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Fed. Trade Comm'n v. Roca Labs, Inc.
Citation: 345 F. Supp. 3d 1375Docket: Case No: 8:15-cv-2231-T-35TBM
Court: District Court, M.D. Florida; September 14, 2018; Federal District Court
The Court has granted the Federal Trade Commission's (FTC) Amended Motion for Summary Judgment against all defendants, while denying the defendants' Amended Motion for Partial Summary Judgment concerning Count Three of the Amended Complaint. The FTC, an independent U.S. agency, enforces sections of the FTC Act that prohibit unfair or deceptive practices and false advertising. The defendants include five corporate entities and two individuals, Don Juravin and George Whiting, who have significant ownership and operational roles in the corporations. The FTC's allegations stem from deceptive marketing practices related to weight-loss products sold by the defendants, which purportedly violated the FTC Act. The FTC filed the initial action in September 2015, subsequently obtaining a temporary restraining order and various injunctions to protect assets while litigation was ongoing. Since 2009, the defendants have claimed to sell weight-loss products, generating at least $20 million in revenue, marketed as alternatives to gastric bypass surgery. Defendants promoted their products using the terms "Gastric Bypass No Surgery" and "Gastric Bypass alternative," accompanied by illustrations demonstrating product use. They claimed safety for children as young as six, recommending parental supervision and medical consultation. Marketing efforts included the Roca Labs Websites, RocaLabs.com and Mini-Gastric-Bypass.me, along with online advertisements. Promotional videos asserted that the Roca Labs Formula mimics gastric bypass effects by filling the stomach to reduce food intake. The websites featured a "Letter to Your Doctor" claiming benefits and scientific backing, attributed to Dr. Ross Finesmith, who discussed the product's efficacy. Medical imagery and terminology were used to enhance credibility, while fine print in the "Terms and Conditions" acknowledged the absence of clinical studies on the product. Testimonials, labeled "Success Videos," were solicited from customers with the promise of up to $1,000 for meeting specific criteria, yet the payments were undisclosed. Defendants also failed to reveal their connection to Gastricbypass.me, a site promoting Roca Labs products alongside bariatric surgery discussions. The basic package of Roca Labs products was advertised at $480 with insurance and $640 without, including supplies for several months. Consumers wishing to purchase Roca Labs products were required to fill out a confidential "Questionnaire" or "Health Application" addressing various health conditions and psychological issues related to weight. Upon shipping, customers received documents affirming the confidentiality of their information, a warning against returns or refunds, and potential legal consequences for canceling installment payments. The "Roca Labs Procedure Rules. Diet" provided specific dietary guidelines and lifestyle recommendations to maintain weight loss effects. Since September 2012, a non-disparagement clause in the Terms and Conditions restricted customers from making negative comments about the products, with financial penalties for breaches, including a $100,000 fee for disparaging remarks in an earlier version and a $3,500 fee in a later version. The FTC's complaint against Roca Labs includes seven counts, with Count I alleging deceptive weight-loss claims, asserting that the products enable significant weight loss, are comparable to bariatric surgery, and are purportedly safe for children as young as six. The FTC alleges that the defendants made false or misleading representations regarding their products, violating Sections 5(a) and 12 of the FTC Act (15 U.S.C. 45(a) and 52). In Count I, the FTC claims these representations constitute deceptive acts and false advertising. Count II addresses a specific false establishment claim regarding the defendants' assertion of a ninety percent success rate for their products, which the FTC contends is misleading. Count III alleges the use of a non-disparagement clause in product sales constitutes unfair acts under Section 5 of the FTC Act. Count IV claims the defendants misrepresented Gastricbypass.me as an independent resource, labeling this as deceptive advertising. Count V points out that the defendants failed to disclose that individuals in their advertisements were compensated and that they own Gastricbypass.me. Count VI involves a deceptive privacy claim, asserting that the defendants' claim of confidentiality regarding consumer information is false. Count VII challenges the defendants' representation of a discount condition tied to negative reviews as deceptive. The FTC filed an amended motion for summary judgment on all claims, while the defendants sought partial summary judgment for Count III. Summary judgment is applicable when no genuine issue of material fact exists, with the moving party bearing the burden to demonstrate this. Evidence is assessed favorably for the non-moving party in summary judgment motions. The moving party must demonstrate the absence of evidence supporting the non-moving party’s claims. Once this burden is met, the non-moving party must present specific facts through affidavits, depositions, or other means to show a genuine issue for trial. Conclusory statements without factual support are insufficient. If a party does not adequately support its claims or respond to opposing assertions, the court may grant summary judgment. The review standard for cross-motions for summary