The POM Wonderful Case Enters the Playoffs

August 24, 2012By John R. Fleder

By John R. Fleder

We have previously reported about the Federal Trade Commission’s (“FTC”) case against POM Wonderful, the maker of pomegranate juice (here, here, here, and here). In the world of FTC advertising cases, this litigation is certainly “big league” litigation.

On September 27, 2010, the FTC filed an administrative complaint against POM Wonderful LLC (“POM”), its sister corporation and three officers of POM (collectively “Respondents”).  The FTC asserted that the Respondents had violated the FTC Act in connection with years of advertisements.  The Commission asserted that POM’s advertising was false and misleading because it made unsubstantiated disease claims.  The FTC sued POM even though it was undisputed that Respondents had invested considerable resources in clinical studies to try to substantiate the claims made in the advertisements.

At the risk of mixing up sports, one is reminded of what former Washington Redskins owner Edward Bennett Williams said about his then Coach and General Manager, George Allen:  “George was given an unlimited budget and he exceeded it.”  In the POM case, we have no doubt that both sides exceeded any budgets they may have allocated to the case.  The filing of the FTC’s Complaint has led to a titanic struggle between the FTC and the Respondents.  They participated in a hotly-contested hearing before an FTC Administrative Law Judge (“ALJ”) that included testimony from many experts on both sides.  The parties also submitted hundreds and hundreds of pages of briefs.

On May 21, 2012, the ALJ issued an “Initial Decision” that made neither side happy.  He ruled that some, but not all, of the ads challenged by the Commission were unlawful.  He issued a cease and desist order against the Respondents.  However, he rejected two key arguments advocated by the FTC, namely that Respondents must possess two double blinded studies before making certain claims and that they should only be permitted to make certain claims if those claims have been precleared by another federal agency, namely FDA.

Both sides appealed that ruling to the five member Federal Trade Commission.  Further briefing ensued.  Once that briefing had been completed, the regular season ended.  It was on to the playoffs.

The next event was a fascinating hearing held at the FTC in Washington on August 23, 2012, presided over by the five FTC Commissioners, all of whom have been nominated by a President and confirmed by the United States Senate. The hearing had all the atmospherics of an appellate court argument.  The FTC’s hearing room was packed with people anxious to hear what is a rare event—a formal hearing before the FTC where the Commissioners function as judges in an adjudicatory proceeding.

The Commissioners entered the room together, taking their seats on a podium above the litigants.  When the hearing ended, the Commissioners got up from the podium, went down to the area where the litigants were seated and shook their hands.  This is a custom that one sees rarely in court cases.  This writer has only seen it in the United States Court of Appeals for the Fourth Circuit.  However, that courtesy by the Commissioners demonstrated how seriously everyone involved took this proceeding.  Indeed, on a number of occasions Edward Lazarus, POM’s Counsel referred to an FTC Commissioner as “Your Honor.”  These references led to a number of comments by the Commissioners indicating that they appreciated the reference.

The argument lasted almost two hours.  POM’s Counsel argued first.  His first argument was that the advertisements at issue did not make the implied claims that the FTC Staff asserted had been made.  Commissioners Rosch and Brill immediately disagreed, saying that it was clear to them that a number of POM’s advertisements had made implied disease claims.  They indicated that they can examine the ads de novo, meaning that they are not bound to give any deference to the ALJ’s analysis of those advertisements.  They also indicated that they can decide the meaning of the ads without needing to examine extrinsic evidence as to the ads’ meaning.

POM then argued that it is legally entitled to say anything that is true.  This comment elicited an immediate response from Commissioner Rosch, who stated that “no you are not,” if POM is making deceptive claims by implication.

There was a substantial discussion about whether the FTC can require POM to substantiate certain of its ads by requiring two adequate and well-controlled clinical studies, which are referred to in this case as RCTs, short-hand for randomized clinical trials.  POM asserted that the FTC has never required RCTs in any litigated case.  Commissioner Rosch disagreed, stating that the FTC required RCTs many years ago in  Thompson Medical Co., 104 F.T.C. 648, 842-43 (1984), aff’d, 791 F.2d 189 (D.C. Cir. 1986), cert. denied, 479 U.S. 1086 (1987) (see here).  POM then sought to distinguish that case from the POM situation.

