Federal Trade Commission, Plaintiff-Appellant-Cross-Appellee v. Pantron I Corporation, Defendants-Appellees-Cross-Appellants

Citations: 33 F.3d 1088; 94 Daily Journal DAR 11944; 94 Cal. Daily Op. Serv. 6482; 1994 U.S. App. LEXIS 22977; 1994 Trade Cas. (CCH) 70,831Docket: 92-56228, 92-56292

Court: Court of Appeals for the Ninth Circuit; August 25, 1994; Federal Appellate Court

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The case involves the Federal Trade Commission (F.T.C.) appealing a district court order concerning advertising claims made by Pantron I Corporation and its president, Hal Z. Lederman, regarding their product, the "Helsinki Formula," marketed as a baldness cure. The F.T.C. contends that the district court erred by not enjoining additional representations made by Pantron, specifically claims that the Formula was subject to medical investigation by European physicians and that it is effective for some individuals dealing with male pattern baldness. The F.T.C. also sought monetary equitable relief, which the district court denied.

The court addressed whether a seller can lawfully claim a product is "effective" if its efficacy is solely due to a "placebo effect," concluding such representations constitute "false advertisement" under the Federal Trade Commission Act. The F.T.C. challenged Pantron's advertisements, which included claims of the product’s effectiveness and scientific validation, and highlighted scrutiny from multiple regulatory entities before the F.T.C. filed its complaint in 1988, alleging deceptive trade practices. 

The court reversed the district court's decision regarding the F.T.C.'s appeal but affirmed the ruling on the cross-appeal from Pantron and Lederman, who disputed the classification of the Formula as a "drug" under federal law and sought sanctions. The Helsinki Formula purportedly contains ingredients like polysorbate 60 and polysorbate 80 and is sold with a money-back guarantee.

A 5-day bench trial occurred in November 1989, where the F.T.C. presented evidence indicating that the Helsinki Formula had no efficacy in preventing hair loss or promoting regrowth beyond a placebo effect. Expert dermatologist Dr. Karl Kramer testified that there was "no reason to believe" the Formula was effective, aligning with the consensus of the medical community. His views were supported by Drs. Elaine Orenberg and Theodore Ganiats, with Orenberg criticizing the studies relied upon by Pantron as lacking proper scientific rigor, and Ganiats asserting that the key ingredients, polysorbate-60 and polysorbate-80, were ineffective.

The court noted an F.D.A. rule prohibiting claims of effectiveness for over-the-counter baldness treatments, which specifically identified polysorbate-60 among other ingredients in the Helsinki Formula. The F.D.A. concluded that such product claims were misleading or unsupported by scientific data. The F.T.C. presented two studies, including the Groveman study, which was a rigorously designed placebo-controlled trial that found polysorbate-60 ineffective for male pattern baldness. The Shuster study also indicated ineffectiveness but was criticized for not including a clear placebo.

In contrast, Pantron provided testimony from 18 users who claimed benefits from the Helsinki Formula and introduced a consumer satisfaction survey involving 579 customers. However, the survey's credibility was diminished as the company did not retain records of the questions asked.

Survey data indicated that 29.4% of users who had used the product for less than two months reported positive results, while this figure increased to 70% for those who had used it for six months or more. Pantron presented evidence that over half of its orders were from repeat customers, noted a limited number of written complaints, and indicated that less than 3% of customers had utilized the money-back guarantee. Clinical studies were introduced, including one by Dr. Ilona Schreck-Purola, which, despite being uncontrolled and unpeer-reviewed, claimed a polysorbate-based product effectively reduced hair loss and promoted new growth in 60% of subjects within four months, although she acknowledged skepticism from the medical community regarding polysorbate effectiveness in treating male pattern baldness. Dr. Annik Pons conducted a similar study, reporting an 82-87% decrease in hair loss over eleven months and new hair growth in up to 35% of participants within three months. Dr. Paul Williams critiqued the Groveman study for its inadequate sample size, asserting a 40% chance of false conclusions regarding efficacy and recommending a minimum of 151 subjects for reliability. On September 24, 1991, the district court found that Pantron's claims of efficacy were not wholly unsupported, stating that evidence showed the compound worked for some individuals. Consequently, the court ruled that the F.T.C. did not prove Pantron made false claims regarding the effectiveness of the Helsinki Formula.

