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This morning, the FDA announced its intention to engage in greater oversight of the dietary supplement industry.  The announcement also conveyed that the Agency had sent 12 warning letters and five advisory letters to companies over the prior two weeks.  Some of these letters were jointly issued by FDA and the Federal Trade Commission, focusing on what the two agencies consider to be illegal and deceptive claims in advertising and labeling for products intended to treat Alzheimer’s and other serious diseases such as diabetes and cancer, rendering the products unapproved new “drugs” rather than “dietary supplements” under federal law.

In his statement, FDA Commissioner Scott Gottlieb stated an intent to step up FDA efforts to improve product safety and police deceptive claims.  Amongst other initiatives, Mr. Gottlieb stated that the Agency is developing a new “rapid response tool” to alert the public if a supplement contains an illegal ingredient or poses a health risk.  While supplement manufacturers should be pleased that efforts are being made to weed out bad actors, they should also be concerned about unintended consequences that might result from use of such a rapid response tool.  The damage to a brand from an FDA alert could be significant.

Gottlieb also indicated that FDA is working to “develop [new] guidance for preparing [new dietary ingredient] NDI notifications” to help ensure that the regulatory framework is both sufficiently flexible and adequately protects public safety.  As part of its work to modernize the NDI process, FDA is also planning to update its compliance policy regarding NDIs.  Mr. Gottlieb also weighed in on the idea of creating an FDA registry, whereby supplement manufacturers would be required to list products and ingredients.  The registry, presumably, would allow FDA to concentrate enforcement efforts, but before it could be created, Congress almost certainly would need to act.  Gottlieb’s statement seemed to acknowledge this, and he cited the possibility of “dietary supplement exclusivity” similar to the exclusivity presently enjoyed by drug manufacturers as another potential issue ripe for congressional consideration.

In order to concentrate on these issues and others affecting industry and consumers, Mr. Gottlieb reported that he has established a Dietary Supplement Working Group at the FDA, “comprised of representatives from multiple centers and offices across the agency.”  The Working Group will report directly to the Commissioner and will review “organizational structures, processes, procedures and practices in order to identify opportunities to modernize our oversight of dietary supplements.”  In addition to these steps, FDA will conduct a public meeting this spring that will focus on “responsible innovation and safety.”  All stakeholders are invited to provide comment on “how the FDA should strengthen the dietary supplement program for the future.”

Much of the justification for increased oversight is centered on what FDA has characterized as a startling increase in the number of dietary supplements generally, and adulterated and misbranded supplements specifically.  Whether the framework that FDA will put in place is narrowly conceived to address this problem, without creating unnecessary and burdensome requirements on reputable companies, remains to be seen.  Stakeholders should monitor these developments closely and consider engagement through public comments or participation at the public meeting given Gottlieb has made clear that the Agency wants to hear both from industry and consumers as it assesses how best to move forward.

The FTC’s “Hey Nineteen” blog post caught our attention this past week, and not just for its witty title. One of those reasons is the reference to continued interest in “Made in USA” claims.  As we’ve written about here, “Made in America” has been a frequent enforcement target in recent years and 2018 generally continued this trend.  Here’s how it stacked up:

The FTC completed 25 investigations, settling four enforcement actions and issuing 21 closing letters.

Similarly, in 2017 the FTC settled two enforcement actions and issued 22 closing letters. All indications are that these trends will continue in 2019.

So what can companies do to avoid being the subject of an upcoming FTC Business Center blog post? Here are some tips:

Tip #1: Audit Inventory Management Systems and Processes

Mistakes can launch FTC investigations, as one company learned this past year.

In response to inquiries from the FTC, Prime-Line Products Company, a maker of corner shields, stated that after depleting its inventory of US-made corner shields, it substituted identical imported corner shields. Then, apparently inadvertently, the company continued to apply the “Made in USA” label.

Eventually, the FTC closed its investigation without bringing an enforcement action against the company. But the case serves as a reminder to companies employing the “Made in USA” label to closely manage inventory.  If only a percentage of supply is sourced to the US, companies should create internal processes to avoid mislabeling inventory.

