“(Attorney Anthony DiResta is) not as positively inclined toward the decision to do away with the “results may vary” disclaimer in favor of describing typical results. “Whenever there is going to be a claim of typicality, then there’s going to have to be substantiation.” And that can be costly and timely, DiResta added.”

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If your marketing plan includes raising awareness through bloggers, read the latest FTC announcement on disclosure of freebies. The agency says that bloggers who review products given to them for free should disclose that fact in some circumstances. Failure to do so will not affect the bloggers, but could trigger FTC action against marketers for what the agency considers deceptive practices. The good news: Chats and other unprepared communications among consumers are not considered corporate marketing. Read the entire notice, which goes into effect Dec. 1, here.

Given the unruliness of the Web, many companies have wondered whether solicited and unsolicited product reviews constituted marketing and advertising. For reviews by news media, the answer is no, the FTC says. For bloggers, the answer is maybe. Much depends on the nature of the blog, the FTC says. For example, what is the blog’s readership? Does the blogger disclose the product’s value? Does the blogger accept requests to product reviews on a regular basis?

More to the point, the FTC says, “the post of a blogger who receives cash or in-kind payment to review a product is considered an endorsement. Thus, bloggers who make an endorsement must disclose the material connections they share with the seller of the product or service.”

The FTC says it will examine each instance separately, which means for marketers more incremental understanding than firm rules at the outset. Expect the rules to change as the distinction between members of traditional news media and bloggers continues to erode. For now, the FTC expects companies that send samples and ask for reviews to tell the blogger that he or she should that they received the items gratis. The company must also monitor the blog to see that disclosure is made.

A company does not have to keep an eye on people who buy a supplement and write about whether they liked it. Nor does a company have to monitor the comments on that review. None of that is considered a product endorsement.

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Lesson #1: Do not copy someone else’s advertising. Just because the other companies make product claims does not mean it is OK. The FTC might penalize all of you. The FTC settled with Airborne for $30 million in August 2008 and with Rite-Aid, seller of Germ Defense, in July for $500,000.

Lesson #2: Have product claims reviewed before you advertise. The FTC said in a press release that it had charged CVS with “making false and deceptive advertising claims that using its product would reduce the risk of colds and protect against catching colds in crowded places, such as schools, airplanes, offices, health clubs, theaters, or restaurants.” The FTC said that “the company had no evidence that the products could boost the immune system or prevent colds.”

Lesson #3: The FTC is cracking down on supplement advertising. “With orders against Airborne, Rite Aid, and the one proposed against CVS, manufacturers and retailers are on notice that they have to tell the truth about what dietary supplements can and cannot do,” the FTC said in its release on the CVS settlement.

Lesson #4: Do not stretch the truth. The FTC is taking a highly critical view of product claims and scientific evidence. The agency has sued Rite Aid’s supplier of Germ Defense, Improvita Health Products Inc., claiming that company with deceptive acts or practices and with making false advertisements.

Lesson #5: Avoid the flu — and advertising related to it. This fall, the public faces the dual threat of seasonal flu and the H1N1 virus. A company that advertises a defense against either is likely to receive a call from the FTC.

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