There was a fascinating exchange between Commissioner Brill and POM’s Counsel with regard to the distinction under the FTC Act between foods and drugs.  POM’s position is that its product is an all-natural food product.  Commissioner Brill indicated that the ALJ erred in his discussion of the characterization of POM’s product.  Commissioner Brill stated that a food product can be deemed a drug product under the FTC Act based on an analysis of the product’s “intended use.”  She said that water can be a drug if it is marketed to cure a disease.

POM argued that it had generated and relied on a huge number of studies and experts to support the claims at issue in this case.  POM argued that in a close case, the case law decided under the First Amendment requires that a “jump ball” goes to the Respondents.  None of the Commissioners explicitly agreed with that position.

However, POM’s argument led to a series of questions and statements by Chairman Leibowitz with regard to POM’s numerous unpaid appearances on television.  Chairman Leibowitz first asked if the FTC Act even applies to statements and claims made by a company official when the company has not paid for the television appearance.  He also asked if POM contended that there is an absolute First Amendment protection for the Respondents in those situations.  POM’s position is that there is First Amendment protection.

FTC Counsel Heather Hippsley addressed the First Amendment issue in some detail.  She asserted that, with regard to liability, there is no First Amendment issue in this case.  She stated that because this is an enforcement action involving allegedly deceptive advertisements, the Respondents have no First Amendment protections for their claims.  She also stated that the unpaid-for appearances were preceded by a substantial marketing campaign by POM designed to give itself free advertising by promoting its products on television shows such as one hosted by Martha Stewart.

The Commissioners engaged FTC Counsel in a discussion regarding one aspect of Staff’s appeal, namely whether the FTC should require that POM can only make certain claims if those claims have been approved by FDA.  FTC Counsel relied on prior FTC Consent Orders as precedent for that proposition.  Commissioner Rosch indicated that he is unaware of any prior litigated precedent for that requirement.  FTC Counsel agreed.  Commissioner Rosch expressed grave concern about relying on prior FTC Consent Orders as precedent for this requirement.  Commissioner Ramirez weighed in on this topic asking whether FDA preclearance was too harsh and would violate the First Amendment.  Commissioner Rosch then suggested that it may not be appropriate for the FTC to tie itself too closely to FDA, adding that the FTC had earlier distanced itself from FDA requirements in the Daniel Chapter One case (see here).  FTC Counsel vigorously defended the Staff’s request to have an order entered with this preclearance requirement.  She contended that the content of POM’s advertisements demonstrated that the FTC could not trust POM to decide even when two RCTs would be required to substantiate a claim.

Commissioner Brill asked if someone other than the FDA should be entrusted to preclear POM’s claims.  FTC Counsel responded that if the Commission is unwilling to impose a requirement that POM get FDA preclearance, the Commission should require two RCTs.

So what happens now?  Under the Commission’s rules, we can expect a decision by early December 2012.  If the decision goes against the Respondents, they can challenge the FTC’s ruling in a Court of Appeals.  My guess is that this challenge will be filed in the United States Court of Appeals for the District of Columbia Circuit.  That case will likely be the World Series of FTC advertising cases.

Making accurate predictions about the result of cases is a dicey proposition based on an oral argument.  Nevertheless, many of our readers may be curious as to what I think will happen based on what was said and not said during this oral argument.
My record on making such predictions has been historically poor.  Nevertheless, here is my prediction based on this hearing:

(1) The FTC will issue a decision that will find that all the Respondents generated advertisements that made disease claims as to POM’s products;

(2) The FTC will find that at least some of those advertisements were false and or misleading in violation of the FTC Act;

(3)  The FTC will issue a cease and desist order against all five Respondents;

(4) The FTC will not impose an FDA-preclearance requirement with regard to any POM advertisement;

(5) The FTC will require POM to have 2 RCTs for at least some of the claims that POM may make in the future.  I suspect that the Commission will impose this requirement in a fact-based analysis that will continue to leave open the general question of when the FTC will require RCTs;

(6) The FTC decision will have a detailed analysis of the First Amendment.  I will not venture a guess as to whether the FTC will rule that POM has First Amendment protections for any of the ads they have run or the appearances that POM officials made on television; and

(7) The FTC will issue a fascinating ruling on the lines between food and drugs, including the extent to which a food product can be deemed a drug.