judgment remains the same, focusing on whether either party is entitled to judgment based on undisputed facts, and cross-motions can indicate a lack of factual dispute if both parties agree on legal theories and material facts. The document also discusses deceptive and false advertising under the FTC Act. Section 5(a) prohibits unfair or deceptive practices, while Section 12 specifically forbids false advertisements related to various commercial goods. A violation of Section 12 constitutes a violation of Section 5(a). A "false advertisement" is defined as misleading in a material respect. To establish liability, the plaintiff must prove that there was a misleading representation that was material and likely to mislead reasonable consumers. The court evaluates the claims made in the advertisement and how consumers interpret them, considering the overall impression conveyed. The FTC can show misleading representation through either falsity or lack of reasonable substantiation for the claims made. The FTC can establish the materiality of a representation by showing that a reasonable prospective buyer would likely rely on it. Material claims include express assertions, intentionally implied claims, and those related to health and safety, which are presumed material. In the case against the Defendants regarding their weight-loss claims, the FTC asserts these claims are false and deceptive. The Defendants do not dispute the existence or materiality of these claims, leading the Court to focus on whether consumers would likely be misled by the advertisements. The FTC argues the claims are deceptive due to their falsity and the Defendants' lack of reasonable substantiation. The Court finds that the Defendants’ claims are inherently material, as they relate to health and weight loss, and were presented with misleading medical imagery and terminology to enhance credibility. The FTC has demonstrated that the claims are false and likely to mislead consumers, as the Defendants failed to provide competent scientific evidence to substantiate their claims. Expert testimony from Dr. Steven Heymsfield indicates that credible weight-loss claims require well-designed clinical trials, specifically double-blind and placebo-controlled studies, to validate efficacy. The Defendants argue that such trials are not necessary for competent scientific evidence, citing a legal precedent. However, the Court maintains that the lack of sufficient evidence supports the FTC's position for summary judgment on the matter. The Government sought a contempt order against Bayer for allegedly violating a consent decree by failing to provide randomized controlled trials (RCTs) as competent scientific evidence for its advertising claims. The court determined that there was no legal obligation for Bayer to provide RCTs as part of the consent decree and ruled that the Government did not meet its burden of proof. However, the current case differs both procedurally and factually, as the moving party is not contesting a consent decree that would require clear and convincing evidence of a violation. The FTC retains the authority to demand RCTs and challenge claims lacking them, using their absence as part of the overall assessment of evidence. Defendants did not present competent and reliable scientific evidence to support their claims. A clinical trial conducted by the Center for Applied Health Sciences in September 2015 showed no significant weight loss among participants using Roca Labs products, and Dr. Heymsfield concluded the trial design was flawed, lacking competent evidence. Furthermore, scientific articles cited by Roca Labs did not substantiate their claims. Defendants submitted an affidavit from Dr. Marcus Free, a newly appointed medical director, claiming the Regimen is superior to bariatric surgery; however, his qualifications in obesity treatment were not established, rendering his opinion insufficient as reliable scientific evidence. Regarding Count II, the FTC demonstrated that Defendants' claim of a ninety-percent success rate for their Formula and Anti-Cravings products in reducing food intake and inducing weight loss is false. This claim is classified as an establishment claim, which requires a high level of scientific proof, as outlined in case law. Advertisers must possess evidence that meets the standards of the scientific community to substantiate such claims. Defendants have made the unsubstantiated claim that their products are "scientifically proven" without providing any supporting evidence, failing to demonstrate any valid clinical studies. This lack of evidence renders the claim false and misleading to consumers, leading to material misrepresentations as established by the FTC. The FTC is entitled to summary judgment on Counts I and II due to the absence of reliable scientific evidence backing the Defendants' claims, with no dispute raised by the Defendants. In relation to Counts IV and V, the FTC asserts that Defendants misled consumers by not disclosing that testimonials were made by compensated individuals and that they owned the website Gastricbypass.me, which was presented as an independent resource. Evidence shows that the Defendants paid individuals for positive testimonials and did not disclose their affiliation with the website. The creator of Gastricbypass.me admitted to using the site to mislead consumers about gastric bypass surgery and did not disclose the association with Roca Labs. All favorable discussions on the site pertained exclusively to Roca Labs products without any affiliation disclosure. Additionally, it was revealed that purported satisfied customers featured in promotional videos were actually