Stay ADvised: What's New This Week, May 11
In This Issue:
- CA High Court Rules No Jury Trial in False Ad Suits
- "Thrive" Supplements in Trouble With FTC Over False COVID-19, CBD for Cancer Treatments
- Florida AG Sues Co. Over Deceptive Coronavirus Stimulus Check Ads
- NAD Takes a "Bite" Out of SmileDirectClub Claims
- NAD Recommends Beauty Company Discontinue "Unsubstantiated" Cannabis Claims
CA High Court Rules No Jury Trial in False Ad Suits
The California Supreme Court has ruled that litigants are not entitled to a jury trial in actions brought under California's Unfair Competition Law (UCL) and False Advertising Law (FAL), overturning an intermediate appellate court's ruling and reaffirming longstanding state precedent.
The court held that California law does not provide for a right to jury trial under the UCL and FAL, including in government enforcement actions. The court found that the intermediate appellate court's ruling, which held that there is a constitutional right to a jury trial as to "liability in a government enforcement action seeking statutory penalties," had unjustifiably broken with almost half a century of established California law.
Nationwide Biweekly offers a program that claimed to save debtors by having the debtor accelerate the repayment of the debt through an extra monthly payment, thereby decreasing the interest paid over the lifetime of the loan. The suit, filed in 2015 by the California Department of Business Oversight and several California state district attorneys, alleged that Nationwide Biweekly, its subsidiary Loan Payment Administration, and owner Daniel S. Lipsky had violated the UCL and FAL by operating without a license, failing to disclose the full amount of fees charged to customers, and overstating potential savings amounts associated with the program.
After the trial court struck defendants' jury demand, Nationwide filed a petition for writ of mandate in the Court of Appeal. Relying on Tull v. United States, 481 U.S. 412 (1987), a United States Supreme Court decision that applied the federal Seventh Amendment civil jury trial provision, the intermediate appellate court ruled that under article I, section 16 of the California Constitution—the jury trial provision—Nationwide has a right to a jury trial. However, the court further held that right was limited to the issue of liability and did not extend to the issue of remedy, including the amount of civil penalties to be imposed.
Defendants appealed the decision to the state Supreme Court, which unanimously ruled that Nationwide was not entitled to a jury trial.
In the majority opinion, Chief Justice Tani Cantil-Sakauye wrote that in California jury trials are not available in suits seeking civil penalties and injunctive relief, which are equitable remedies. Further, aside from the well-settled judicial precedent, California legislative history and intent did not envision the availability of jury trials in false advertising cases.
By reversing the appellate court, the California Supreme Court affirmed 45 years of California Court of Appeal precedent holding UCL and FAL actions are to be tried by the court rather than by a jury. The Court aptly reasoned that the jury trial provision of the California Constitution, not the federal Constitution, should be interpreted to determine whether a jury trial exists in state court proceedings brought under the UCL or FAL.
Citing Shaw v. Superior Court, 2 Cal.5th 983 (2017), the California Supreme Court stated that: "Under California law, the right to a jury trial in a civil action may be afforded either by statute or by the California Constitution." After reviewing the "legislative history and underlying purpose" of the UCL and FAL, the court held that:
These very broadly worded consumer protection statutes were fashioned to permit courts to utilize their traditional flexible equitable authority, tempered by judicial experience and familiarity with the treatment of analogous business practices in this and other jurisdictions, in evaluating whether a challenged business act or practice or advertising should properly be considered impermissible under these statutory provisions.
Turning to the constitutional prong, the Court found that any constitutional right must flow from the state and not federal constitution, which does not recognize a jury right for cases brought in equity.
In a concurring opinion, Justice Leondra Kruger agreed with the majority's result on the facts of the case and as to the UCL, but noted that she would have reached a different result as to the FAL, which "L does not create a standard of liability that depends on the exercise of a court's equitable judgment."
The District Attorney's office hailed the decision as a victory. Meanwhile, Nationwide currently also faces a federal lawsuit brought by the U.S. Consumer Financial Protection Bureau, also centering on allegedly deceptive sales practices.
This case reminds us that advertisers facing suits under the California UCL and FAL will not be entitled to a jury trial, even if the suit also seeks civil penalties, because these causes of action are deemed to be equitable in nature and "properly tried by the court rather than the jury."
"Thrive" Supplements in Trouble With FTC Over False COVID-19, CBD for Cancer Treatments
In response to a Federal Trade Commission (FTC) complaint filed in federal court, a California-based supplement company has agreed to a preliminary order barring it from claiming that its vitamin C-based herbal supplement is effective at treating, preventing, or reducing the risk of COVID-19. The order also temporarily bars the company from making claims its CBD-based supplements can treat cancer.
