Antitrust Law Daily Wrap Up, ADVERTISING—9th Cir.: Dismissal of false advertising claims involving supplement ingredient reversed, (Jun 29, 2016)

By Michael Menzhuber, J.D., LL.M.

The federal district court in Los Angeles erred in dismissing a putative class action’s false advertising and deceptive business practices claims, which arose from a nutritional supplement manufacturer’s clinical trial claims regarding a supplement ingredient, according to the U.S. Court of Appeals in San Francisco. The appellate court also: (1) affirmed the dismissal of the civil RICO claims, fraud claims, and individual claims against the manufacturer’s CEO; and (2) vacated the dismissal with prejudice of the Consumer Legal Remedies Act (CRLA) (Bitton v. Gencor Nutrientes, Inc., June 28, 2016, per curiam).

Michael Bitton and two other individuals appealed the dismissal of their putative class action complaint against Gencor Nutrients, Inc. and GE Nutrients, Inc.; Direct Digital, LLC, Truderma, LLC, and Force Factor, LLC (collectively, "Wholesalers"); General Nutrition Corporation (GNC); and several executives of the named corporate entities. The plaintiffs alleged that Gencor’s clinical trial of Testofen, an ingredient in nutritional supplements manufactured by GNC and the Wholesalers, did not produce statistically significant results that showed an increase in "free testosterone" in study participants and they purchased Testofen products in reliance on the false representation that the clinical trial did produce statistically significant results.

The district court dismissed, with prejudice: (1) the claims against individuals for lack of personal jurisdiction or, alternatively, failure to adequately allege alter-ego liability; (2) the Racketeer Influenced and Corrupt Organizations Act (RICO) claims for failure to allege acts of mail and wire fraud with particularity; and (3) the breach of warranty claims for failure to allege reliance, causation, and injury.

The district court also dismissed claims under California and New York false advertising and deceptive business practices statutes, on the theory that an expert report submitted by the plaintiffs, although critical of the clinical trial, did not allege that it was not statistically significant. In support of its theory, the district court cited an article for the proposition that the Bonferroni correction test (which the expert asserted that the Testofen clinical trial would have failed) was the most conservative approach used and that less conservative methods of correction might show that the results of the Testofen clinical trial were statistically significant.

As an initial matter, the appellate court found that the district court erred in relying on its interpretation of the Bonferroni correction test because the article it relied on in reaching its decision was not before the court and it should have ruled only on the sufficiency of the allegations in the complaint.

The appellate court reversed the dismissal of the plaintiffs’ California and New York false advertising and unfair competition statutes because the plaintiffs alleged that the assertion that the Gencor clinical trial produced statistically significant results was false; they appended to their complaint the expert report stating that the clinical trial’s results were not statistically significant; and these allegations were sufficient to state a claim for violation of the California and New York statutes.

The dismissal of the plaintiffs’ CRLA claims with prejudice was vacated because the failure of plaintiffs to comply with the 30-day notice requirement prior to filing their complaint only required that their claim be dismissed until 30 days or more after they complied with the notice requirements.

However, the appellate court affirmed the dismissal of the plaintiffs’ claims under RICO and for common law fraud. The RICO claims were properly dismissed in the absence of allegations of fraud forming the predicate acts of a RICO claim. The common law fraud claims were properly dismissed because there were no allegations plausibly suggesting that the results of the study were altered or that any of the defendants knew that the study was falsified or unreliable.

Finally, the district court erred in finding that it lacked personal jurisdiction over Gencor’s CEO, according to the appellate court. However, because the plaintiffs failed to challenge the district court’s alternative holding regarding alter-ego or individual liability, they were considered to have waived the issue on appeal.

The case is No. 14-56381.

Attorneys: Barry Himmelstein (Himmelstein Law Network) for Michael Bitton. Matthew R. Orr (Call & Jensen, PC) for Gencor Nutrientes, Inc. and GE Nutrients, Inc. Daniel Scott Silverman (Venable LLP) for General Nutrition Corp. and GNC Corp.

Companies: Gencor Nutrientes, Inc.; GE Nutrients, Inc.; General Nutrition Corp.; GNC Corp.

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