Georgia pharmaceutical company appeals $40 million fine over false supplement claims

ATLANTA (CN) — A federal appeals court heard arguments Tuesday from a pharmaceutical company that claims it shouldn’t have to pay the Federal Trade Commission a $40 million judgment for violating an injunction by making repeated assertions about weight-loss supplements.

Hi-Tech Pharmaceuticals, a Georgia corporation, manufactures and sells dietary supplements. In 2004, the Federal Trade Commission filed a complaint against the company and its officers, Jared Wheat and Stephen Smith, for allegedly making weight-loss and other health-related efficacy claims about three dietary supplements without adequate scientific evidence.

A federal judge found Hi-Tech’s efficacy claims should have been supported by “independent, well-designed, well-conducted, randomized, double-blind, placebo-controlled clinical trials" and was unpersuaded by the company’s arguments that this kind of testing is only required for drugs and not supplements.

Hi-Tech was ordered to pay $15.9 million in disgorgement and consumer redress, which has since been fully collected. The court also entered a permanent injunction prohibiting the company from further violating the Federal Trade Commission Act and from making future efficacy claims about any dietary supplement without “competent and reliable scientific evidence” to back them up.

However, years later, the FTC accused the company of violating the injunction by making unsubstantiated efficacy claims about four new weight-loss supplements. After multiple hearings and appeals, a federal judge entered an order and judgment holding Hi-Tech in civil contempt and imposed $40 million in equitable monetary relief in 2017. That judgment was affirmed by the U.S. 11th Circuit Court of Appeals two years later.

Standing before the Atlanta-based federal appeals court once again on Tuesday, Hi-Tech argued that it shouldn’t have to continue paying the $40 million contempt judgment, due to a recent ruling from the Supreme Court.

In April 2021, the high court held that Section 13(b) of the FTC act does not authorize the commission to seek, or a court to award, equitable monetary relief such as restitution or disgorgement in the case of* AMG Capital Management v. Federal Trade Commission.*

“Under Federal Rule of Civil Procedure and in light of AMG Capital, it is inequitable for the district court to prospectively enforce and administer the $40 million civil-contempt judgment and for the government to retain funds collected but unclaimed by consumers,” attorney Robert Parsley from the Tennessee based firm Miller & Martin wrote in his appellant brieffor Hi-Tech.

Concluding that the rule applies only to judgments that have a “prospective effect,” not to those “‘that offer a present remedy for a past wrong," the federal judge denied all aspects of Hi-Tech’s motion.

The three-judge circuit panel also appeared unpersuaded by Parsley’s argument on Tuesday. Chief U.S. Circuit Judge William Pryor, a George W. Bush appointee, said that the Supreme Court’s ruling that his claims rely on doesn’t mention anything about contempt enforcement proceedings for violating an injunction.

“After the court enters an injunction, we’re no longer talking about the agency’s power, we’re talking about the court’s power,” said the judge. He added that nothing in the high court decision limits the contempt power of the lower court.

Parlsey argued that the company should be granted an accounting of the money collected by the FTC, because they don’t know how much of the original $15.9 million judgment has actually been paid back to the consumers and how much remains in the government’s hands.

“Any amounts collected but not claimed by consumers should be returned to Hi-Tech, and the remainder of the contempt judgment should no longer be collected. To carry out those objectives, an accounting is warranted," Parsley wrote in his brief to the court.

According to the Federal Trade Commission, the pharmaceutical company’s claims are just the latest effort of its long-standing refusal to cooperate with the court’s orders. The agency explained in its briefthat Hi-Tech took extraordinary measures to avoid paying the initial monetary judgment by submitting inaccurate compliance reports, concealing assets, setting up accounts in other companies’ names and even hiding $260,000 in cash under the floor of CEO Wheat’s house.

Attorney Mariel Goetz wrote that it took seven years of multiple judicial proceedings to collect the monetary judgment and that Hi-Tech deliberately violated the court’s injunction with its unsubstantiated weight-loss supplement advertisements.

Goetz added that the court’s injunction expressly bars Hi-Tech’s request for an accounting of funds, because under that judgment, the company cannot challenge “the commission’s choice of remedies” with regard to consumer redress funds “or the manner of distribution chosen by the commission.”

“Had your client timely followed the district court’s order, we wouldn’t be here today,” Chief Judge Lawrence Scott Coogler, who joined the circuit panel from the Northern District Court of Alabama, told Parsley.

“Wouldn’t you be required to have clean hands for that to apply?” the fellow George W. Bush appointee asked Parsley of his claims.

Coogler and Pryor were joined by U.S. Circuit Judge Jill Pryor, a Barack Obama appointee. The panel did not signal when their decision will be made.

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