The district court determined that there was no scientifically valid evidence supporting the effectiveness of polysorbate 60 for hair loss treatment, leading to a conclusion that the F.T.C. marginally met its burden of proof regarding false claims. Consequently, an injunction was issued against Pantron and Lederman, prohibiting them from making any claims that the Helsinki Formula is scientifically proven to treat baldness, while allowing them to disclose that the formula was the subject of medical investigations by European physicians, provided it included a disclaimer about the lack of adherence to U.S. scientific standards. Additionally, the injunction barred any misrepresentation of the product's effectiveness but permitted limited claims regarding its potential to arrest hair loss, with required disclosures about the nature of its effectiveness and the absence of supporting scientific studies. The court denied monetary equitable relief, finding insufficient evidence of consumer deception or injury and lack of knowledge of fraud by Lederman. The F.T.C. appealed the limited injunctive relief and Pantron cross-appealed the classification of the Helsinki Formula as a "drug." The F.T.C. contended that the district court erred in its findings about the formula's effectiveness and argued that it applied an incorrect legal standard. The court agreed with the F.T.C. that the standard used was erroneous and held that the challenged aspects of the injunction must be modified. The F.T.C. filed the suit under sections 5(a) and 12 of the Federal Trade Commission Act, which address unfair or deceptive practices and false advertising, respectively, defining false advertising as misleading advertisements that affect commerce.

The F.T.C. has established a three-part test to evaluate misleading and deceptive advertisements under section 12, as articulated in Cliffdale Associates. This test requires that: (1) there is a representation, omission, or practice; (2) it is likely to mislead consumers acting reasonably; and (3) the representation is material. The Commission has consistently applied this standard in subsequent cases, and it became binding after its adoption in Cliffdale Associates. 

In the case at hand, Pantron's advertisements claimed that the Helsinki Formula effectively arrests hair loss and promotes regrowth, based on purported scientific studies, which the district court found to be material claims. Pantron did not contest this finding. The key issue is whether these claims were likely to deceive consumers. 

The F.T.C. can utilize two theories in section 12 cases regarding objective product claims: the "falsity" theory, which requires proof that the advertisement's message is false, and the "reasonable basis" theory, which asserts that the advertiser must have a reasonable basis for the claims made. Although the district court analyzed both theories, the F.T.C. ultimately abandoned the reasonable basis theory for this case, focusing only on the falsity theory for evaluation.

The district court determined that the Federal Trade Commission (F.T.C.) did not prove that Pantron's claims about the Helsinki Formula's efficacy were false, asserting that the F.T.C. needed to demonstrate the product was entirely ineffective. However, it acknowledged that Pantron's clinical studies did not meet contemporary scientific standards yet indicated some effectiveness in reducing hair loss. Upon review, it was concluded that the district court erred, as the evidence indicated that any effectiveness was due solely to the placebo effect. It was established that claims of product effectiveness are considered "false" under section 12 of the Federal Trade Commission Act if scientific evidence shows no effectiveness beyond a placebo effect. 

Testimony from experts, including Drs. Kramer, Orenberg, and Ganiats, confirmed a consensus in the medical community that polysorbate-based products lack efficacy in treating male pattern baldness. The absence of a credible mechanism for action further supported this consensus. Pantron failed to provide evidence to counter the prevailing view that such products are ineffective, with all evidence of effectiveness attributed to the placebo effect, which could account for significant perceived results in studies. Dr. Kramer noted that the placebo effect could be as high as 41%, and even when hair growth occurs, it may not be due to the product itself but rather other factors, such as scalp stimulation from regular application. 