Of course, inventory management can become challenging, especially when working with multiple dealers, distributors, or resellers that may not be familiar with inventory changes. Companies should proactively develop a compliance plan to ensure marketing remains accurate in all sales channels.

Tip #2: Train Employees

Employees, from marketing and sales to the warehouse floor, are the first line of defense against false “Made in USA” claims. Employees should be aware of when “Made in USA” claims may be made, and should be trained on processes for alerting management if they observe any inadvertent errors.

As detailed in multiple closing letters, companies targeted by FTC investigations told the FTC that they would retrain staff on proper, non-deceptive claims. This common-sense approach is advisable for all companies.  All training materials should conform to the standards laid out by the FTC in its Complying with the Made in USA Standard guidance, but should also be practical and easy-to-use.  Checklists, webinars, and workplace posters are good options for educating a company’s workforce.

Tip #3: Qualify Advertising Claims

Last year’s cases show that investigations skewed toward plain, unqualified “Made in USA” claims. Qualified claims, which provide more detail about a component made domestically or process that occurred domestically, may take up more space or obscure a company’s marketing message.  Nevertheless, when it comes to “Made in USA” labeling, accuracy counts.

In one example from the last year, The Gillette Company, LLC, was the target of an FTC inquiry due to its “Boston Made Since 1901” advertising. The FTC closed its investigation, but the example is instructive.  Gillette has deep roots in Boston and sought to use this information in an advertisement.  But without a qualification, the FTC viewed the advertisement as asserting that all of Gillette’s products are made in the US.  Gillette stated that it would re-focus its advertising campaign to highlight its Boston-based employees and manufacturing and the FTC closed the matter.

Tip #4: Size Doesn’t Matter

When it comes to enforcement of the “Made in USA” standards, there is no safe harbor for small businesses. Companies large and small were the target of investigations in 2018.

That included large companies, like Hallmark Cards, Incorporated, and IKEA Purchasing Services (US), Inc. The FTC closed investigations into each of these companies via a closing letter, without further action.

Meanwhile, the FTC’s major enforcement actions of the year were primarily against small or mid-size companies. Underground Sports Inc. d/b/a Patriot Puck imported just 400,000 hockey pucks since January 2016, but faced a significant enforcement action.  Notably, American-made claims featured prominently in these companies’ advertising.  Indeed, their conduct was so objectionable, that following announcement of these settlements, discussion has arisen regarding monetary penalties for false “Made in USA” claims.

Tip #5: Act Now!  Financial Penalties May Be Coming

FTC commissioners are very publicly debating the merits of imposing financial penalties for false “Made in USA” claims.

A leading advocate has been Commissioner Rohit Chopra, who argued in a dissent that settlements have been too lenient and are not deterring similar conduct.  But, as reported in December in this blog, Chairman Joseph Simons too is focused on the potential need to impose monetary relief.  At a hearing before the Senate Subcommittee on Consumer Protection, Product Safety, Insurance, and Data Security, Simons said, “Now we’re exploring whether we can find a good case that would be appropriate for monetary relief to serve as an additional deterrent.”

Given the political interest in increasing the penalties for false claims, companies may want to (make and actually stick to) a New Year’s resolution to make sure their “Made in USA” claims are substantiated. If you’re new to this area or need a refresher, check out our webinar and materials here.

The 2018 Farm Bill legalized cultivation and processing of industrial hemp and various by-products.  One hemp-based derivative of considerable interest to manufacturers of personal care products, dietary supplements, cosmetics, and OTC drugs is cannabidiol (“CBD”).  As industry races to commercialize and advertise CBD, it’s important to understand the regulatory hurdles that remain.  Ad law partner, Kristi Wolff, addresses several common misunderstandings in an article recently published online in Nutritional Outlook. 

