There is a growing trend toward increased potential risk of litigation and significant damages for marketers who cannot adequately substantiate product benefit claims in their marketing materials and advertising. The risk comes not just from competitors, but as the cases discussed herein show, from the Federal Trade Commission (“FTC”), from state attorneys general, and from class action suits brought by contingent fee plaintiffs’ counsel on behalf of consumers. Three marketers have paid over $140 million in recent months to settle such false advertising claims.
The FTC is an independent federal agency tasked with preventing fraudulent, deceptive, and unfair business practices that harm consumers. Two recent FTC cases illustrate the considerable consequences of advertising claims about consumer products without adequate support.
In September 2011, Reebok International Ltd. (“Reebok”) paid $25 million to settle FTC charges. At issue were Reebok’s advertising claims touting health and fitness benefits of its EasyTone® and RunTone® footwear, such as improved muscle tone and strengthened hamstrings and calves. The FTC asserted that the claims were not backed by laboratory tests or otherwise substantiated. As part of the settlement, Reebok was ordered to refrain from making any health or fitness representations about its toning footwear unless it “possesses and relies upon competent and reliable scientific evidence” at the time the representation is made.
Similarly, in May 2012, Skechers U.S.A., Inc. (“Skechers”) paid a total of $50 million to settle charges brought by the FTC, state attorneys general, and class action plaintiffs ($40 million to the FTC to settle accusations that Skechers made unfounded claims, $5 million to various states, and $5 million to class action attorneys’ fees to end all domestic legal actions resulting from these claims.)
The FTC called the settlement one of the largest, if not the largest, in terms of consumer recovery. At issue were weight loss, muscle strengthening, and improved circulation claims made by Skechers in advertising its Shape-ups®, Shape-ups Toners®, and other footwear. In particular, Skechers represented that its clinical studies were “independent case studies.” The FTC, however, found that the studies at issue were conducted by a compensated chiropractor who was married to a Skechers senior vice president of marketing, that the studies were defective, and that the advertised test results were either cherry-picked or altered to support Skechers’ claims. The FTC also found that some of Skechers’ efficacy claims were unsubstantiated, as no product-specific studies were conducted to support these claims. Pursuant to the settlement order, Skechers is now prohibited from making any health, weight loss, or fitness-related benefit claims for its toning footwear unless supported by scientific evidence (the parameters of which are strictly defined in the settlement order), and must pay the FTC a $40 million penalty.
The FTC is not the only one policing advertising claims – contingent fee plaintiffs’ counsel are also taking note and filing class action suits, exposing companies to further increased liability. For instance, in February 2010, Dannon Co., Inc. (“Dannon”) paid $45 million in damages to settle a consumer class action false advertising lawsuit brought against efficacy claims for Dannon’s Activia® yogurt and DanActive® probiotic dairy drink. Dannon’s marketing campaign claimed that its proprietary bacteria strains provided its products with “clinically and scientifically proven” health benefits absent from other yogurt products, such as strengthening consumers’ immune systems and regulating digestion. The class action complaint asserted that these representations persuaded consumers to pay a 30% price premium over other yogurt products, which was a key element in the damages claim. As part of the settlement, Dannon was ordered to remove the words “clinically” and “scientifically proven” from its product labels and ads in reference to claims that Activia® helps regulate the digestive system, to remove the word “immunity” from DanActive® labels and ads, and to include a qualifier to the claims that DanActive® “helps strengthen your body’s defenses” or “helps support the immune system.” Later that same year, Dannon paid an additional $21 million to settle state and FTC investigations into these and additional advertising claims related to the same products.
Another consumer class action suit was brought against Pom Wonderful LLC (“Pom”) over so-called “bulletproof” representations made in connection with the marketing of its pomegranate juices, juice blends, teas, and extracts, including benefits such as the prevention, mitigation, and/or treatment of prostate cancer, cardiovascular disease, and other age-related medical conditions. Pom continued making these claims despite 2005 and 2006 determinations by the National Advertising Division of the Council of Better Business Bureaus and a 2009 determination by the U.K.’s Advertising Standards Authority that such claims were unsubstantiated and “misleadingly exaggerated” health benefits, and despite a 2010 warning letter from the U.S. Food and Drug Administration that Pom’s claims were in serious violation of the Federal Food, Drug, and Cosmetic Act. While the class action suit is now part of an on-going multi-district litigation, it will be interesting to see how it plays out, especially in view of a recent decision by an administrative law judge upholding much of an FTC complaint alleging that Pom violated federal law by making deceptive claims related to these products.
In addition to health benefit claims, an increasingly contentious area lies with marketing products as “all natural.” Late last year, a class action lawsuit was filed against the makers of Skinnygirl® Margarita, Beam Global Spirits & Wine, Inc. (“Beam”). Beam’s bottled margarita product is promoted as a healthier alternative to other bottled cocktails, supposedly containing only agave nectar and tequila, which led Beam to characterize the product as “all natural” and “no preservatives.” However, the class action complaint alleges that Beam’s product contains a potentially carcinogenic synthetic preservative that is not indicated on any product labeling, and that as much as 49% of the bottled product contains a lower quality tequila by-product called mixto, despite the “100% blue agave tequila” claims. Beam has since removed the “all natural” and the “100%” claims from their advertising, but the class action suit is still pending.
As of last month, 20+ consumer lawsuits have been filed against Tropicana Products, Inc. (“Tropicana”) in another “all natural” dispute. These suits allege that Tropicana’s “100% pure and natural” claims are false and misleading and that Tropicana’s orange juice is actually highly processed and uses “flavor packs” (aromas and flavoring created by chemists from processed orange oils and essence) to increase its shelf life.
While false advertising suits are not breaking news, these cases and others highlight an increased risk of suit and an increase in the potential liability faced by companies making claims found to be misleading, unsubstantiated, or spurious. The FTC appears to be imposing a higher standard of substantiation for health benefit claims, but the risk goes beyond such claims. Not exercising caution and diligence in vetting advertisement claims can raise considerable potential consequences, including exposure to multiple suits for the same claims and significant monetary damages.