Pantron's consumer satisfaction claims were also criticized, as the surveys were conducted by its sales staff without proper documentation, raising questions about their validity. Ultimately, the irregular nature of hair loss made it difficult for consumers to accurately assess the product's effectiveness, further undermining Pantron's claims.

Dissatisfied consumers often do not pursue refunds for products due to perceived inconvenience, feelings of guilt, or self-blame related to their use of the product. Pantron's clinical studies, used to support the effectiveness of the Helsinki Formula, lacked proper placebo controls, failing to account for the placebo effect. Pantron claimed that Dr. Schreck-Purola's scalp biopsy tests eliminated subjectivity in measuring hair loss; however, without controlled and blinded designs, they could not address natural hair loss patterns or bias. Although Pantron argued that historical controls from previous treatment attempts served as valid controls, the studies did not explicitly incorporate such controls nor did they compare results adequately with prior attempts. Dr. Kramer testified that historical controls are unsuitable for hair loss studies due to the unpredictable nature of male pattern baldness. Pantron also highlighted a high success rate in their studies, arguing it could not be solely attributed to the placebo effect, yet their statistical expert acknowledged that comparing placebo rates across studies is inappropriate due to dependency on experimental design. As a result, the studies did not effectively counter the evidence presented by the F.T.C. showing that any perceived effectiveness of the Helsinki Formula was likely due to the placebo effect. The district court determined that the F.T.C. did not prove the Helsinki Formula was entirely ineffective, concluding that a seller could claim product effectiveness based on placebo-driven results. However, the court misinterpreted the law, as the F.T.C. argued that prevailing scientific standards should govern the classification of product effectiveness, contrasting the district court’s findings of some efficacy with a lack of valid scientific evidence for the product's effectiveness.

Contemporary scientific standards are not the sole determinants of "truth" or "falsehood." Historical examples, such as Galileo's theories, illustrate that what was once deemed untrue can be recognized as true today. Similarly, a product's efficacy, if attributed solely to the placebo effect, may mislead consumers despite some experiencing positive results. Under section 12 of the Federal Trade Commission (F.T.C.) Act, an advertisement can be labeled "false" if it is "misleading in a material respect," regardless of the broader definitions of truth. The F.T.C. Act aims to protect consumers from misleading advertisements, not to assess the absolute truth of claims. The court clarifies that the F.T.C. does not need to prove a product is "wholly ineffective" to establish misleading claims; instead, representations based on placebo effects can qualify as false advertising. For example, a court found that a magnetic patch’s therapeutic claims were misleading because any perceived benefits were attributed to the placebo effect. The reasoning indicates that products marketed based on deceptive efficacy claims can harm consumers and lead to economic costs as they make repeated purchases of ineffective products. Thus, the F.T.C. cannot accept psychological reactions that arise from misleading claims as valid proof of efficacy, as this would enable advertisers to exploit consumer trust.

The district court found that the Helsinki Formula lacks effectiveness beyond a placebo effect, rendering Pantron's claims about its ability to combat male pattern baldness materially misleading under Cliffdale Associates. The court's decision, which concluded that the Federal Trade Commission (F.T.C.) had not proven Pantron's claims false, was deemed erroneous. The district court is instructed to remove any allowance for Pantron to state that the Formula is effective "to some extent for some people," as this assertion is misleading and based solely on the placebo effect. The court determined that accompanying disclosures regarding the product's effectiveness, including limitations on hair loss arrest and the lack of support from recognized scientific studies, do not alleviate the misleading nature of Pantron's claims. In fact, such limitations fail to provide full and fair consumer information, as existing scientific evidence contradicts Pantron's claims. Consequently, the district court must modify its injunction to prevent Pantron from making any assertions about the Formula's effectiveness in hair loss or regrowth. Additionally, the court is to eliminate the allowance for Pantron to claim that the Formula was subject to medical investigative work by responsible European physicians, as this misrepresents the efficacy of the Formula. The court emphasized that the misleading nature of these representations is not resolved by disclosing their non-conformance with U.S. standards, as the overwhelming evidence indicates the Formula's ineffectiveness beyond the placebo effect. Pantron cannot cite European studies in advertisements without ensuring that all necessary facts are disclosed to prevent misleading consumers.

