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 nutraceutical 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:
- Marketers of Indoor Tanning Systems to Pay Refunds to Consumers (April 14, 2016)
- Four Companies Agree to Stop Falsely Promoting Their Personal-Care Products as “All Natural” or “100% Natural”; Fifth is Charged in Commission Complaint (April 12, 2016)
- District Court Ruling Allows FTC to Attempt to Collect Up To $3.2 Million From Marketers Who Deceptively Advertised Homeopathic HCG Diet Direct Drops (February 25, 2016)
- FTC Approves Final Order Prohibiting “Ultimeyes” Manufacturer from Making Deceptive Claims that the App Can Improve Users’ Vision (February 23, 2016)
- Court Settlement Bars Weight-Loss Pill Merchants from Deceptive Conduct (February 8, 2016)
- Portland, Maine Weight-Loss Supplement Sellers to Stop Deceptive Advertising, Illegal Billing Practices Following Joint FTC and Maine Attorney General Action (February 5, 2016)
- Lumosity to Pay $2 Million to Settle FTC Deceptive Advertising Charges for Its “Brain Training” Program (January 5, 2016)
- Tommie Copper to Pay $1.35 Million to Settle FTC Deceptive Advertising Charges (December 1, 2015)
- FTC Sends Refund Checks Totaling More Than $250,000 To Consumers Who Bought Lipidryl Weight Loss Supplement (November 20, 2015)
- FTC Brings Action to Stop Marketer from Making Deceptive Opiate Addiction and Withdrawal Treatment Claims (November 17, 2015)
- Court Finds Promoter of Bogus “Alcohol Cure” in Contempt (October 14, 2015)
- FTC Sues Marketers Who Used “Gag Clauses,” Monetary Threats, and Lawsuits to Stop Negative Consumer Reviews for Unproven Weight-Loss Products (September 28, 2015)
- FTC to Host Workshop September 21 to Examine Advertising for Over-the-Counter Homeopathic Products (September 18, 2015)
- FTC Charges Marketers of ‘Vision Improvement’ App With Deceptive Claims (September 17, 2015)
- FTC Sends Refund Checks Totaling Almost $175,000 to Consumers Who Bought Deceptively Marketed Supplements to Treat Childhood Speech Disorders (August 24, 2015)
- FTC Staff Comment: FDA Should Reevaluate Its Current Regulatory Framework for Homeopathic Products (August 21, 2015)
- FTC: Lights Out for Falsely Advertised UV Disinfectant Devices (August 20, 2015)
- “Melanoma Detection” App Sellers Barred from Making Deceptive Health Claims (August 13, 2015)
- Supplement Marketers Will Relinquish $1.4 Million to Settle FTC Deceptive Advertising Charges(July 8, 2015)
- FTC to Host September Workshop in Washington, DC, to Examine Advertising for Over-the-Counter Homeopathic Products (June 1, 2015)
- FTC Charges Marketers with Misleading Claims That Their Supplement Causes Weight Loss, Fat Loss, and Increased Metabolism in Women Over Forty (May 12, 2015)
- FTC Halts Deceptive Marketing of Bogus Weight-Loss Products (May 4, 2015)
- FTC Approves Final Order Barring Misleading Claims about App’s Ability to Diagnose or Assess the Risk of Melanoma (April 13, 2015)
- Federal Court Rules Affiliate Marketing Network and its Parent Company Must Turn Over $11.9 Million They Received From Deceptive Marketing Scheme (April 6, 2015)
- FTC Sends Refund Checks Totaling More Than $416,000 to Consumers Who Lost Money Buying “Body Slimming” Creams that Were Deceptively Marketed (March 20, 2015)
- FTC Sending Refund Checks Totaling Nearly $955,000 to Consumers Who Lost Money Buying Lane Labs’ AdvaCAL Calcium Supplement (March 18, 2015)
- FTC Cracks Down on Marketers of “Melanoma Detection” Apps (February 23, 2015)
- FTC Sends Refund Checks Totaling More Than $464,000 to Consumers Who Lost Money Buying Deceptively Marketed ‘Fat Burning’, ‘Calorie Blocking’ Diet Pills (February 20, 2015)
- Marketer Who Promoted a Green Coffee Bean Weight-Loss Supplement Agrees to Settle FTC Charges (January 26, 2015)
- Makers of Jungle Rangers Computer Game for Kids Settle FTC Charges that They Deceived Consumers with Baseless “Brain Training” Claims (January 20, 2015)
- Company That Touted Products’ Ability to Treat Children’s Speech Disorders Settles FTC Charges It Deceived Consumers (January 9, 2015)
- Marketers Settle FTC Charges That They Used Deceptive Ads In Promoting Products for Mole and Wart Removal, Anti-Aging and Weight Loss (December 23, 2014)
- Federal Trade Commission Continues Crackdown on Fad Weight-Loss Products (December 11, 2014)