About a year ago, the SEC issued a warning to celebrities and social influencers who promoted Initial Coin Offerings (ICOs) on social media, noting that such promoters are subject to federal securities laws. Apparently, at least two celebrities weren’t paying attention because they recently settled the SEC’s first cases regarding promoting ICOs without proper disclosures.

Khaled Khaled, better known as music producer DJ Khaled, and professional boxer Floyd Mayweather Jr. both allegedly promoted investments in ICOs for Centra Tech Inc. in 2017 without disclosing the compensation they received in exchange for their endorsements ($50,000 for Khaled and $100,000 for Mayweather). This triggered a violation of the anti-touting provision of the federal securities laws.

A few examples of these endorsements include Khaled referring to Centra’s ICO as a “Game changer” on various social media accounts, and Mayweather tweeting that Centra’s ICO “starts in a few hours. Get yours before they sell out, I got mine…”

Mayweather also allegedly failed to disclose his relationship with two other ICOs that paid him $200,000 for posts such as, “You can call me Floyd Crypto Mayweather from now on.”

In settling the charges, Khaled agreed to pay $152,725 in disgorgement, penalty, and prejudgment interest, while Mayweather agreed to pay $614,775 for the same. Mayweather and Khaled also agreed not to promote any securities, digital or otherwise, for three and two years, respectively.

Although proper disclosures in social media endorsements have been an area of concern for the FTC for years, this settlement indicates that the SEC is just as interested in making sure consumers understand when they’re seeing sponsored content in the marketing of financial products.

For more information on this topic, check out our earlier post on SEC activity and our webinar, “Advertising Under the Influence.”

On November 27, the FTC Commissioners testified on a range of issues before the Senate Subcommittee on Consumer Protection, Product Safety, Insurance, and Data Security. One excerpt that caught our attention was their comments on “Made in USA” advertising and the potential for increased scrutiny.

Here’s an excerpt of the Q&A between Sen. Shelly Moore Capito (R-WV) and the FTC Commissioners (emphasis added):

CAPITO: Okay, last question I have on fraudulent marketing would be the… fraudulent Made in America label. How prevalent is this? And what are some of the means you’re going to try to curb this practice?

SIMONS: This is fairly prevalent. We get hundreds of these, hundreds of complaints a year, that people are improperly using the Made in the USA label. We are committed to investigating those, and usually a lot of times what happens is the firm, the company doesn’t even realize that it’s a violation. So we explain to them it’s a violation and they stop it.

Sometimes companies do it intentionally, sometimes we tell them and they don’t stop and those people we sue. And one of the things that we’re exploring now, as a general rule, we have only gotten injunctive relief in cases like this previously. Now we’re exploring whether we can find a good case that would be appropriate for monetary relief to serve as an additional deterrent.

CHOPRA: I just want to add here that I think there are manufacturers out there who hire American workers and who purposely do that because they want to put the flag on their product. And for those who lie, this cheapens the Made in the USA label so it’s not just hurting American consumers, it’s hurting every American manufacturer who is trying to do right. So I want us to be much more aggressive with this, actually. And if you and Senator Cortez-Masto want to team up, finding civil penalties for some of these bad actors, we can make sure we increase compliance levels. And I got to tell you — right now there’s a country of origin labeling issues in agriculture, country of origin issues in product marketing. We have to do more to put a stop to this because this is extremely unfair to honest companies.

Continue Reading FTC Testimony Signals Possible Increase in “Made in USA” Advertising Scrutiny

California Governor Jerry Brown recently signed into law Assembly Bill 2632, which amended California’s slack fill law to create several new exemptions, hopefully providing some relief from the plague of slack fill lawsuits that has hit the food and beverage industry, among others, particularly hard in recent years.  For those who are unfamiliar, slack fill is non-functional empty space in product packaging.  The argument that plaintiffs have been using is that this non-functional space renders the products misleading to consumers, causing them to think that they are getting more of the product than they actually are.  Although there have been many lawsuits filed, they have met with little success.  Nevertheless, they persist, as we’ve written about here.

