Fed. Trade Comm'n v. Quincy Bioscience Holding Co.
Docket: 17 Civ. 124 (LLS)
Court: District Court, S.D. Illinois; July 24, 2019; Federal District Court
Plaintiffs, the Federal Trade Commission (FTC) and the State of New York, allege violations of the Federal Trade Commission Act and state law due to deceptive advertising of the dietary supplement Prevagen, which claims to enhance memory. Defendants seek dismissal of the complaint on grounds of failure to state a claim and lack of personal jurisdiction over co-founders Mark Underwood and Michael Beaman. The court partially grants and partially denies this motion.
Defendant Quincy Bioscience Holding Company, Inc., based in Wisconsin, has subsidiaries including Quincy Bioscience, LLC, Prevagen, Inc., and Quincy Bioscience Manufacturing, LLC. Underwood and Beaman, who hold significant shares (33% and 22% respectively), serve as President and CEO. Prevagen, containing the protein apoaequorin derived from jellyfish, has generated $165 million in sales from 2007 to mid-2015 and is marketed through various channels with claims of improving memory and cognitive function.
The advertising cites the Madison Memory Study, a clinical trial involving 218 participants that compared Prevagen to a placebo over 90 days. However, the study did not demonstrate statistically significant benefits for the treatment group across nine cognitive tasks. Although some positive results were noted in smaller subgroups, most analyses lacked statistical significance. Additionally, the defendants’ claims suggest that apoaequorin can enter the brain to mitigate age-related protein loss; however, there is no evidence supporting that orally ingested apoaequorin crosses the blood-brain barrier, with studies indicating it is digested in the stomach like other dietary proteins.
Defendants sought to dismiss the complaint on multiple grounds, including insufficient allegations of violations under the FTC Act and New York law, claims of unconstitutional restraint on commercial speech, the FTC's lack of quorum to authorize the action, and issues regarding personal jurisdiction and individual liability for Mr. Underwood and Mr. Beaman. The court dismissed the complaint for failure to state a claim under the FTC Act and declined to exercise jurisdiction over the New York claims. The Second Circuit later vacated this ruling, allowing the court to reconsider the dismissal based on arguments not previously addressed. Defendants have since withdrawn the argument regarding commercial speech and are now focusing on the validity of the FTC quorum, personal jurisdiction over the individuals, and their individual liability.
Regarding the FTC quorum, the FTC has five seats, with three appointed at the time the lawsuit was authorized. Defendants argue that a majority of three is necessary for a valid quorum, asserting that only two Commissioners voted in favor of the complaint, thus rendering the action ultra vires. However, the definition of quorum pertains to the number of members present for decision-making, not the total authorized. FTC rules stipulate that a majority of currently serving members constitutes a quorum. Since three Commissioners were in office and none were absent during the voting, the court finds that the actions taken were valid due to the presence of a quorum.
The court's outcome remains unchanged regardless of a 'not participating' member's opposition to filing the Complaint, as a majority vote of two to one supports it. The defendants, Mr. Underwood and Mr. Beaman, contest the court's personal jurisdiction over them, asserting they are non-residents of New York and have no direct business dealings in the state. The plaintiffs counter that the defendants' connections to New York are irrelevant due to section 13(b) of the FTC Act, which allows for nationwide service and personal jurisdiction. This section empowers the court to grant injunctive and equitable relief for FTC law violations and permits service wherever the defendant is located. The plaintiffs reference case law underscoring that Congress intended to allow nationwide jurisdiction, as seen in the language permitting service "wherever the defendant may be found." Furthermore, under Federal Rule of Civil Procedure 4(k)(1)(C), personal jurisdiction can be established through service authorized by federal statutes. The defendants argue that the FTC must demonstrate proper venue in the district before invoking nationwide service. They cite Daniel v. American Board of Emergency Medicine to support their claim that the service provision applies only if its venue requirement is met.
Section 12 of the Clayton Act permits lawsuits against corporations to be filed in the district where the corporation resides or conducts business, allowing for service of process in those locations. The Second Circuit clarified that "in such cases" refers specifically to those cases qualifying for venue under the preceding clause, thereby enabling worldwide service of process for these actions. In contrast, the RICO Act separates its venue and service of process provisions, allowing service in any action without the same limitations as the Clayton Act. The FTC Act mirrors RICO's structure, as it does not confine the service of process provision to cases satisfying the venue criterion; instead, it allows nationwide service for any suit under its relevant section concerning false advertising and related remedies. This means that in actions under the FTC Act, the focus is on minimum contacts with the United States rather than with a specific state, affirming that defendants with minimal contacts within the U.S. can be subjected to federal jurisdiction, as noted in relevant case law.
Jurisdictional issues arising from federal statutory grants authorizing lawsuits under federal-question jurisdiction with nationwide service of process invoke the Fifth Amendment. The Second Circuit mandates that the minimum-contacts test focuses on the defendants' connections with the entire United States rather than a specific state. Established precedent indicates that federal jurisdiction, conferred by statutes allowing nationwide service, subjects defendants to personal jurisdiction irrespective of state long-arm statutes. For constitutional validity, defendants must have minimum contacts with the United States, and the assertion of jurisdiction must be reasonable and align with traditional fair play and justice principles.
In the context of the FTC Act, which permits nationwide service of process, a federal district court has personal jurisdiction over defendants with sufficient contacts across the U.S. Mr. Underwood and Mr. Beaman, who control companies based in Wisconsin, acknowledge their potential personal jurisdiction in Wisconsin and do not contest their overall contacts with the United States. They also concede that service in this case was proper.
The court must evaluate whether asserting personal jurisdiction meets fairness and justice standards. Given the national distribution of advertisements linked to the case, there is no evidence suggesting that exercising personal jurisdiction would be unreasonable. The defendants further claim that personal jurisdiction does not extend to state law claims under New York law; however, the doctrine of pendent personal jurisdiction allows for jurisdiction over related state claims when they arise from a common nucleus of operative fact tied to the federal claims. Since both federal and state claims relate to the same alleged false advertising of Prevagen, personal jurisdiction is affirmed over both Mr. Underwood and Mr. Beaman for claims under the FTC Act and New York statutes. They also maintain that the Complaint does not sufficiently state a claim for their individual liability under the applicable laws.
An individual can be held liable under the Federal Trade Commission Act (FTCA) for a corporation's deceptive practices if they knowingly participate in or have authority over those practices. Under New York Executive Law and General Business Law, corporate officers may also be liable for participating in or having knowledge of fraudulent activities. The Complaint asserts that Mark Underwood, as co-founder and President of Quincy and its affiliates, has the authority to control their advertising practices. He is the largest shareholder with 33% ownership and serves as the final decision-maker on advertising claims. Underwood's roles include being part of the marketing team, coordinating advertising language reviews, translating scientific data for marketing, directing research, and participating in infomercials promoting Prevagen. His direct involvement and decision-making roles support the inference that he was aware of the deceptive nature of the advertisements.
Conversely, while Michael Beaman has authority as a co-founder, former President, and current CEO of Quincy and its affiliates, the Complaint fails to adequately demonstrate his participation in or knowledge of the deceptive acts. His actions, such as giving media interviews and pre-approving research proposals, do not sufficiently establish that he was aware of the misleading nature of the advertising. Consequently, claims against Beaman are dismissed but may be repleaded with additional supporting facts. The motion to dismiss claims against Underwood is denied, while Beaman's motion is granted with leave to amend.
