Telebrands Corp. v. F.T.C.

• Decision Date: 07 August 2006
• Docket Number: No. 05-2322.,05-2322.
• Citation: 457 F.3d 354
• Parties: TELEBRANDS CORP., a corporation; TV Savings, LLC, a limited liability company; Ajit Khubani, individually and as president of Telebrands Corp. and sole member of TV Savings, LLC, Petitioners, v. FEDERAL TRADE COMMISSION, Respondent.
• Court: U.S. Court of Appeals — Fourth Circuit

457 F.3d 354

TELEBRANDS CORP., a corporation; TV Savings, LLC, a limited liability company; Ajit Khubani, individually and as president of Telebrands Corp. and sole member of TV Savings, LLC, Petitioners, v. FEDERAL TRADE COMMISSION, Respondent.

No. 05-2322.

United States Court of Appeals, Fourth Circuit.

Argued May 23, 2006.

Decided August 7, 2006.

ARGUED:

Edward Francis Glynn, Jr., Venable, L.L.P., Washington, D.C., for Petitioners. Leslie R. Melman, Federal Trade Commission, Washington, D.C., for Respondent.

ON BRIEF:

Theodore W. Atkinson, Venable, L.L.P., Washington, D.C., for Petitioners. James A. Kohm, Associate Director, Connie M. Vecellio, Bureau of Consumer Protection, Walter Gross, III, Bureau of Consumer Protection, William Blumenthal, General, John F. Daly, Deputy General for Litigation, Federal Trade Commission, Washington, D.C., for Respondent.

Before WILKINS, Chief Judge, DUNCAN, Circuit Judge, and JOSEPH R. GOODWIN, United States District Judge for the Southern District of West Virginia, sitting by designation.

Order enforced by published opinion. Judge DUNCAN wrote the opinion, in which Chief Judge WILKINS and Judge GOODWIN joined.

OPINION

DUNCAN, Circuit Judge.

The petitioners, Telebrands Corporation, TV Savings, LLC and Ajit Khubani¹ (collectively, "Telebrands"), challenge the scope of a Federal Trade Commission ("FTC") Order containing an "all claims, all products" fencing-in provision. We enforce the Order.

I.

Telebrands markets a wide variety of products to consumers using direct-response advertising — product advertisements that offer the consumer a vehicle, such as a telephone number, mailing address or Internet site, to respond directly to the advertiser.² It routinely employs a "compare and save" strategy to select and market products. In other words, Telebrands monitors trends in the marketplace and in various advertising channels to identify popular items that it can replicate cost effectively. Once it locates such a product, Telebrands enters the market as a competitor, offering a comparable item at a lower price.

Telebrands employed this strategy when it introduced the Ab Force, an electronic muscle stimulation ("EMS") abdominal belt, in December 2001. The Ab Force consisted of a small battery-powered control unit held in place by an elastic belt worn around the abdominal area. The control unit cycled an electric current into the abdominal muscles, causing them repeatedly to contract and release involuntarily. When Telebrands introduced the Ab Force, several other EMS products, including several abdominal belts, were already on the market. In fact, Khubani first considered marketing an EMS abdominal belt in early 2001 when he noticed the AbTronic abdominal belt in J.W. Greensheet. J.W. Greensheet is a direct-response television industry publication that generates weekly rankings of spots and infomercials based on two sources of information: 1) media budget data that it receives from advertisers; and 2) its own monitoring of national cable and selected broadcast markets.³

According to J.W. Greensheet, infomercials for three competing EMS abdominal belts, AbTronic, Ab Energizer and Fast Abs, were highly ranked before and during the time that the Ab Force was being marketed. Those infomercials promoted the belts as a method to lose weight, fat and inches, and to gain well-defined abdominal muscles, all without the need for exercise. Advertisements that aired during that time period for some other EMS abdominal belts contained similar claims.

Telebrands elected not to make such claims expressly but suggested them implicitly by encouraging comparison to the products that did so. For example, Ab Force advertisements referenced "those fantastic electronic ab belt infomercials on TV." J.A. 991, 1014, 1015. The initial television and radio advertisements for the Ab Force also described abdominal belts as "the latest fitness craze to sweep the country," J.A. 991, 1015, and the radio advertisement pointed out that the other belts "promis[e] to get our abs into great shape fast — without exercise." J.A. 1015. Fit, well-muscled models were shown using the Ab Force in the television advertisements; some of those models also posed to show off lean physiques, while others performed conventional abdominal exercises.

The FTC issued an administrative complaint alleging that Telebrands had made false and misleading claims in violation of sections 5 and 12 of the Federal Trade Commission Act ("FTC Act"), 15 U.S.C. §§ 45, 52.⁴ Specifically, the complaint alleged that Telebrands had made unsubstantiated claims that the Ab Force caused loss of weight, inches or fat, caused well-defined abdominal muscles, and was an effective alternative to regular exercise.