Marc Ching, d/b/a Whole Leaf Organics, sells health supplements marketed to boost immunity, using organic ingredients sourced in the United States, according to the company's website. The FTC's complaint concerns Thrive Full Spectrum Immune Defense Booster (Thrive), an herbal supplement marketed for the treatment and prevention of COVID-19, as well as three CBD products, CBD-EX, CBD-RX, and CBD-Max, sold as purported cancer treatments.
The FTC alleges that Ching and Whole Leaf began marketing Thrive in December 2018. In March 2020, after the start of the pandemic, the company began promoting Thrive as an "anti-viral wellness booster" for the treatment, prevention and reduction in risk of infection from coronavirus. Online, the company called Thrive "the perfect way to strengthen your immunity against pathogens like 'COVID-19 the coronavirus,'" according to the FTC. Whole Leaf also claimed that Thrive was "clinically proven" to work, despite having no "competent and reliable scientific evidence" that the product, which primarily contains vitamin C and herbal extracts, was clinically proven to be effective.
The complaint additionally alleged that since 2018 Whole Leaf had marketed several of its CBD products as cancer treatments: CBD-EX, a capsule containing CBD and herbal extracts; CBD-RX; and CBD-Max, which contains CBD oils and hemp extract. These three products were all marketed as "superior in genius" and combining "the most effective cancer and immune regulating clinically tested components." Again, the company had no competent and reliable scientific evidence to support its claims, said the FTC.
The preliminary order enjoins Ching and Whole Leaf Organics from continuing to make the foregoing claims. It further prohibits the company, Ching, or any of the company's employees from making misrepresentations that the company's products can cure COVID-19, cancer, or any other disease without competent scientific evidence backing up those claims. Defendants are also prohibited from making misrepresentations about the products' health benefits and from representing that it possesses clinical evidence to support such benefits.
The FTC also approved the issuance of a separate administrative complaint containing the same allegations about the health claims Ching made for both Thrive and the CBD-based products. The preliminary order will remain in effect until the complaint is resolved by an Administrative Law Judge.
This matter illustrates the FTC's different but parallel approach to dealing with false advertising claims related to coronavirus cures versus other types of health-based false advertising.
Florida AG Sues Co. Over Deceptive Coronavirus Stimulus Check Ads
The Florida Attorney General's Consumer Protection Division filed a complaint and motion for preliminary injunction against a Florida-based advertising company accused of using deceptive federal stimulus checks to promote its client's used car sale.
The complaint accuses Traffic Jam Events and its principal, David J. Jeansonne, II, of attempting to capitalize on consumer expectations about the impending distribution of federal stimulus checks by the Internal Revenue Service, part of the economic stimulus package of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. It charges defendants with violations of the Florida Deceptive and Unfair Trade Practices Act (FDUTPA).
Traffic Jam Events is a marketing company specializing in the auto industry. The company organizes and advertises automobile tent sales for car dealerships. The Florida AG says the company sent the offending ads to over 35,000 consumers, inviting them to a car sale. In these advertisements for the "automotive tent sale," Traffic Jam included fabricated checks in the amount of $3,000 that were designed to give the impression that they were the anticipated stimulus checks from the federal government "Stimulus Relief Program."
Further, Traffic Jam falsely represented that the coronavirus relief funds and "other incentives" would be available at the car sale in addition, of course, to a number of "good quality cars, trucks, vans and SUVs."
Attorney General Ashley Moody argues that Traffic Jam "unapologetically [sought] to capitalize on the vulnerability, confusion and fear plaguing Florida consumers during the novel coronavirus … pandemic." "Defendants have made false representations that the Attorney General reviews its marketing materials, leaving the false impression that the Attorney General approves these unfair, deceptive and misleading advertising communications," asserts Attorney General Moody in the complaint.
The false ads came to light following a number of consumer complaints made to Attorney General Moody's office and a subsequent investigation.
MK Automotive, the company that hired Traffic Jam to market the auto sale, and its owner Michael Kastrenakes are said to be cooperating with the investigation and have agreed to pay $10,000 towards consumer restitution and a $1,000 civil penalty.
The complaint seeks damages, fees and equitable relief. Meanwhile, Attorney General Moody's office also contemporaneously filed a motion for temporary injunction to bar Traffic Jam and Jeansonne from sending any deceptive advertisements related to the stimulus checks while the case proceeds.
Attorney General Moody's office has been especially focused on pursuing coronavirus scammers seeking to capitalize on the coronavirus stimulus checks versus other enforcement actions we've covered at the state and federal level pursing deceptive coronavirus cures. Whether that's due to a particular propensity for stimulus check scams in Florida or the priorities of the Attorney General's Office is unclear. One scam reported on by Attorney General Moody's office, however, did involve door-to-door salespeople marketing COVID-19 test kits to seniors.
NAD Takes a "Bite" Out of SmileDirectClub Claims
In a decision likely to have significant impact on SmileDirectClub's advertising copy, the National Advertising Division (NAD) has recommended that the company modify or discontinue cost and efficacy claims for its clear teeth aligners.
