On February 19, 2014, a judge for the United States District Court for the Northern District of California held that Wellness Support Network, Inc. (“WSN”) had violated Sections 5(a) and 12 of the Federal Trade Commission Act (the “FTC Act”), and awarded the Federal Trade Commission (“FTC”) the full amount of net sales WSN made since 2004. The FTC alleged that WSN engaged in false advertising and deceptive sales practices in connection with the sale of its “Diabetic Pack” and “Insulin Resistance Pack”-products which WSN marketed as effective in the treatment of diabetes. In addition to the substantial monetary judgment, the Court also found WSN’s principals individually liable for WSN’s violations of federal law. The Court order includes a 20-year injunction, requiring the WSN principals to report to the FTC any future name or address changes and any prospective business activity.
The Violations of Federal Law
In granting the FTC summary judgment on its claims, the Court found that WSN had engaged in 9 separate actionable advertising “claims”, as defined by the FTC Act. It was undisputed that with respect to each claim, WSN never conducted any scientific studies to substantiate product efficacy claims. Instead, the principals of WSN conducted Internet research on the individual ingredients contained in WSN products and gathered anecdotal stories about the effectiveness of those ingredients in treating diabetes. Despite this, WSN made claims such as “clinically Proven Drug Free Solution That Lowers Blood Sugar,” and “Nobel Prize winning science and over 60 independent American university studies confirm the superiority of” WSN products. The Court ultimately found that all 9 of the subject WSN advertising claims “lack[ed] adequate substantiation” and in certain instances, were actually false. The Court rejected WSN’s use of disclaimers as a basis to defend its advertising, finding them to be just as misleading as the advertisements themselves. The Court also rejected WSN’s argument that because its advertising complied with Food and Drug Administration requirements, it cannot be held to have falsely advertised in violation of the FTC Act.
With respect to the principals, the Court also found them, a father and daughter, to be individually liable for WSN’s violations of federal law. The Court reasoned that both were “at least recklessly indifferent to the truth or falsity of the representations in WSN’s advertising about Diabetic Pack and Insulin Resistance Pack.” Important to the Court’s decision was the fact that one of the principals, who was not a trained scientist or doctor, was responsible for coming up with the constituent ingredients for the subject products. Both principals were heavily involved in preparing WSN’s advertising, and both had either actual or constructive knowledge of the falsity of their claims.
Ultimately, the Court awarded the FTC a monetary judgment of $2,198,612.12, which represents the entire amount of WSN’s net sales since 2004. Pursuant to the Court order, the FTC can recover this award jointly and severally from WSN, and its principals. Additionally, WSN and its principals are permanently enjoined from making any future health-related claims concerning diabetes treatment products.
The FTC’s victory against WSN should serve as yet another substantial warning about advertising health-related products in the absence of claim-substantiating clinical studies. Although WSN argued that it should only be financially responsible for some of its sales, but not, for example, sales to recurring customers, the Court rejected this argument and compelled WSN to turn over all money made from its sales. Moreover, liability for the judgment was extended to the principals, who were unable to use the corporate shield or claims of ignorance to escape liability. The Court’s holding provides the FTC with the means to cripple not just the corporate entity, but also the principals behind the corporation for claims of false advertising.