Antitrust Law Daily Wrap Up, ADVERTISING—N.D. Ga.: Compensatory sanctions ordered against marketers of dietary supplements for civil contempt, (May 20, 2014)

By Linda O’Brien, J.D., LL.M.

The federal district court in Atlanta ordered compensatory sanctions and a product recall as an appropriate remedy for civil contempt in an FTC action against three companies and several individuals for allegedly deceptively advertising dietary supplements as rapid and substantial weight loss aids (FTC v. National Urological Group, Inc., May 14, 2014, Pannell, C).

National Urological Group, Inc., National Institute for Clinical Weight Loss, Inc., and Hi-Tech Pharmaceuticals, Inc. manufactured and marketed dietary supplements, Fastin, Lipodrene, Benzedrine, and Stimerex-ES. In 2004, the FTC filed a complaint against the companies and several individuals, including Jared Wheat, Sean Smith, and Mark Wright, alleging that the defendants deceptively advertised the supplements by making false and unsubstantiated claims. Final judgments and permanent injunctions were entered against the defendants, enjoining them from advertising the products using claims that the products cause rapid and substantial weight loss unless the claims are substantiated with competent and reliable scientific evidence. The FTC moved to show cause why High-Tech, Wheat, Smith, and Wright should not be held in contempt for failure to comply with the requirements of the final judgments and permanent injunctions. In August 2013, the court found the defendants in civil contempt but reserved judgment on the nature and amount of sanctions.

Disgorgement. The court determined that the disgorgement of gross receipts from the sale of the supplements as compensatory damages to redress consumers was an appropriate remedy for civil contempt. The court noted that (1)Wheat and Smith, as executives of High-Tech, were authorized and in control of the company’s marketing practices; (2) the defendants disseminated the prohibited advertising through national magazines, the company website, and product packaging and labels; (3) the defendants disregarded legal advice that the advertising was in violation of the judgments and permanent injunction; (4) the defendants disregarded the substantiation requirement; and (5) the defendants continued the prohibited advertising after the entry of the contempt order. The defendants also repeatedly provided inaccurate and incomplete compliance reports to the FTC, acquired other dietary supplement businesses, failed to pay the majority of the final judgments, and did not recall supplements with product packaging and labels that contained the prohibited claims. Further, since Wright provided unsubstantiated endorsements for the supplements which were disseminated in print advertisements and in articles printed in national magazines, he was ordered to pay compensatory sanctions in the amount of the compensation for his endorsement services.

Product recall. The court also determined that the defendants would remain in contempt of the court order as long as the product packaging and labels with the prohibited claims remained in the retail market. Thus, the supplements with the prohibited packaging and labeling were ordered recalled and the defendants were required to submit written reports to the court on the status of the recall or risk coercive incarceration for insufficient action to effect a complete recall of the products.

The case is No. 1:04-cv-03294-CAP.

Attorneys: National Urological Group, Inc.; National Institute for Clinical Weight Loss, Inc.; Hi-Tech Pharmaceuticals, Inc.

Companies: Amanda C. Basta for the FTC. Edmund J. Novotny (DeLong Caldwell Bridgers & Fitzpatrick, LLC) for National Urological Group, Inc., National Institute for Clinical Weight Loss, Inc., and Hi-Tech Pharmaceuticals, Inc.

Cases: Advertising GeorgiaNews