August 30, 2012

You Touch It, You Own It -- FTC Settlement Stemming from Misleading Advertisement Encompasses Wide Range of Involved Parties

Consumer Blog Report

The Federal Trade Commission (FTC) announced last week that it reached a settlement with the marketers of an exercise device named the "Ab Circle Pro" that was sold online and through television infomercials. Like many "revolutionary" pieces of exercise equipment sold through infomercials, the Ab Circle Pro was marketed as "the most innovative piece of exercise equipment ever" because it enabled consumers to achieve incredible weight loss results with very little time and effort for the low price of "$14.95, plus shipping and handling." The advertisements compared a three minute workout with the Ab Circle Pro to "30 minutes of abs and cardio" and claimed that "just three minutes a day" of exercise using the device was the equivalent of "100 Sit Ups." The advertisements also "guaranteed" results with a "30-day-risk free trial" and assured consumers that they would either "lose ten pounds in just two weeks or [receive their] money back." As usual, the infomercial featured numerous testimonials from users who had lost weight using the Ab Circle Pro, and the host of the infomercial was an "incredible fitness celebrity" and "busy mom," Jennifer Nicole Lee, who claimed that she "lost over 80 pounds" using the "miracle breakthrough" device.

The FTC investigated the claims made in the Ab Circle Pro advertisements and concluded that the device was not the "miracle breakthrough" that was advertised because "just three minutes a day" of exercise using the device was not the equivalent of "30 minutes of abs and cardio&" or "100 Sit Ups." The FTC also concluded that the claims about "rapid and substantial weight loss" were deceptive because the advertisements failed to appropriately disclose that the advertised weight loss could only be achieved through "a reduced calorie diet and engaging in cardiovascular exercise, in addition to using the Ab Circle Pro." Moreover, the FTC discovered that "$14.95, plus shipping and handling," actually meant a $235 to $285 charge to most consumers (including delivery fees). Finally, the FTC found that video testimonials from the host and alleged users of the Ab Circle Pro were misleading because they suggested that use of the Ab Circle Pro caused weight loss that was actually achieved with cardiovascular exercise and dieting. Accordingly, the FTC filed a complaint against the owners of the rights to the Ab Circle Pro, the host of the infomercial, the producers of the infomercial and the distributors of the Ab Circle Pro. A day after the complaint was filed, proposed settlements with each defendant were filed.

To settle the FTC claims, Fitness Brands, Inc., agreed to pay $1.2 million in consumer refunds. Fitness Brands was a key defendant in this case because it was allegedly the owner of the rights to the Ab Circle Pro and it was responsible for creating the misleading advertisements. Specifically, Fitness Brands allegedly created the website advertising for the Ab Circle Pro and it paid another defendant to produce the misleading infomercials that it scripted. Fitness Brands also distributed the Ab Circle Pro for the first three months that it was on the market and it continued to update the infomercial and misleading advertisements after it sold the distribution rights to the device.

The Reader's Digest Association, Inc., was also named as a relief defendant because one of its subsidiaries, Direct Entertainment Media Group, Inc. ("Direct Entertainment"), contracted with Fitness Brands in March 2009 "to market and distribute the Ab Circle Pro in the United States." The FTC did not identify any misleading advertisements that were created by Direct Entertainment, and, in fact, the FTC complaint specifically alleges that the misleading infomercials and advertisements were created by Fitness Brands and its agents. (There is a fleeting reference in the FTC complaint to Direct Entertainment's "creation" of advertisements, but specific paragraphs allege that Fitness Brands and its agents created and updated the Ab Circle Pro advertisements.) However, Direct Entertainment's parent corporation, Reader's Digest, will still pay ten to twenty times more than Fitness Brands to settle the FTC claims -- at least $13.8 million and up to $23.8 million, depending on the amount of refund requests that are received -- because it was "unjustly enriched" by its distribution of the product after it "reviewed and approved" the misleading advertisements. This FTC settlement vividly illustrates how a company that profits from a misleading advertising "package" developed by another entity can still be held liable for false advertising claims where it "reviews and approves" misleading advertisements for a product it distributes.

Jennifer Nicole Lee, the host of the infomercial, and her related corporate entities were also alleged to have misled consumers by making unsupportable claims about the Ab Circle Pro in the infomercial and repeatedly claiming that Ms. Lee lost "80 pounds" using the device without an appropriate disclosure stating that Ms. Lee's weight loss was achieved through a combination of diet and exercise. Even though Ms. Lee earned significant royalties from her appearance in the Ab Circle Pro advertisements, she was not required to pay any funds as part of her settlement with the FTC, but she (and her related corporate entities) must refrain from making misleading statements about the Ab Circle Pro. Similarly, the individual and entities hired by Fitness Brands to script and produce the misleading infomercial were also not required to pay any funds as part of their settlement with the FTC, but they were ordered to refrain from making misstatements about the Ab Circle Pro in the future.

© Arnold & Porter Kaye Scholer LLP 2012 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.

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