Here’s a summary of the changes to California’s law:

    • Online Sales Exempted.       Perhaps the most significant change of the new law is that it exempts packaging sold in a mode of commerce that does not allow the consumer to view or handle the physical container or product. This would appear to exempt online sales, which is consistent with the rationale that a consumer could not be misled by packaging that he or she didn’t handle prior to purchase.
    • Only If It’s Substantial. The law was amended to add the clarification that “nonfunctional slack fill is the empty space in a package that is filled to substantially less than its capacity for reasons other than any one or more of the following:…” “Substantially” is not defined but seems likely to create an argument that some degree of non-functional space is acceptable provided that it is not substantial. Consistent with this, the new law also states that “slack fill shall not be used as grounds to allege a violation of this section based solely on its presence unless it is nonfunctional slack fill.”
  • Actual Size. The prior CA law required that the actual size of the product be depicted on the exterior packaging. The new law specifies that this depiction can be on any side of the packaging, excluding the bottom. “Actual size” must be noted in a clear and conspicuous disclosure.
  • Fill Line. The new law also allows for a line or graphic representing the “fill line” on either the actual product or the product container. The “fill line” must be clearly and conspicuously depicted. If the product is subject to settling, the fill line must represent the minimum amount of expected settling.

 

The changes also apply to California’s Sherman Food and Drug Act. Slack fill lawsuits against food and beverage companies declined between 2016 and 2017 as courts resisted indulging arguments such as an inability to understand basic item counts clearly labeled on a container’s front label.  We’ll see whether these changes collectively help drive numbers even lower.

The California Food, Drug, and Medical Device Task Force announced a settlement this week with Goop, the lifestyle brand founded by Gwyneth Paltrow, which we’ve written about here and here. The complaint alleges that Goop made false and misleading representations regarding the effects or attributes of three products—the Jade Egg, Rose Quartz Egg, and Inner Judge Flower Essence Blend. According to the complaint, Goop advertised that the Jade and Rose Quartz Eggs—egg-shaped stones designed to be inserted vaginally and left in for various lengths of time—as well as the Inner Judge Flower Essence Blend could balance hormones, prevent uterine prolapse, increase bladder control and prevent depression. The complaint also alleges that none of Goop’s claims regarding these products were supported by competent or reliable scientific evidence.

The stipulated judgment prohibits Goop from (1) making any claims regarding the efficacy or effects of any of its products without possessing competent and reliable scientific evidence that substantiates the claims; and (2) manufacturing or selling any misbranded, unapproved, or falsely advertised medical devices. In addition, Goop agreed to pay $145,000 in civil penalties and will provide refunds to consumers who purchased the products during 2017.

Goop responded, in part, as follows: “Goop provides a forum for practitioners to present their views and experiences with various products like the Jade Egg. The law, though, sometimes views statements like this as advertising claims, which are subject to various legal requirements.”

Yep. True story. Here are a few other lessons:

  • When made on a site promoting sale of a product, statements by practitioners or other testimonialists about the benefits of that product are advertising (not sometimes, always) and can never be used to support claims that are not otherwise supported by competent and reliable scientific evidence.
  • Competent and reliable scientific evidence is a flexible standard. For health claims, though, it frequently requires well-designed clinical tests. Simply put, the standard isn’t whether there is any evidence; it is whether there is credible evidence that experts in the field would agree is reliable.
  • Fanciful claims that do not rise to the level of disease prevention aren’t necessarily puffery either. Advertisers need to clearly understand when they are making objectively provable claims and have an obligation to substantiate them before dissemination.
  • Products that feature claims of disease treatment or reduction may be classified as medical devices or drugs and may be subject to FDA clearance or approval prior to marketing.

Goop claims to have modified its claims to comply with the settlement. Notably, the Jade Egg remains available. We’ll let you decide what to do with that.

The FTC recently finalized updates to its Guides for the Jewelry, Precious Metals, and Pewter Industries, which provide the FTC’s interpretation of the jewelry marketing rules found in 16 C.F.R. §23.  The FTC hosted a roundtable in 2013, which we wrote about here, and considered stakeholder comments prior to finalizing the new Guides.  The updated Guides address a number of topics, including the surface application of precious metals, below-threshold previous metal alloys, gemstone products, and “cultured” diamonds.