Pantron is required to disclose specific information if citing European studies regarding the effectiveness of its hair growth products, including: 1) the stricter medical and scientific standards in the U.S. compared to those of the European studies; 2) findings from U.S. researchers on polysorbate-based products; and 3) the consensus that the Helsinki Formula lacks curative or restorative effects. The Federal Trade Commission (F.T.C.) contends that the district court incorrectly denied restitution or profit disgorgement to consumers, based on flawed legal reasoning. The court's refusal to grant monetary relief must be reversed due to the F.T.C.'s successful demonstration of misrepresentations by Pantron. Section 13(b) of the Federal Trade Commission Act empowers courts to issue permanent injunctions and ancillary relief, including restitution, when misrepresentations lead to consumer injury. The district court found that Pantron falsely claimed scientific support for the Helsinki Formula, which was materially misleading to consumers. Despite this, it denied monetary relief, stating that consumer injuries were merely economic and trivial, relying on inadequate reasoning. The appellate court determined that it is inappropriate to dismiss economic injuries from consideration for restitution, as the purpose of the Act is to protect consumers from such losses. Furthermore, the cumulative effect of many small individual losses constitutes substantial injury, warranting restitution.

A district court's refusal to grant monetary relief against a corporation for false advertising is criticized for allowing unjust enrichment, particularly when the fraudulent conduct impacts many individuals with small amounts. The presence of a money-back guarantee does not legally exempt a seller from monetary remedies, as it could effectively nullify the prohibitions against false advertising. The court cites the Seventh Circuit's decision that such guarantees cannot be used as a defense against section 12 charges, emphasizing that many consumers may not utilize the guarantee, enabling the fraudster to retain illicit profits. Consequently, the court instructs the district court to award monetary equitable relief to the Pantron Corporation based on its unjust enrichment.

Additionally, the district court is found to have abused its discretion in not holding Lederman personally liable for monetary relief. The court's reasoning, which hinged on the F.T.C.'s failure to prove Lederman's knowledge of the dishonesty, is challenged. The F.T.C. argues that knowledge of wrongdoing should not be a prerequisite for restitution. Evidence indicates that Lederman exhibited "reckless indifference" to the truth regarding Pantron's misleading efficacy claims. Notably, Lederman had previously received communications from the F.D.A. indicating a lack of valid scientific support for the products in question, further demonstrating his awareness of the fraudulent nature of the advertisements.

Lederman was aware of a high likelihood that Pantron's claims regarding scientific support for its product were false, due to various investigations and findings from the Postal Service, F.D.A., and the Better Business Bureau. The evidence indicated that Lederman could not have been ignorant of the falsehoods unless he deliberately ignored the truth. Consequently, the district court's refusal to hold him personally liable for monetary relief was deemed erroneous.

In its cross-appeal, Pantron challenged the district court's classification of the Helsinki Formula as a "drug" under 15 U.S.C. § 55(c). Pantron argued that the conclusion was unnecessary for the court's decision and thus should be stricken, but the appellate court found that Pantron had sufficient notice of the issue being litigated, as outlined in the pretrial order. Therefore, the appellate court declined to remove the conclusion solely because it was not essential to the case’s outcome.

Additionally, Pantron contended that the district court erred in determining that the Helsinki Formula met the statutory definition of a drug, arguing that the product's labels and advertisements indicated it was merely a shampoo and conditioner without the intent to alter bodily functions. The appellate court disagreed, affirming the district court's finding that the Helsinki Formula was intended to affect hair growth functions, thus aligning with the statutory definition of a drug.