Defendants' employees, who were directed to create fictitious reviews and social media posts without revealing their connection to Roca Labs. Employees were instructed to post positive comments regularly, further entrenching deceptive advertising practices. The FTC thus maintains that these material misrepresentations or omissions would likely influence consumer purchasing decisions. Defendants acknowledge that Gastricbypass.me did not disclose its affiliation with RLI but contend that Roxie's testimonial is valid because her weight loss occurred before her employment. However, the timing of her weight loss is irrelevant to the failure to disclose the financial connections between Defendants and the testimonial providers. The FTC asserts that Defendants did not reveal their ownership of Gastricbypass.me, their self-review practices, or their financial relationships with testimonialists. This lack of disclosure is significant, particularly as it relates to health and weight loss claims that influence consumer decisions about purchasing Roca Labs products. The Court finds that the FTC has adequately shown Defendants made material misrepresentations and omissions, warranting summary judgment on Counts IV and V. In regard to Count VI, the FTC is also granted summary judgment due to Defendants' failure to uphold their promise of confidentiality regarding customers' health information. Customers provided sensitive personal data through a Health Application, which Defendants assured would remain private. Contrary to this promise, Defendants disclosed customers' sensitive information to payment processors and in response to disputes over credit card charges. Defendants admit to sharing this data, arguing it was necessary to address disputes, yet this does not negate their obligation to maintain confidentiality. Defendants argue that their 2014 Terms and Conditions assured customers that their information would not be shared or sold, provided there was no breach of the Terms. However, the Court finds these claims unsubstantiated, as Defendants failed to present evidence that customers' personal health information was publicly accessible or that sharing such information was necessary for addressing credit card disputes. Additionally, the relevant Terms and Conditions cited by Defendants were dated June 2014, while Alice King and the Broward Customers had purchased products before this date. Consequently, the Court concludes that Defendants' claims regarding customer privacy were materially false, granting the FTC summary judgment on Count VI under Section 5(a) of the FTC Act. In Count VII, the Court also grants the FTC summary judgment regarding Defendants' discount claim. Defendants misrepresented to consumers that they agreed to pay significantly more for Roca Labs products contingent upon not posting negative reviews. Although Defendants contend that customers were informed of the discount and its conditions, they failed to disclose that the actual price was $480 without mentioning the discount or its implications in their advertisements. Instead, their promotional materials prominently displayed the price as $480, misleading consumers regarding potential costs and obligations. The Court finds that Defendants’ overall pricing representation was deceptive, reinforcing the FTC's entitlement to summary judgment. Defendants advertise the "Roca Labs Formula" starting at $480, with various package options ranging from $480 to $1,080, reflecting product quantity and customer service levels. Numerous online advertisements reinforce this price, prominently displaying "$480" without disclaimers indicating that this price might be contingent upon customers agreeing to refrain from negative comments. The overall impression created is that the price stands at $480 without any conditions. The disclaimer in the Terms and Conditions, which was accessible via a hyperlinked page located at the bottom of the website, does not effectively mitigate this impression. Customers were not required to read these Terms before purchasing, and if they did access them, the disclaimer regarding the pricing conditions was inconspicuous among extensive legal language. This lack of visibility parallels previous legal findings where disclosures in separate hyperlinks were deemed insufficient to counter deceptive marketing practices. Defendants' advertising, which emphasizes the $480 price without clarifying limitations, misleads consumers into thinking they can purchase at "full" price while retaining the freedom to express negative but truthful opinions about the products. This misrepresentation is deemed material and deceptive, as it concerns crucial information regarding product pricing and consumer rights. Customers may be misled into believing they agreed to refrain from posting negative comments by paying a discounted price, despite not having explicitly consented to such an agreement. The Court grants the FTC summary judgment on Count VII regarding this issue. In Count III, the FTC argues that the defendants' gag clause, which prohibits negative comments about their products, constitutes an unfair practice under Section 5 of the FTC Act. The defendants contend that the clause is not illegal and assert they had no fair notice of its unfairness. However, the Court finds the defendants' arguments unconvincing. The defendants assert that the gag clause was part of a valid contract, as customers clicked to agree to the terms before purchase. Nonetheless, the enforceability of the contract itself is not in question; the focus is on whether the gag clause practices are deemed unfair under the FTC Act. Under Section 5, an act is unfair if it causes