Antitrust Law Daily Wrap Up, CONSUMER PROTECTION—D.N.J.: FTC assessment of appropriate damage award for civil contempt rejected, (Jan 27, 2014)

By Edward L. Puzzo, J.D.

After a supplier of dietary supplements had been found in civil contempt for violating a final order regarding its advertising practices, the federal district court in Newark, New Jersey, permitted the damage award to be based upon the supplier’s experts’ calculation of the premium paid by consumers for products sold based upon the offending advertising claims, rather than the FTC’s estimate (FTC v. Lane Labs-USA, Inc., January 17, 2014, Cavanaugh, D.).

Background. The FTC had charged defendants, suppliers of dietary supplements, with deceptive acts in violation of § 5 of the FTC Act. A final order was entered by the court, imposing a permanent injunction against defendants for misrepresenting the health benefits of their products. Subsequently, the FTC sought a finding of contempt against defendants for health claims that allegedly violated the permanent injunction.

After remand from the Third Circuit Court of Appeals, the district court held that defendants’ claims, that its calcium supplement AdvaCal was three to four times more absorbable than other calcium supplements and increased bone density, violated the final order. The court found defendants’ in civil contempt for violation of the prior court order. The present issue for the court was determining the proper amount of damages to award based on the finding of contempt.

Expert testimony. The FTC moved to eliminate expert testimony of three of defendants’ expert witnesses, alleging that their testimony violated the Federal Rules of Evidence 702 and 703. The FTC also moved to strike as inadmissible hearsay certain academic journal articles presented by one of the experts. Defendants’ presented three expert witnesses to support their damages calculations. The FTC did not challenge the qualifications of the experts, but did allege that the experts’ opinions lacked a sufficient evidentiary basis or relied on flawed data.

In its not-for-publication decision, the court noted that motions seeking to bar expert testimony may be denied on the ground that the movant’s arguments are more appropriately considered attacks on the weight to be given such evidence, as opposed to its baseline admissibility. Given this more lenient standard, the court found that it would be appropriate to consider the FTC’s arguments when determining the weight to be given this testimony in its damages analysis, rather than its admissibility altogether. Accordingly, the court denied the FTC’s Motion in Limine to exclude the expert testimony. The court also dismissed as moot the FTC’s motion to strike certain exhibits introduced by one of the experts.

Damages analysis. The court explained that the damage remedy for civil contempt should be the loss suffered by the consumers who relied on the offending advertising claims in purchasing AdvaCal. Therefore, the court explained, the most appropriate measure of relief was one that was tied to sales from the offending claims. The position of the FTC was that the measure of damages was over $l5 million, the amount of Defendants’ total AdvaCal revenues during the relevant period.

Although AdvaCal did not live up to the unsubstantiated and misrepresentative claims made by defendants’, the court noted, it was still an effective calcium supplement, as the FTC’s own expert conceded, the court stated. Therefore, awarding all revenues during the relevant period, as suggested by the FTC, would dramatically overstate the consumers’ loss, the court explained. A more accurate calculation of the harm suffered would be the price premium paid by consumers in selecting AdvaCal over other calcium products, the court continued.

Using this price premium approach, the defendants’ expert witnesses estimated that direct sales revenues from the offending advertisements were approximately $2.5 million. Although the FTC objected to the methodology used to arrive at this figure, the court ruled that defendants’ sales data was sufficiently reliable. Defendants’ next estimated that retail revenues from the offending advertisements was approximately $1.3 million. The court also found the evidence behind this figure to be adequately supported. Thus the total of direct and retail sales came to approximately $3.9 million. The court also accepted defendants’ expert opinion that the price of AdvaCal was 1.26 the price of comparable products. Finally, the court accepted the determination of one of defendants’ experts that the ratio of the average price of comparable products to the average price of a daily dose of AdvaCal was 20.56%.

Applying this percentage to the total AdvaCal revenues from offending ads ($3,905,991 x 20.56%), it was determined that the damages resulting from the premium charged for AdvaCal would be approximately $803,072. The FTC argued that the damage estimate arrived at by defendants’ expert was based on flawed data, but the court ruled that defendants’ sales data and tracing methodology were sufficiently reliable and defendants’ experts opinions were sound and based upon reliable facts. Thus the court ordered defendants’ to pay $803,072 in damages for civil contempt.

The case is Civil Action No. 2:00-cv-03 174 (DMC) (JAD).

Attorneys: Amanda Christine Basta for FTC. Jack Wenik (Sills Cummis & Gross PC) for Lane Labs-USA, Inc., Cartilage Consultants, Inc. and Andrew J. Lane.

Companies: Lane Labs-USA, Inc.; Cartilage Consultants, Inc.

Cases: ConsumerProtection Advertising FederalTradeCommissionNews NewJerseyNews