February 6, 2015

D.C. Circuit Upholds FTC Ruling on Deceptive Advertising; Rejects First Amendment Challenge

Holland & Knight Regulatory Litigation Blog
Steven D. Gordon

In a much-awaited decision on Friday, January 30, the D.C. Circuit upheld the Federal Trade Commission’s decision that pomegranate juice maker POM Wonderful LLC engaged in false or misleading advertising by claiming its products were effective in fighting heart disease, prostate cancer and erectile dysfunction.  The court rejected POM Wonderful’s argument that the ads were protected by the First Amendment’s protection of commercial speech.  The court upheld that FTC’s ruling that any future POM Wonderful claims that its products help treat or prevent any disease must be supported by a randomized, controlled, human clinical trial study (RCT).  The court ruled, however, that the FTC had exceeded its authority by requiring a minimum of two RCTs, rather than one, for any and all such claims.  

POM Wonderful, its owners and affiliate spent more than $35 million on pomegranate-related medical research, sponsoring more than one hundred studies at forty-four different institutions.  POM Wonderful touted the results of some of these studies in its ads and promotional materials without noting the studies’ limitations or the existence of conflicting evidence. 

The FTC found that a number of POM Wonderful's ads and promotional materials contained implied claims that POM products treat, prevent, or reduce the risk of heart disease, prostate cancer, or erectile dysfunction.  It further concluded that POM Wonderful and the related parties lacked sufficient evidence to substantiate those claims, and that the claims were material to consumers.  Accordingly, it held the respondents liable under the FTC Act and ordered them to cease and desist from making further claims about the health benefits of its products unless the claims are non-misleading and supported by competent and reliable scientific evidence. 

The D.C. Circuit upheld both of the FTC’s conclusions, i.e. that the ads had made such implied claims and that there was insufficient evidence to substantiate those claims.  The court explained that its review of these determinations was deferential and mindful of the FTC’s “special expertise in determining what sort of substantiation is necessary to assure that advertising is not deceptive.”  The court noted that, under the FTC Act, it is not free to engage in its own, independent appraisal of the evidence or to substitute its own appraisal of the conflicting expert testimony for that of the FTC.

POM Wonderful challenged both the FTC’s liability determination and its remedy on First Amendment grounds, and argued that this constitutional challenge required de novo review by the court.  The FTC had found that POM Wonderful's ads are not entitled to First Amendment protection because they are “deceptive and misleading.”  POM Wonderful asked the court to review this finding de novo.   The court noted that its precedents call for reviewing a FTC factual finding of a deceptive claim under the deferential “substantial-evidence” standard, even in the First Amendment context.  But it did not decide this issue.  Instead, it concluded that the FTC’s  findings of deception were supported by substantial evidence in the record; and said that it would reach the same conclusion even if it were to exercise de novo review.

The court did, however, uphold the First Amendment challenge to a part of the remedy imposed by the FTC: the blanket two-RCT-substantiation requirement for disease claims made in future advertising.  The  First Amendment requires that a restriction on commercial speech be narrowly tailored to advance a substantial government interest.  The court concluded that a general RCT-substantiation requirement for disease claims—i.e., without regard to any particular number of RCTs—met this standard, but that the FTC had failed adequately to justify a categorical floor of two RCTs for any and all disease claims.  The court added that it was not saying that the FTC would be barred from imposing a two-RCT-substantiation requirement in any circumstances.

In addition, POM Wonderful’s former president challenged the FTC’s decision to hold him individually liable (along with the company’s owners) for POM Wonderful's deceptive acts and practices.  The court rejected this challenge, finding sufficient evidence that he had participated directly in the deceptive practices or acts or had authority to control them.  He also argued that the FTC failed to prove his knowledge that the ads conveyed misleading claims.  But the court ruled that the FTC is required to demonstrate an individual's knowledge only when it seeks monetary relief.  In this case, where the FTC did not seek restitution or monetary penalties, the FTC Act imposes strict liability and creates no exemption for unwitting disseminators of false advertising.

The FTC has become increasingly aggressive about pursuing false advertising claims against  companies and individuals who promote their products based on scientific studies if the FTC believes that the advertising is not sufficiently scrupulous in the claims that it makes.  In reviewing FTC enforcement actions, the courts traditionally have given substantial deference to the agency’s “expertise” in determining what sort of claims are being implied by particular ads and in  determining what sort of substantiation is necessary for such claims.  Much of this body of law has developed in cases where the FTC was going after fraudsters who were selling “snake oil” in one form or another.  Increasingly, however, the FTC is pursuing false advertising claims against legitimate companies, selling legitimate products, who seek to promote those products based on selective use of actual scientific studies.  POM Wonderful was seen as a test case for determining whether the First Amendment might limit the FTC’s ability to police and prohibit such advertising.  The answer provided by the D.C. Circuit is, for the most part, “no.”

It remains to be seen, however, whether the courts will take an equally deferential approach to cases where the FTC seeks to recover substantial amounts of money, in the form of restitution or penalties, from respondents who are found to have inadequately substantiated their ads for legitimate products.  It is one thing for the FTC to seek injunctive relief requiring them to adhere to a stricter standard in future advertising.  It is another thing for the FTC to seek millions of dollars in restitution or penalties from them based on the theory that all proceeds from the sales of a product that is advertised in “misleading” fashion are ill-gotten gains. 

POM Wonderful LLC v. F.T.C., 13-1060, __F.3d __  (D.C. Cir. Jan. 30, 2015)

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