INSIDER Law
Federal Trade Commission 2019

Appeals court affirms $40 million in sanctions against dietary supplement maker

An appeals court ruling dealt a victory to Federal Trade Commission officials and a blow to Georgia-based Hi-Tech Pharmaceuticals Inc. and its owner, Jared Wheat.

An appeals court this week upheld an order that imposed US$40 million in sanctions against a manufacturer of dietary supplements for violating injunctions by failing to support advertising statements with “competent and reliable scientific evidence.”

The Sept. 18 ruling dealt a victory to Federal Trade Commission (FTC) officials and a blow to Georgia-based Hi-Tech Pharmaceuticals Inc. and its owner, Jared Wheat. Hi-Tech and Wheat also have been fighting the federal government in civil litigation over controversial ingredients—including DMAA (1,3-dimethylamylamine)—and a criminal indictment.

History of case

FTC’s years-long beef with Hi-Tech is over whether the supplement maker and others violated 2008 court injunctions by falsely advertising four fat-burning and weight-loss products.

In 2014, a federal judge ordered the defendants jointly and severally liable for roughly $40 million in sanctions after finding them in contempt for violating the injunctions. The U.S. Court of Appeals for the Eleventh Circuit subsequently vacated the court order.

Federal Senior Judge Charles A. Pannell Jr. improperly barred the defendants from presenting evidence to prove compliance with the court injunctions, the Eleventh Circuit found. In refusing to consider the defendants’ evidence to substantiate their advertising claims, the judge misapplied a legal doctrine known as collateral estoppel, the appeals court determined.

The case was sent back to the district court. After conducting a bench trial, Pannell concluded in 2017 that the defendants lacked the necessary evidence—specifically randomized, double-blind, placebo-controlled clinical trials—to support their advertising statements.

He also re-imposed sanctions of roughly $40 million against three defendants, including Hi-Tech sales executive Stephen Smith. The judge found a fourth defendant in contempt for violating a separate injunction, and he imposed $120,000 in sanctions.

“The court recognizes that the compensatory sanctions are significant, but so, too, was the defendants’ contumacious conduct," Pannell wrote in his 132-page order. “While the defendants essentially claim that several of the violations were honest mistakes, the record is replete with evidence—both direct and circumstantial—showing an intentional defiance of the court’s injunctions."

Appeals court decision

Hi-Tech, Wheat and Smith challenged the ruling. The defendants argued the injunction was “too ambiguous to be enforced,” contending “the ‘competent and reliable scientific evidence’ standard and its accompanying definition are unclear,” according to the Eleventh Circuit.

However, in its recent order, the appeals court held the defendants “waived their challenge to the clarity of the injunction.” It also concluded “the district court did not abuse its discretion in finding that the defendants lacked competent and reliable scientific evidence to substantiate the relevant claims and in imposing the order of contempt.”

In an email, Wheat noted his legal team is preparing a motion for the appeals court to reconsider “the "waiver" issue” due to a belief that it was “incorrectly applied.”

“Otherwise companies like Bayer, Garden of Life and Basic Research would not have been able to challenge the meaning of ‘competent and reliable scientific evidence,’ and we would all have been relegated to randomized double-blind controlled placebo studies,” said Wheat, referring to other dietary supplement companies that have battled FTC in litigation.

An FTC spokesman and an attorney for Smith did not immediately provide comments on the ruling in response to emailed requests.

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