substantial consumer injury that is not avoidable and is not outweighed by benefits. The FTC alleges that restricting negative reviews likely causes substantial injury by limiting consumer information and inflating perceptions of product quality. Dr. Paul Pavlou, an expert witness, supports this claim, stating that the suppression of negative reviews misleads potential customers, leading them to purchase products that may not meet their expectations. The Court finds that the FTC has established that the defendants' practices related to the gag clause are unfair. Juravin testified to paying $40,000 to a company to suppress negative comments that he claimed hurt Defendants' sales by at least the same amount. The FTC alleges that Defendants' threats of legal action against customers who complained, especially to the Better Business Bureau or online, caused significant harm. Customer Marie McGaha noted that prior to her purchase of Roca Labs products, she found no negative reviews. After her negative experience with the product, which led her to seek a refund that was denied, she wrote a blog post that prompted legal threats from Defendants, including accusations of defamation, tortious interference, and extortion, which pressured her to remove her blog. Following this, she ceased her complaint to the Better Business Bureau due to fear of litigation. Another customer, Amina Di'Leonardi, withdrew her complaint with the Better Business Bureau after receiving threats from Defendants regarding her pursuit of a refund. Joyce Agbetunsin also reported being threatened with a lawsuit after expressing doubts about the product's legitimacy and seeking a refund. She eventually abandoned her complaint due to the aggressive nature of the threats, without receiving her refund. Defendants argue that the FTC failed to provide evidence of tangible harm, yet they do not substantiate their claim that the FTC must demonstrate such harm. Defendants reference the legislative history of the FTC Act, indicating that substantial injury typically involves monetary harm or significant health and safety risks, while emotional harm alone is insufficient to constitute an unfair injury. However, the law does not necessitate proof of tangible harm over intangible harm. The FTC is not required to demonstrate actual harm, as unfair conduct can exist prior to any injury, as established in FTC v. Wyndham Worldwide Corp. The Court finds that Defendants’ suppression of negative product information likely caused substantial injury to consumers, supported by testimonies indicating that consumers paid significant amounts for Roca Labs products without receiving refunds due to intimidation tactics related to a gag clause. The FTC asserts that Defendants' practices create injury that is not reasonably avoidable since prospective customers often lack access to negative reviews. A consumer's declaration illustrates that her purchasing decision was influenced by the absence of negative feedback. Defendants failed to provide evidence that their practices did not hinder the availability of such reviews, instead arguing that consumers could have avoided injury by reading the contract or exploring alternative programs, which the Court deems irrelevant because the focus is on the unfair practices, not the clause itself. Finally, the FTC argues that there are no countervailing benefits to consumers or competition that outweigh the injuries from Defendants' practices. The evidence presented shows consumer injuries due to the lack of negative reviews, while Defendants only claim benefits from the product's effectiveness and argue for a required cost-benefit analysis, which the FTC has not provided. Defendants argue that the statute mandates a comparison of (1) the Relevant Costs, which include expenses related to false negative reviews and compliance with an order against the disparagement clause, against (2) the Relevant Benefits, defined as the consumer injuries associated with enforcing the disparagement clause. Their argument is rejected for two main reasons: first, they misinterpret the claim's focus, which pertains to the unfairness of their gag clause practices rather than the benefits of their products. Second, the court finds no requirement for a detailed cost-benefit analysis under 15 U.S.C. § 45(n), as prior case law does not support such a necessity. The cited case, Wyndham Worldwide Corp., clarified that while cost-benefit analysis can be relevant, it does not require quantitative precision, and in that instance, no such analysis was presented. The FTC has demonstrated that Defendants' practices regarding the gag clause were unfair, leading to the conclusion that only the FTC is entitled to summary judgment, while Defendants' motion for partial summary judgment on Count III is denied. Regarding the fair notice doctrine, Defendants claim that the FTC's unfairness allegation is invalid due to a lack of fair warning about the interpretations being applied. They assert they were unaware that intangible injuries could be deemed substantial under the statute, arguing that FTC communications did not provide sufficient clarity. The court finds these claims unconvincing, noting that the FTC's policy statement on unfairness clearly indicates that only substantial injuries are relevant, dismissing Defendants' arguments about the need for "ascertainable certainty." Substantial injury typically entails monetary harm, such as coercion in sales or inability of consumers to assert claims against creditors for defective goods. Health and safety risks can also contribute to a finding of unfairness, while emotional or subjective harms usually do not. The FTC's Policy