Align Technology, maker of the Invisalign prescriber-direct clear aligner therapy, challenged express and implied claims that SmileDirectClub (SDC) aligners provide smile correction for the same or a comparable range of severity levels as Invisalign, at a cost that is 60 percent less and in a shorter period of time. Unlike Invisalign, SDC aligners are sold direct to consumers.
NAD found that SDC modify the claim that its aligners "straighten most smiles in an average of 6 months" to limit it to "mild-to-moderate malocclusion"—the severity SDC aligners are designed to treat. NAD also determined that the advertiser had substantiated the claim that its aligners may correct some bite issues, in addition to straightening teeth.
NAD agreed with the challenger, however, that many of the challenged claims stated or implied that users of SDC aligners could expect to see results in six months, for 60 percent less than competing products, regardless of the severity of occlusion—messages the advertiser could not support. Accordingly, NAD recommended that the company modify or discontinue certain comparative claims, including "faster than the same treatment completed with braces," "our average smile plan gets you a smile you will love 3x sooner," and the comparative claim that customers could finish with teeth straightening "in as little as 6 months." However, NAD said that the company could continue to make claims about average treatment times for customers using its products.
NAD also recommended that SDC discontinue the claim "Unlike some other brands, we trim our aligners straight across the top, not scalloped. Because of this, our aligners allow for optimal turning force to straighten your teeth without the need for attachments or buttons." NAD determined that the claim reasonably conveys that the "optimal turning force" necessary to treat certain levels of misalignment, achieved by other aligner brands by means of attachments, can be treated by SDC aligners without the use of attachments—a claim that, according to NAD, must be supported by competent and reliable scientific evidence. Although the advertiser had submitted a study suggesting that thermoformed plastic aligners with a straight trim line have more retentive power than those with scalloped edges (with or without attachments), the study had not tested actual SDC aligners but, rather, a product developed especially for the test.
Further, NAD recommended that SDC discontinue claims that its products cost "60% less than other brands" or "60% less than braces" after finding that SDC's evidence to support this claim "was not a good fit for these comparative savings claims," and that therefore the company "provided no reasonable basis" for the claim.
SDC said it would comply with the NAD's recommendations and had already begun by removing the questionable content from its website.
This case reaffirms NAD's commitment to scrutinizing the fit between substantiation and claims; its distrust of studies on prototypes, rather than actual products; and the need for advertisers to limit efficacy claims to the particular patient population and conditions reflected in its support.
NAD Recommends Beauty Company Discontinue "Unsubstantiated" Cannabis Claims
NAD has recommended that a beauty company discontinue CBD-based efficacy and quantitative claims for its hair products after it was unable to show that its products "contain CBD in any appreciable amount."
Following a challenge by competing hair care product manufacturer Zotos International, the NAD reviewed certain claims made by cosmetics company Talyoni Professional and its affiliate Ecoco regarding the cannabidiol content of its Ecoco Cannabis Sativa line of hair, skin and wellness products. The challenged claims included statements that the products "feature the time-honored therapeutic benefits of CBD Oil;" "deeply nourish, repair and strengthen with CBD, olive and flaxseed oils," and contain, as examples, "850MG per ounce of CBD" or "25 PPM [parts per million] of CBD."
The crux of the challenger's claim was independent product testing that failed to detect any CBD in the advertiser's product. In response, Talyoni offered test results for a single bottle of product that had not been sourced in market—data NAD found insufficient to establish that its products, as sold, contain the claimed concentration of CBD.
Although Talyoni independently offered to modify its product packaging "to remove the quantitative amounts of CBD," NAD found that this was not enough to remedy the issues. NAD reasoned that the company's express claims "not only convey that an appreciable amount of CBD can be found in the products, but also that the amount of CBD is sufficient to provide a meaningful consumer benefit." Because Talyoni failed to establish that its products contained any appreciable amount of CBD, NAD reasoned that any product performance claims tying benefits to the presence of CBD would be "misleading" and should be discontinued. So, for instance, NAD said the company should discontinue making claims that its CBD-infused shampoo "deeply nourishes, repairs and strengthens with CBD."
Talyoni agreed to comply with NAD's recommendation because it said it is a "strong supporter of NAD and the self-regulatory process," though it objected to a number of NAD's recommendations.
NAD's decision reaffirms the principle that advertisers generally require reliable testing on final product formulations to support an ingredient or formulation-based claim. Advertisers are cautioned against claims that tie product benefits to specific ingredients unless they have evidence that the ingredient is present and present at a functional level. NAD did not say what amount it would require to render the presence of CBD effective, but advertisers of CBD should note that in order to substantiate a claim their product contains CBD—and provides any benefits of CBD—it must at minimum contain an amount that can be connected to a consumer-meaningful benefit.