Fed. Trade Comm'n v. Lane Labs-usa Inc.

• Decision Date: 26 October 2010
• Docket Number: No. 09-3909.,09-3909.
• Parties: FEDERAL TRADE COMMISSION, Appellant v. LANE LABS-USA, INC; Cartilage Consultants, Inc.; I. William Lane; Andrew J. Lane.
• Court: U.S. Court of Appeals — Third Circuit

624 F.3d 575

FEDERAL TRADE COMMISSION, Appellant

v.LANE LABS-USA, INC; Cartilage Consultants, Inc.; I. William Lane; Andrew J. Lane.

No. 09-3909.

United States Court of Appeals,Third Circuit.

Argued Sept. 14, 2010.

Filed: Oct. 26, 2010.

COPYRIGHT MATERIAL OMITTED.

Theodora T. McCormick, Jack Wenik (argued), Sills, Cummis & Gross, Newark, NJ, for Appellee Lane Labs-USA, Inc. and Andrew J. Lane.

Paul F. Carvelli (argued), McCusker, Anselmi, Rosen & Carvelli, Florham Park, NJ, for Appellee I. William Lane.

Michele Arington (argued), John F. Daly, Federal Trade Commission, Elsie B. Kappler, Constance M. Vecellio, Federal Trade Commission, Amanda C. Basta, Kirkland & Ellis, Washington, DC, Susan J. Steele, Office of United States Attorney, Newark, NJ, for Appellant.

Before: SLOVITER, BARRY, and SMITH, Circuit Judges.

OPINION

SMITH, Circuit Judge.

The Federal Trade Commission (“FTC”) appeals from an order of the United States District Court for the District of New Jersey denying its motion to hold Lane Labs-USA, Inc., I. William Lane, and Andrew J. Lane in contempt for violation of consent judgments entered by the District Court on July 6, 2000 and September 26, 2000. For the reasons set forth below, we conclude that the District Court committed clear error. Accordingly, we will vacate the order of the District Court and remand for further proceedings.

I.

Lane Labs-USA, Inc. (“Lane Labs”) is a manufacturing distributor of specialty dietary supplements and cosmetic products. ¹ The company was founded in 1994 by its current president and sole shareholder, Andrew J. Lane (“Lane”). Lane's father, I. William Lane, is not an employee of Lane Labs, but has served as a consultant to the company since its founding. ²

In June of 2000, the FTC charged the Lane defendants with deceptive acts in violation of § 5 of the Federal Trade Commission Act (“FTC Act”). ³ The FTC's complaint focused upon unsubstantiated representations pertaining to two products: BeneFin, a dietary supplement, and SkinAnswer, a cosmetic cream. ⁴ Shortly after the litigation was commenced, however, each of the Lane defendants reached a settlement with the FTC and agreed to the terms of a consent decree. The District Court entered the decree as a stipulated final order for permanent injunction (hereinafter, the “Final Order”), ⁵ and adjudged Lane Labs liable for the sum of $1 million.

Two provisions of the Final Order are pertinent to this appeal. In Section III, the Lane defendants agreed that “in connection with the manufacturing, labeling, advertising, promotion, offering for sale, or distribution of any food, dietary supplement, or drug,” they would refrain from

mak[ing] any representation, in any manner, ... expressly or by implication, about the effect of [a] product on any disease or disorder, or the effect of such product on the structure or function of the human body, or about any other health benefits of such product, unless, at the time the representation is made, [they] possess[ed] and rel[ied] upon competent and reliable scientific evidence that substantiates the representation.

“Competent and reliable scientific evidence” was defined as “tests, analyses, research, studies, or other evidence based on the expertise of professionals in the relevant area, that have been conducted and evaluated in an objective manner by persons qualified to do so, using procedures generally accepted in the profession to yield accurate and reliable results.” Section IV of the Final Order forbade express or implied misrepresentations regarding “the existence, contents, validity, results, conclusions, or interpretations of any test, study or research” in connection with “the manufacturing, labeling, advertising, promotion, offering for sale, sale, or distribution of any food, dietary supplement, or drug.” Two other provisos, Sections IX and XIV, imposed record keeping and periodic reporting requirements, respectively.

Two products are at issue: AdvaCal, a calcium supplement, and Fertil Male, which, as the name suggests, purports to improve male fertility. We shall briefly consider the development and marketing of both products before turning to the proceedings that occasioned the instant appeal.