Statement on Unfairness clarifies that an injury can be considered substantial if it affects a large number of people or poses a significant risk of concrete harm. The statement does not exclude intangible injuries from this definition. The Court dismisses Defendants' argument regarding the fair notice doctrine, noting that the FTC has not significantly altered its enforcement guidelines. Under Section 13(b) of the FTC Act, the FTC seeks permanent injunctive relief and monetary relief against the Defendants. The Court agrees that a permanent injunction is justified due to a credible risk of recurring violations, given Defendants' history of deceptive practices and current marketing strategies. Juravin’s testimony revealed ongoing promotion of products under a different brand while maintaining similar formulas. The Court finds a continuing danger of violations exists, warranting an injunction against Defendants' deceptive practices. The FTC is entitled to monetary relief for consumer redress, including disgorgement of profits. The proper measure for calculating damages is the defendants' unjust gains, defined as net revenue (gross receipts minus refunds). Defendants' proposed calculation method, based on customer complaints to the Better Business Bureau, is rejected in favor of the FTC's method per Eleventh Circuit precedent. The calculation of damages involves multiplying the number of affected customers by the average selling price of the Roca Labs Product, then adjusting for customers who did not complain but felt the product did not work, ultimately applying a multiplier of twenty-five. Defendants argue this method aligns the disgorgement with customer experiences, but the Court disagrees, referencing Eleventh Circuit precedent that emphasizes measuring disgorgement based on unjust gain rather than consumer loss. The Court concludes that damages should be calculated as gross sales revenue minus customer refunds. The FTC claims net revenue of $25,246,000 from gross sales of $26.6 million, supported by corporate tax returns and affidavits. However, the FTC’s stated customer refund amount of $1,354,000 lacks sufficient evidentiary backing, as it is only described as a "reasonable approximation" without reference to specific internal records or documentation. This absence of evidence prevents the Court from validating the FTC’s approximation of unjust gains. Consequently, the Court cannot determine the disgorgement amount until more evidence is presented. Additionally, the Court finds Juravin and Whiting individually liable for the Corporate Defendants' deceptive actions. To establish individual liability for corporate acts, the FTC must show that the businesses operated as a common enterprise, assessed through factors like shared employees, common control, and shared office space. The Corporate Defendants, comprised solely of Juravin and Whiting, engaged in sharing funds and marketing efforts. Juravin owns MCO and JI and has held officer positions in RLI and RLNU, while Whiting has ownership and officer roles in RLI, RLNU, and ZCL. Evidence indicates that funds were comingled, with MCO's revenues from 2014 and 2015 reported on RLI's tax returns, and JI's income derived from RLI, RLNU, or MCO during the same period. The FTC has proven that the Corporate Defendants operated as a common enterprise. To hold Juravin and Whiting accountable, the FTC must show their awareness of deceptive practices, either through direct participation or control. Juravin demonstrated knowledge of material misrepresentations, asserting responsibility for all content on the corporate website and controlling significant aspects of the businesses, including operations, marketing, and finances. From 2009 to 2015, he received around $7 million from the Corporate Defendants and managed their main checking accounts, authorizing expenditures and transferring funds between entities, often for personal expenses. Whiting also exhibited knowledge of the deceptive acts, acknowledging awareness of customer complaints and lawsuits against the Defendants. His role as an owner and officer, alongside his involvement in bookkeeping and tax preparation for the entities, further establishes his authority over the deceptive practices, as evidenced by his portrayal as president on the Roca Labs website. Whiting received $42,000 in director's fees and had a more limited role compared to Juravin, although he was informed by Juravin about matters requiring RLI corporate approval. Whiting's discussions with Juravin were primarily about advertising expenditures. The FTC holds Whiting liable for injunctive relief due to his awareness of deceptive practices and his authority as a corporate officer. The court denied the defendants' motion for partial summary judgment but granted the plaintiff's motion regarding liability, pending further evaluation of damages. The plaintiff must submit a supplemental memorandum detailing specific refunds related to the disgorgement amount within twenty-one days, followed by a response from the defendants in fourteen days. The case is administratively closed pending these submissions. The record does not show that defendants billed health insurance companies, and their referenced research articles lack expert qualifications. Customer declarations indicate a lack of communication regarding restrictions on product criticism. The court rejected the defendants' claim of full compliance with the preliminary injunction, asserting no factual basis for their jurisdiction argument. Additionally, a Certified Fraud Examiner estimated that the defendants made approximately $9.7 million in gross sales and issued nearly $1 million in refunds.