Pantron cites the case of United States v. An Article of Drug, which determined that Helene Curtis's "Magic Secret" skin lotion was a cosmetic rather than a drug, despite claims that it smoothed wrinkles. The ruling was based on the premise that consumers would perceive the product as offering only temporary, superficial effects. In contrast, Pantron's claims regarding the Helsinki Formula suggest it induces new hair growth in areas devoid of hair, implying a more significant impact on bodily structure and function, thus categorizing it as a drug. The district court's classification of the Helsinki Formula as a drug is upheld.

Pantron also requests double costs and attorneys' fees, arguing the F.T.C.'s appeal is frivolous, but the court finds the F.T.C.'s arguments to have merit and deems Pantron's request for sanctions inappropriate. Sanctions are described as extraordinary remedies not to be sought routinely, with a warning that repeated improper requests may result in sanctions against the requester. The court's judgment is partially reversed and partially affirmed, directing the district court to amend the injunction and impose monetary equitable relief on both Pantron and Lederman. The excerpt concludes with a note on the "placebo effect," illustrating how products without inherent merit can still produce perceived benefits.

The shampoo contains ingredients such as purified water, olefinsulfate, cocamidopropyl betaine, amino oxide, glycerine, chamomile extract, aloe vera gel, allatonin, D-panthenol, propylene glycol, jojoba oil, wheat germ oil, PABA, vitamins A, D, E, biotin, polysorbate 80, nucleic acids, folic acid, keratin protein, polyquaterium 10, citric acid, imidozolidinyl urea, and fragrance. The conditioner includes water, polysorbate 80, polysorbate 60, biotin, propylene glycol, imidozolidinyl urea, niacin, and fragrance.

In February 1987, the Postal Service filed a complaint against Pantron, alleging false claims regarding the effectiveness of their Formula in preventing hair loss and promoting regrowth, leading to a consent order that restricted such claims unless backed by reliable scientific evidence. An FDA inspection in June 1987 resulted in a "Notice of Adverse Findings" due to a lack of competent scientific evidence supporting the efficacy claims on the Helsinki Formula labels. Following this, a search warrant executed by the D.A.’s office in July 1987 asserted that Pantron's claims about the Helsinki Formula were false.

In October 1988, the National Advertising Division requested that Pantron cease making efficacy claims, citing improperly conducted studies. An expert concluded that the likelihood of the effectiveness of the drugs was very low, especially in light of studies showing non-efficacy, which collectively undermined the claims. The F.T.C. highlighted prior court cases and Postal Service decisions indicating that polysorbate-based products from other manufacturers were similarly ineffective in addressing hair loss and regrowth.

Several studies relevant to the efficacy of polysorbate-based products in treating male pattern baldness were reviewed, with key testimonies highlighting their scientific validity. Dr. Kramer identified the Groveman study as "corroborating evidence" against the effectiveness of the Helsinki Formula. Dr. Orenberg praised the Groveman and Shuster studies for adhering to appropriate scientific criteria, while Dr. Ganiats affirmed the Groveman study's design and execution. Dr. Donald Guthrie, the F.T.C. statistician, supported this by stating the study followed good scientific principles and had competent methodology. 

Conversely, Dr. Kramer considered the Shuster study well-designed, suggesting it indicated that polysorbates may not be effective if Pantene lacks inherent qualities. Both Dr. Kramer and Dr. Orenberg criticized the Schreck-Purola and Pons studies for scientific invalidity, lacking placebo controls, and reproducibility. Pantron introduced an uncontrolled study by Dr. Marie, which reported a significant decrease in hair loss among subjects, paralleling methodology with the Pons study.

In the district court's findings, it concluded that the Helsinki Formula likely works for some individuals, equating this with the assertion that its effectiveness is not significantly proven. The court determined that the Helsinki Formula qualifies as a drug under 15 U.S.C. Section 55(c). Pantron and Lederman's cross-appeal did not challenge the injunction issued by the district court. The court also noted that it need not address whether material misrepresentation must affect consumer choices, as established in previous F.T.C. rulings.