An administrative law judge ("ALJ") found that Telebrands had made the claims alleged in the complaint and that the claims were material to consumers. Furthermore, the parties had stipulated that Telebrands neither possessed nor relied on substantiation of the alleged claims, and that, in fact, the use of the Ab Force did not result in the claimed benefits. Therefore, the ALJ concluded that the claims made by Telebrands were false and misleading in violation of the FTC Act.

The FTC complaint sought broad "fencing-in" relief,⁵ including a provision requiring Telebrands to have "substantiation prior to advertising `any other EMS device, or any food, drug, dietary supplement, device, or any other product, service, or program.'" J.A. 717. However, the ALJ imposed a narrower provision:

[Telebrands] . . . in connection with the manufacturing, labeling, advertising, promotion, offering for sale, sale, or distribution of Ab Force, any other EMS device, or any device, product, service or program promoting the efficacy of or pertaining to health, weight loss, fitness, or exercise benefits shall not make any representation, in any manner, expressly or by implication, about weight, inch, or fat loss; muscle definition; exercise benefits; or the health benefits, safety, or efficacy of any such product, service, or program, unless, at the time the representation is made, [Telebrands] possess[es] and rel[ies] upon competent and reliable scientific evidence that substantiates the representation.

J.A. 724. On appeal, the FTC affirmed the ALJ's conclusion that Telebrands had violated the FTC Act but entered a Final Order that included a broader fencing-in provision:

[Telebrands] . . . in connection with the manufacturing, labeling, advertising, promotion, offering for sale, sale, or distribution of Ab Force, any other EMS device, or any food, drug, dietary supplement, device, or any other product, service or program, shall not make any representation, in any manner, expressly or by implication, about weight, inch, or fat loss, muscle definition, exercise benefits, or the health benefits, safety, performance, or efficacy of any product, service, or program, unless, at the time the representation is made, [Telebrands] possess[es] and rel[ies] upon competent and reliable evidence, which when appropriate must be competent and reliable scientific evidence, that substantiates the representation.

J.A. 773 (emphasis added).

Telebrands appeals this fencing-in provision, which it refers to as an "all claims, all products" provision and the FTC refers to as "comprehensive coverage." Telebrands requests that we modify the FTC's Final Order to replace the challenged provision with the more narrow provision imposed by the ALJ or remand to the FTC for the purpose of determining the appropriate scope of the provision in light of our opinion. Significantly, Telebrands does not appeal the FTC's conclusion that Telebrands violated sections 5 and 12 of the FTC Act.

II.

Telebrands argues that the FTC lacked authority to issue the broader fencing-in provision because no reasonable relation exists between that provision and Telebrands's violation of sections 5 and 12. Specifically, it argues that substantial evidence does not support two FTC findings relied upon as a foundation for the provision: 1) Telebrands intended to make false advertising claims; and 2) Telebrands's conduct in making implied claims in the marketing of the Ab Force is transferable to other product advertising. It also argues that the FTC erred as a matter of law in finding that Telebrands's entry into three prior consent orders for unrelated alleged violations on unrelated products, and with no admission of liability, constitutes a history of prior violations that supports the imposition of the broad fencing-in language.

Congress has "empowered and directed" the FTC to prevent the use of "unfair or deceptive acts or practices in or affecting commerce." 15 U.S.C. § 45(a)(2). In line with that directive, Congress has given the FTC primary responsibility for devising orders to address those deceptive practices, and the FTC has broad discretion in doing so. FTC v. Colgate-Palmolive Co., 380 U.S. 374, 392, 85 S.Ct. 1035, 13 L.Ed.2d 904 (1965). The FTC's factual findings are conclusive if supported by substantial evidence. El Moro Cigar Co. v. FTC, 107 F.2d 429, 431-32 (4th Cir.1939). Moreover, courts will interfere with the remedy selected by the FTC "only where there is no reasonable relation between the remedy and the violation." Atlantic Ref. Co. v. FTC, 381 U.S. 357, 377, 85 S.Ct. 1498, 14 L.Ed.2d 443 (1965).

The FTC considers three factors in determining whether order coverage bears a reasonable relationship to the violation it is intended to remedy: "(1) the seriousness and deliberateness of the violation; (2) the ease with which the violative claim may be transferred to other products; and (3) whether the respondent has a history of prior violations." Stouffer Foods Corp., 118 F.T.C. 746, 811 (1994). In reviewing FTC orders for the existence of a reasonable relationship between the remedy and the violation, courts have relied on these same factors. See, e.g., Sears, Roebuck & Co. v. FTC, ...