F.T.C. v. Direct Marketing Concepts, Inc.

569 F.Supp.2d 285

FEDERAL TRADE COMMISSION, Plaintiff, v. DIRECT MARKETING CONCEPTS, INC., d/b/a Today's Health and Direct Fulfillment, ITV Direct, Inc., d/b/a Direct Fulfillment, Donald W. Barrett, Triad ML Marketing, Inc., King Media, Inc., Allen Stern, Lisa Stern, Steven Ritchey, and BP International, Inc., Defendants.

Civil Action No. 04-11136-GAO.

United States District Court, D. Massachusetts.

July 14, 2008.

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Edward Glennon, James A. Trilling, Kial S. Young, Shira D. Modell, Federal Trade Commission, Washington, DC, Heather Hippsley, Federal Trade Commission, Washington, MA, for Plaintiff.

Christopher F. Robertson, Peter S. Brooks, Susan W. Gelwick, Seyfarth Shaw, LLP, Joseph F. Ryan, Lyne, Woodworth & Evarts LLP, Boston, MA, for Defendants.

OPINION AND ORDER

O'TOOLE, District Judge.

The Federal Trade Commission ("FTC") has brought this action to remedy alleged violations by the defendants of sections 5(a) and 12 of the Federal Trade Commission Act ("FTC Act"), 15 U.S.C. §§ 45, 52, in connection with the production and dissemination of two "infomercials" and the sales of the products advertised in those infomercials. See 15 U.S.C. §§ 53(a)-(b), 57b (permitting the FTC to initiate federal court actions to enforce violations of section 5 and 12). The complaint focuses on two particular infomercials—one for a product marketed and sold as "Coral Calcium Daily" ("Coral Calcium") and one for a product marketed and sold as "Supreme Greens with MSM" ("Supreme Greens"). Both are herbal dietary supplements.

The FTC has moved for summary judgment (dkt. no. 130) against all defendants on all counts of the complaint. The FTC has also moved to strike (dkt. no. 157) portions of the defendants' materials submitted in support of their opposition to the motion. Upon consideration of the issues presented, as explained herein I GRANT in part and DENY in part the FTC's motion for summary judgment. In a separate Order, I also GRANT in part and DENY in part the motion to strike.

I. The Defendants

The complaint alleges that seven defendants participated in violating the FTC Act. These so-called "liability defendants" are: (1) Direct Marketing Concepts, Inc. ("Direct Marketing"), (2) ITV Direct, Inc. ("ITV"), (3) Donald W. Barrett, (4) Robert Maihos, (5) Allen Stern, (6) King Media, Inc. ("King Media"), and (7) Triad ML Marketing ("Triad"). In addition, the complaint seeks relief from three other defendants (referred to as the "relief defendants"), Lisa Mount,¹ Steven Ritchey, and BP International, Inc. ("BP International"), for their receipt of proceeds derived from the infomercials.

The FTC claims that Direct Marketing produced the Coral Calcium infomercial and that ITV produced the Supreme Greens infomercial. Those two companies also provided customer service for the two infomercials. Although Direct Marketing and ITV are separate corporations, they are commonly owned and operated by Donald Barrett and Robert Maihos. The FTC alleges that Barrett, as president and director of both Direct Marketing and ITV, oversaw the production of the infomercials and was ultimately responsible for their content as well as the content of related brochures, packaging inserts, and other sales materials. As vice president at Direct Marketing, Robert Maihos oversaw the shipping and customer service departments and the company's finances, while at ITV he acted as treasurer and vice president, overseeing its merchant account.² Maihos had authority to enter into contracts on behalf of both companies. (Maihos Dep. 12:16-14:25.)

Between January 2002 and February 2003, Triad functioned as the processing intermediary between Direct Marketing and its consumers. In this role, Triad allowed Direct Marketing to use its "merchant account" so that individual consumers purchasing Coral Calcium via personal credit cards could be processed. (Stern Dep. 28:4-7.) Triad received fifty percent of the net profits from sales generated by the Coral Calcium infomercial as compensation for its services. (Ritchey Dep. 22:10-23, 36:11-21.) Furthermore, as part of its agreement with Direct Marketing, Triad also exerted some editorial influence over the Coral Calcium infomercial.

Direct Marketing contracted with King Media to purchase the television air time for Coral Calcium, from approximately December 2001 to March 2003.³ (Id. 21:11-25, 35:9-12.) As compensation, King Media earned "upwards of 15 percent" commission from Direct Marketing. (Id. 22:1-9; Stern Dep. 26:14-16.)