What’s Changed

Some highlights of the changes include advising that jewelry marketers may:

  • Qualify if a coated product only has a service layer of a precious metal;
  • Advertise a product’s precious metal coating to assure reasonable durability;
  • Disclose the purity of coatings made with precious metal alloys;
  • Qualify a product’s gold karat fineness or a parts per thousand (PPT) designation for silver products that have less than 925 PPT;
  • Use alternative words and phrases for man-made stones (where it shares the same properties as the named stone) if they clearly and conspicuously convey that the product is not a mined stone.

Continue Reading All That Glitters Is Not Gold: FTC Updates Jewelry Guides

Having now turned the page to the back half of 2018, we took a look at how the FTC’s “Made in USA” enforcement is stacking up to prior years. As we previously posted, the FTC made known its intent to prioritize “Made in USA” enforcement in remarks delivered at last fall’s NAD Conference.  Year to date, the FTC has settled two cases (Bollman Hat Company and Nectar Brand LLC) and has issued 15 closing letters regarding “Made in USA” claims.

By comparison, there were two settlements and 22 closing letters in 2017. If the current pace continues, the number of closing letters may exceed prior years.

What can we learn from these cases?

  • Qualified Claims Must Still Be Substantiated: Most closing letters involve unqualified “Made in USA” claims. However, qualified claims and those involving terms open to interpretation can still be the subject of scrutiny and must still be properly substantiated. Nectar Brands allegedly claimed in promotional materials that its mattresses were “Designed and Assembled in USA,” but the FTC’s complaint alleges that the mattresses were wholly imported from China, with no assembly taking place in the United States. “Crafted in America” was also among the claims that saw enforcement as was “Built in USA.”
  • Watch For Disclosure Issues: In addition to labeling wholly imported products as “Made in USA,” the FTC alleged that Bollman Hat Company and its subsidiary licensed the “American Made Matters” seal to any company that claimed it had a United States-based manufacturing factory or one product with a U.S.-origin label, and met several membership requirements, including self-certifying that at least 50% of the cost of at least one of their products was incurred in the United States, with final assembly or transformation in the U.S., and payment of an annual licensing fee of $99. The settlement requires the respondents to engage an independent auditor regarding use of the seal or to clearly and conspicuously disclose that products and services may display the seal based on self-certification.

Continue Reading Ever Wondered What Pillows, Electric Bikes, and Neon Signs Have in Common? FTC’s “Made in USA” Enforcement On Pace With 2017

A federal jury in Illinois recently awarded Dyson, Inc. over $16 million in damages after finding that SharkNinja falsely advertised that its Rotator Powered Lift-Away vacuum was better than Dyson’s best-performing vacuum, the DC65.  SharkNinja ran ads that claimed that independent testing showed that the Rotator Powered Lift Away vacuum was proven to have “more suction” and “deep-cleans carpets better than Dyson’s best vacuum.”

The commercial also featured a graph that purported to measure each machine’s cleanability, but Dyson alleged that the results were not actually from referenced independent tests but rather internal tests.  Dyson further alleged that the tests failed to comply with industry standards for vacuum cleaning testing in the first instance and that SharkNinja effectively rigged the third-party tests by directing the testing company on how to test the machines.  The jury found that SharkNinja’s advertising of results from unsound tests was an intentional act to mislead consumers and awarded significant damages accordingly.

The case underscores the importance of conducting objective and reliable testing and carefully tailoring ad claims to accurately convey the results of tests.  The decision also is striking in terms of the size of the award, particularly as the jury found it appropriate to disgorge nearly all of the $18 million in profits that SharkNinja made from its vacuum during the time the commercial aired.

Summer associate Vishwani Singh contributed to this post. Ms. Singh is not a practicing attorney and is practicing under the supervision of principals of the firm who are members of the D.C. Bar.