Supplement Maker Fights FTC in 11th Circuit Over $40M Penalty

ATLANTA (CN) — Continuing a 15-year legal battle with the Federal Trade Commission, attorneys for a Georgia-based dietary supplement manufacturer asked the 11th Circuit on Friday to overturn a ruling imposing $40 million in sanctions for violating court orders related to false advertising.

The Elbert P. Tuttle U.S. Courthouse in Atlanta, home of the 11th Circuit Court of Appeals. (Photo via Wikipedia Commons)

A federal judge issued an order in October 2017 finding Hi-Tech Pharmaceuticals, CEO Jared Wheat, and Senior Vice President Stephen Smith in contempt for violating an injunction related to the company’s sale of weight-loss dietary supplements.

The order imposed a $40 million judgment against the manufacturer and against Wheat personally for selling $40.1 million in products in violation of the terms of a 2008 injunction.

From January 2009 through early January 2014, Hi-Tech, Wheat and Smith advertised products nationally using unsubstantiated claims and failed to include warning labels on packaging.

The FTC is authorized to use a portion, or all, of the sanction proceeds to give refunds to consumers who purchased Hi-Tech’s products and were deceived by the company’s advertising.

The protracted legal battle between Hi-Tech and the FTC began in November 2004, when the FTC filed a complaint alleging the company and its officers engaged in deceptive marketing practices in their sale of dietary supplements.

In December 2008, U.S. District judge Charles Pannell, Jr. found in favor of the FTC and ordered Hi-Tech to pay a $15.8 million judgment.

The 2008 order also included a permanent injunction barring the company from making a variety of claims in connection with the sale and distribution of weight loss and erectile dysfunction products.

The injunction prohibited Hi-Tech from proclaiming the safety and efficacy of its products unless the claims are based on “competent and reliable scientific evidence that substantiates the representation.”

Hi-Tech, Wheat and Smith were ordered to recall from retail outlets all Fastin, Lipodrene, Benzedrine and Stimerex-ES products with product packaging and labels that violated the injunction.

In November 2011, the FTC filed documents seeking sanctions against Hi-Tech, Wheat and Smith for violating the 2008 order by making representations that their products guaranteed “extreme” or “rapid” weight loss in advertisements in magazines including Cosmopolitan, In Touch, Martha Stewart Weddings, Muscle & Fitness, US Weekly and National Enquirer.

After two bench trials, Judge Pannell entered a ruling in October 2017 finding Hi-Tech, Wheat, and Smith liable for $40 million in sanctions due to their “numerous” violations of the “clear and unambiguous” injunction.

Attorney Anne Voigts of King & Spalding, arguing Friday morning on behalf of Hi-Tech, asked a three-judge 11th Circuit panel to overturn the district court’s ruling, telling the panel that the injunction was impermissibly vague.

“In order to find contempt, the government has to show that the order was clear and was violated… In order to impose sanctions, you have to be able to understand the injunction,” Voigt said.

“It would be manifestly unfair not to review the injunction,” the attorney added.

“Why wasn’t this brought up specifically when the injunction was entered? Why was this not raised in the appellate filing?” U.S. Circuit Judge Robin Rosenbaum asked.

“We can challenge the injunction [now] because it provides the basis for the contempt order,” Voigt explained.

But FTC staff attorney Theodore Metzler urged the panel to affirm the district court’s imposition of sanctions.

“The injunction forbade Hi-Tech from saying their products caused rapid fat loss unless they had science to support their claims… The injunction was clear on its face. They understood it. The district court didn’t commit any error, much less clear error. They didn’t [challenge] it when the district court entered the order and didn’t mention it before this court in direct appeal. They clearly understood it, it’s not vague,” Metzler argued.

In rebuttal, Voigts told the panel that the allegedly unclear injunction would have prevented Hi-Tech from continuing to do business.

“No company in the industry could satisfy the requirements of the injunction,” Voigts said.

Rosenbaum was joined on the panel by U.S. Circuit Judge Beverly Martin and U.S. District Judge Jose Martinez, sitting by designation from the Southern District of Florida.

The panel did not indicate when it will reach a decision in the case.

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