Allen Stern is the president and chief executive officer of both Triad and King Media. Stern owns sixty-six percent of King Media (with the other thirty-three percent owned by relief defendant Steven Ritchey). Stern actively conducted the businesses of both Triad and King Media. (Stern Dep. 71:17-73:20.)

As noted above, Lisa Mount, Steven Ritchey, and BP International are only sued as relief defendants. Although the FTC does not claim that Mount, Ritchey, or BP International are themselves liable for any wrongdoing, it does claim that they were unjustly enriched by receipt of proceeds from the infomercial to which they have no legitimate claim. Lisa Mount owned approximately thirty-three percent of both King Media and Triad from 1996 to about 2003, at which point she relinquished her ownership positions as part of her divorce settlement with Allen Stern. (Stern Dep. 19:1-4.) The FTC seeks to reclaim $1,545,305 from Lisa Mount, which represents the total of her Subchapter S distributions from Triad for the year 2002. (Federal Trade Commission's Rule 56.1 Statement of Material Facts Not in Dispute ¶ 376.) It is estimated that ninety percent of Triad's earnings in 2002 were attributable to the Coral Calcium infomercial. (Id. ¶ 378.)

Steven Ritchey owned about thirty-three percent of both King Media and Triad since both companies' inception. The FTC seeks an order requiring him to disgorge the $772,652 he received from Triad in Subchapter S distributions in 2002. (See id. ¶ 377.)

BP International did database work for Direct Marketing's master distributors⁴ to help organize the master distributors' businesses. BP International was entitled to receive royalties from sales of the products advertised by the infomercials. (Barrett Dep. 40:4-16 (July 21, 2005).)

II. The Claims

The FTC brings an eight count complaint that alleges the following:

• Count One—The Coral Calcium infomercial makes express or implied representations that coral calcium is an effective treatment or cure for cancer, Parkinson's disease, heart disease, and autoimmune diseases such as multiple sclerosis and lupus.

• Count Two—The Coral Calcium infomercial makes express or implied representations that Coral Calcium has an absorption rate of 100% within twenty minutes.

• Count Three—The Coral Calcium infomercial makes express representations that scientific research published in the Journal of the American Medical Association ("JAMA") and the New England Journal of Medicine ("NEJM") supported the proposition that calcium supplements are able to prevent, reverse, or cure cancer in humans.

• Count Four—The Supreme Greens infomercial makes express or implied representations that the Supreme Greens product is an effective treatment, cure, or preventative for cancer, heart disease, diabetes, and arthritis.

• Count Five—The Supreme Greens infomercial makes express or implied representations that Supreme Greens will cause significant weight loss.

• Count Six—The Supreme Greens infomercial makes express or implied representations that Supreme Greens can be taken safely by pregnant women, children, and persons on medication.

• Count Seven—The format of the Supreme Greens infomercial is deceptive.

• Count Eight—The defendants' automatic billing and shipping practices ("autoship"), without first obtaining the consent of customers, was an unfair practice in violation of § 5(a) of the FTC Act.

III. The Challenged Infomercials

A. The Coral Calcium Infomercial

The Coral Calcium infomercial at issue, which aired from about January 2002 to September 2003, advertises and promotes the nutritional supplement "Coral Calcium Daily." The infomercial is styled as a half-hour long talk show entitled "A Closer Look" in which Kevin Trudeau, the host, interviews Robert Barefoot, who is characterized as a "Scientist/Author."

Trudeau opens the infomercial by saying, "We're going to be talking about health this half hour, specifically cancer, heart disease." (Am. Compl. Ex. 2 at 3 [hereinafter Coral Calcium Infomercial Transcript].) The infomercial goes on to say that the "cause" of cancer, heart disease, lupus, fibromyalgia, and multiple sclerosis is an acidic body marked by "a lack of oxygen" and a calcium deficiency. (Id. at 5-6.) Barefoot attempts to bolster this theory by speaking at length about the scientific community's collective knowledge regarding "alkalizing" one's body, about the findings of Nobel Prize scientists that supposedly support Barefoot's claims, and about the conspiracy by the traditional medical community and the pharmaceutical industry to keep this information from the public. As an example, Barefoot explains that the true cause of heart disease is acidosis, not cholesterol. (Id. at 14-16.) Barefoot says that instead of lowering cholesterol to prevent heart disease, one's focus should be on "the calcium deficiency that's going to cause a problem, not the cholesterol." (Id. at 19.)

He also asserts that if one can "drive out the acid," (id. at 4) by "consum[ing] a lot more calcium," then these illnesses can be prevented. (Id. at 8.) Barefoot states:

I can tell you there are tens of millions of people, millions of testimonials. I've had 1,000 people tell me how they've cured their cancer. I've witnessed people get out of wheelchairs with multiple sclerosis just by getting on the...