As we know, it is illegal under the federal securities regime to make material misstatements in connection with a securities transaction (see Rule 10b-5 “It shall be unlawful for any person…[t]o make any untrue statement of material fact…in connection with the purchase or sale of any security.”).

Therefore, based on Rule 10b-5, you must disclose all information if there is a substantial likelihood that a reasonable investor would consider the information important to the investment decision.  The reasonable person standard has been found by courts to be “a savvy person who grasps market fundamentals.

Sometimes less is more with securities filings.  Of course you want to file a clean document and give all material information to investors about your product and the securities they are purchasing.  Many neutraceutical products and health supplement companies are used to hyping their products big time and it doesn’t feel natural for them to leave out some of their products’ health claims from securities filings.  However, most of the claims, especially those unproven through reputable studies, need to be left out of the securities memoranda or disclosures filed with the SEC.

I tend to lean conservatively on the actual descriptions of the supplements themselves in securities filings when it comes to unproven health supplements. State the intended and unproven effects, state the theory on why the Company believes its claims, couch it in cautionary language that are clearly opinions (“we believe users of our weight loss pills will achieve….”).  This way you don’t have a 10b-5 problem (unless the SEC can prove that you didn’t actually believe in your products) and you won’t have any false-claims act FTC problems.

But what about the “puffery” defense!?!  Asks the company’s junior associate general counsel in an effort to show that I’m being a spoil-sport and that I should allow health supplement companies to disclose to their investors that their customers will “effectively and conveniently receive advanced extreme energy and powerful weight loss” that will help them “push past their limits” and “instantly boost their metabolism.” Puffing health products or “supps” is a well-worn tradition.  Go to any GNC store and read the labels of the unregulated supplements and you will see jaw dropping claims.

 

As for the Puffery Defense, as Professor David Hoffman notes in The Best Puffery Article Ever (and I promise I’m not puffing up the title of his article in any way, shape, or form), “the Puffery defense is related to a particular model of consumption, in which purchase decisions are reasonably made based on facts revealed by sellers.”

Puffery is a “vague statement of corporate optimism” that is “so obviously unimportant to a reasonable investor that reasonable minds could not differ.”

As the Fourth Circuit held in 1993,

“Predictions of future growth…will almost always prove to be wrong in hindsight….Imposing liability would put companies in a whipsaw, with a lawsuit an almost certainty. Such liability would deter companies from discussing their prospects, and the securities markets would be deprived of the information those predictions offer.” Raab v. General Physics Corp. 4 F.3d 286 (4th Cir. 1993).

Following Raab, courts generally held that forward-looking puffery is only actionable if it creates a “substantial certainty” about the company’s predicted course or if the statement is made with “actual knowledge” that it is false. Hoffman at 113.

Hoffman’s article also points out that the puffery defense has been applied to many statements regarding nutritional benefits.  These cases are totally inconsistent, which is troubling.  For example, the claim that yogurt is “nature’s perfect food” can technically be falsified and is not puffery. In re Dannon Milk Products, inc. 61 F.T.C. 840 (1962).  Nestle’s boast that it “sells the very best chocolate” was deemed meaningless puffery. PRESTON at 134-136.  On the other hand, the makers of a weight-loss pill’s claims that the pill could cause consumer to “Lose Weight Fast” were protected (even when package insert material suggested consumers would lose up to 1.2 pounds per week).  Thompson Med. Co. v. Ciba-Geigy Corp., 643 F. Supp. 1190, 199-1200 (S.D.N.Y. 1986.  Similarly, Bayer won a Puffery case when they stated that they made “the world’s best aspirin” that “works wonders.”  In re Sterling Drug, Inc., 102 F.T.C. 395, Section II.A.1. (1983).

The lesson is to be careful with puffery! Stay safe!

Recently the the Federal Trade Commission (“FTC”) has made a big push to regulate health claims made by health and fitness product manufacturers.

Since this largely unregulated industry claims several billions per year in the hopes that it will improve individual fitness, it isn’t only the Food and Drug Administration (“FDA”) that is combating deceptive advertising.  The FTC is also regulating the supplement industry by using the National Institutes of Health to spot companies whose claims could be false.

Just look at the recent cases brought against health and fitness companies by the FTC lately:

 

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