A. AdvaCal

AdvaCal was developed by a renowned Japanese scientist named Takuo Fujita. The product primarily consists of calcium hydroxide derived from oyster shells smelted at extremely high temperatures. Once the smelting process is complete, the calcium component is combined with a heated algae ingredient (“HAI”) extracted from Hijiki seaweed. This combination of active ingredients purportedly yields a calcium hydroxide product that is significantly more absorbable by the human body than competing calcium supplements.

Lane Labs began marketing AdvaCal in 2000 as a means to increase bone strength and combat osteoporosis. Over the next several years, the company utilized an array of print, television, and online media to promote its product. Each of these advertisements contained numerous representations regarding AdvaCal's efficacy, and many compared AdvaCal to competing calcium supplements. Typical among the claims appearing in AdvaCal marketing materials were assertions that the supplement (1) was unique in its ability to increase bone mineral density, (2) was clinically proven to be more absorbable than other calcium supplements, and (3) was clinically shown to increase bone density in the hip. In addition, Lane Labs distributed literature promoting AdvaCal as comparable or superior to prescription osteoporosis medicine, and Lane told at least one prospective retail purchaser that the calcium supplement was “on par with” prescription pharmaceuticals.

Consistent with its obligations under the Final Order, Lane Labs provided the FTC with compliance reports pertaining to AdvaCal in 2001, 2004, and 2006. Each report attached print copies of AdvaCal-specific advertisements, as well as the scientific research upon which Lane Labs relied for its representations. The parties do not dispute that many of the marketing claims at issue in this matter were disclosed to the FTC in the 2001 compliance report.

B. Fertil Male

Fertil Male is derived from a Peruvian plant known as “maca.” After it is gelatinised and heated, the plant is combined with HAI. This combination allegedly enhances the human body's capacity to absorb maca, which purportedly improves male fertility parameters such as sperm production and sperm motility. ⁶ In October 2003, Lane Labs began marketing Fertil Male. One advertisement featured a customer who proclaimed that Fertil Male caused his sperm count to “skyrocket” within one month. Just as it had with AdvaCal, Lane Labs submitted an FTC compliance report disclosing its Fertil Male advertisements in 2006.

C. The Contempt Proceeding

On July 12, 2006, the FTC notified Lane Labs that certain Fertil Male advertisements contained misrepresentations which amounted to violations of the Final Order. One month later, the FTC provided Lane Labs with a similar notice concerning the marketing of AdvaCal. Both notices threatened litigation absent the negotiation of an appropriate settlement agreement. The parties did not reach a settlement. Thus, on January 12, 2007, the FTC filed a motion with the District Court to hold the Lane defendants in contempt for violating Sections III and IV of the Final Order. To remedy these purported violations, the FTC requested $24 million in monetary damages.

The District Court held a five-day evidentiary hearing on the motion beginning on April 20, 2009. Two expert witnesses testified on behalf of the FTC: Robert Heaney, a physician and researcher at Creighton University, offered testimony concerning AdvaCal, while Craig Niederberger, a urologist at the University of Illinois at Chicago, addressed matters pertaining to Fertil Male. The Lane defendants presented the testimony of two opposing experts. Boston University physician Michael Holick discussed Lane Labs' marketing of AdvaCal, and University of Massachusetts professor Machelle Seibel testified as an expert in reproductive medicine. Each of these witnesses discussed scientific studies relied upon by Lane Labs to support its marketing claims. The FTC experts generally opined that the claims in question were not substantiated by competent or reliable scientific research; not surprisingly, experts for the Lane defendants contradicted this viewpoint.

In addition to these dueling experts, the Court heard testimony from, among others, Lane and Jennifer Morganti, a naturopathic doctor employed by Lane Labs from 2001 to 2004. Lane testified that he took the Final Order “extremely serious[ly],” and he spoke at length about the measures the company pursued to comply with the decree. Lane explained that: the Final Order was distributed to all senior management personnel; copies were sent to Lane Labs' customers; an outside company was retained to compile existing research and to monitor research updates; and Lane hired Morganti to serve as manager of nutritional research. Morganti testified that her primary responsibility was to scrutinize Lane Labs' marketing claims to ensure that each representation was supported by scientific research. ⁷ In all circumstances, however, the ultimate decision to utilize a particular claim was Lane's alone.

By order dated August 10, 2009, the District Court denied the FTC's motion for contempt. The Court explained that it reached its decision after “carefully considering the complete record” and weighing the testimony of each party's witnesses. In the Court's view, “[a]ll four expert witnesses were credible and knowledgeable in their respective fields of expertise,” but those testifying on behalf of the Lane defendants were more impressive “because their testimony and approach to the subject matter seemed more reasonable and in accordance with the [Final] Order[ ].” The Court also characterized Lane's testimony in a favorable fashion,...