The document addresses a case involving express objective product claims, emphasizing that the reasonable consumer standard is not being assessed as it pertains to these claims. It refrains from determining whether Section 12 of the relevant statute requires consideration from the perspective of a reasonable consumer or merely whether a substantial number could be misled. 

A non-exclusive list of practices deemed misleading or deceptive is provided, including false representations, misleading price claims, and inadequate disclosures about product safety. The Policy Statement also highlights that advertising lacking a reasonable basis is considered deceptive. 

The author expresses confusion over the abandonment of the reasonable basis theory by the Commission, arguing that applying established factors would necessitate that Pantron provide controlled clinical evidence for the Helsinki Formula’s effectiveness. This need arises from the nature of the product claims, the challenges consumers face in evaluating such claims, the potential economic harm from false advertising, and the consensus among experts on requiring clinical tests. 

Furthermore, the document notes that three doctors have rejected a specific theory regarding the Helsinki Formula's mechanism, although one doctor acknowledged it as an interesting theory that might have implications for male pattern baldness progression. Despite these findings, the decision does not rely on the failure to meet the reasonable basis requirement, considering the F.T.C.'s representations during the trial and appeal.

Dr. Kramer rejected reliance on the Helsinki Formula, stating there is "no reason to believe" in its effectiveness based on literature review. The Groveman study, despite its design imperfections, supports the consensus among medical experts per the F.T.C., as it was a placebo-controlled, double-blinded, randomized trial published in a peer-reviewed journal. The district court dismissed this study for not testing the exact Helsinki Formula and for possibly having an inadequate sample size. However, these criticisms also apply to Pantron's studies, which the court deemed supportive of the Formula's efficacy despite similar design flaws. Testimony indicated the Groveman study was more scientifically reliable than Pantron’s studies. The Pons study, while noting participant product histories, had major flaws including reliance on self-reporting and lack of reproducibility. Given the strong placebo effect, physicians testing the Helsinki Formula would not be better positioned to assess its effectiveness than those reviewing studies. Thus, the court erred in discounting the F.T.C.'s expert testimony based on their lack of direct testing of the Formula, as Pantron's experts had also not tested the exact product sold. The term "no scientifically valid evidence" used by the district court referred to the absence of rigorous clinical studies and the prevailing scientific opinion that polysorbate products are ineffective apart from their placebo effects. This finding does not contradict the court's assertion that the Helsinki Formula may be effective for some individuals due to the placebo effect. The F.D.A. has indicated that claims of effectiveness based solely on placebo effects are unsupported, deeming all claims for OTC hair growth products false or misleading.

Pantron attempts to justify its advertising claims based on the placebo effect, citing only one case, F.T.C. v. Simeon Management Corp., which does not support its argument. In Simeon Management, the court denied a preliminary injunction against a weight loss clinic because the overall program was proven effective, despite the ineffectiveness of a specific drug used. In contrast, substantial evidence indicates that Pantron's hair-growth program is entirely ineffective and relies solely on an ineffective product.

The district court's granting of equitable relief is subject to review for abuse of discretion or legal error. Pantron contends that the district court found the F.T.C. failed to prove actual deception; however, the legal standard requires only misrepresentations that reasonable people would rely on, not actual deception. The district court found that Pantron made significant misrepresentations about the scientific support for its claims, which were material.

Upon remand, the district court must determine appropriate monetary relief, including the possibility of alternative remedies if it cannot reimburse all affected consumers. Such remedies should aim to benefit consumers directly. Lederman's assertion that he acted honestly because the Helsinki Formula was deemed effective is undermined by the district court's finding of misrepresentation and Lederman's knowledge of it, which establishes his personal liability.

Pantron's claim that the district court's findings were irrelevant is incorrect, as the applicability of Section 12 of the F.T.C. Act requires the determination of whether the Helsinki Formula qualifies as a drug. The district court's conclusion on this matter, while not essential, is relevant. Finally, the discussion around the concept of "dictum" is acknowledged but not essential to the current case.