- FTC Sends Refund Checks Totaling More Than $26 Million to Consumers Who Bought Sensa Weight-Loss Supplement (December 10, 2014)
- FTC Approves Final Orders Banning Two Companies From Making Unsubstantiated Slimming Claims for Shapewear Undergarments (November 10, 2014)
- FTC Charges Gerber with Falsely Advertising Its Good Start Gentle Formula Protects Infants from Developing Allergies (October 30, 2014)
- FTC Approves Final Orders Banning Marketer Behind ‘Fat Burner’ Diet Pills From Making or Selling Weight-Loss Products (October 24, 2014)
- At FTC’s Request, Court Stops Supplement Marketers From Deceptive Advertising and Illegally Debiting Consumers’ Accounts (October 20, 2014)
- Norm Thompson Outfitters and Wacoal America Settle FTC Charges Over Weight-Loss Claims for Caffeine-infused Shapewear (September 29, 2014)
- FTC Approves Final Order Settling Charges that L’Oréal USA, Inc. Made Deceptive Advertising Claims for its Anti-Aging Cosmetics (September 26, 2014)
- FTC Mails More Than 400,000 Claim Forms to Possible Victims of Alleged LeanSpa Scam(September 19, 2014)
- Marketers of the Pro-Form ab GLIDER™ Agree to Pay $3 Million in Civil Penalties for Violating 1997 FTC Order Prohibiting Deceptive Weight Loss Claims (September 18, 2014)
- FTC Approves Final Order Settling Charges that Company’s Head Lice Protection Claims Were Deceptive (September 17, 2014)
- FTC Settlement Bans Marketer Behind ‘Fat Burner’ Diet Pills from Manufacturing, Marketing Weight-Loss Products (September 11, 2014)
- Green Coffee Bean Manufacturer Settles FTC Charges of Pushing its Product Based on Results of “Seriously Flawed” Weight-Loss Study (September 8, 2014)
- FTC Alerts Major Retailers to Concerns About Concussion Protection Claims for Athletic Mouthguards Made on Websites (August 21, 2014)
- FTC Approves Final Order Settling Charges that “BrainStrong Adult” Supplement Marketers Made Deceptive Memory Improvement Claims (August 21, 2014)
- Judge Expected to Rule in FTC Case Against Marketers Ordered to Pay $40 Million for Making Fraudulent Weight-Loss Product Claims (August 20, 2014)
- Marketers of ‘Fat Burning’ and ‘Calorie Blocking’ Diet Pills to Pay $500,000 for Making Deceptive Weight Loss Claims (July 25, 2014)
- FTC Approves Amended Applications by Fidelity National Financial Inc. to Divest Oregon Title Plant Assets (July 25, 2014)
- FTC Sends Refund Checks Totaling $9.3 Million to Nearly 200,000 Consumers Who Bought ‘Ab Circle Pro’ Device (July 16, 2014)
- Cactus Juice Marketers to Pay $3.5 Million in Refunds to Consumers for Deceptive Claims that Their Product Treats Diseases (July 15, 2014)
- L’Oréal Settles FTC Charges Alleging Deceptive Advertising for Anti-Aging Cosmetics (June 30, 2014)
- FTC Testifies Before Senate Commerce Subcommittee on Agency Efforts to Combat Fraudulent and Deceptive Claims for Weight-Loss Products (June 17, 2014)
- Supplement Marketers Settle FTC Charges that “BrainStrong Adult” Memory Improvement Claims Are Deceptive (June 9, 2014)
- Company Settles FTC Charges that Head Lice Prevention Claims Were Deceptive (May 28, 2014)
- FTC Charges Green Coffee Bean Sellers with Deceiving Consumers through Fake News Sites and Bogus Weight Loss Claims (May 19, 2014)
- FTC Approves Final Consent Settling Charges that L’Occitane, Inc. Misled Consumers to Believe that Creams Could Slim Their Bodies (April 8, 2014)
- FTC Releases Fourth Major Study on Alcohol Advertising and Industry Efforts to Reduce Marketing to Underage Audiences (March 20, 2014)
- FTC Testifies Before Congressional Subcommittee on Improving Sports Safety (March 13, 2014)
- FTC Obtains $2.2 Million Judgment against Supplement Marketer that Made Phony Claims for Treating and Preventing Diabetes (March 7, 2014)
- FTC Has Updated Guidance for Media Outlets on Spotting False Weight-Loss Claims in Advertising (January 7, 2014)
- FTC Seeks Public Comment on Franchise Services of North America’s Application for Approval to Sell Advantage Rent a Car to The Catalyst Capital Group, Inc. (January 7, 2014)
- FTC Sends Refund Checks Totaling nearly $6 Million to Consumers Who Bought Dietary Supplements (December 20, 2013)
- FTC Sends Refund Checks to Consumers Who Bought Walgreens’ ‘Wal-Born’ Dietary Supplements (September 20, 2013)
- FTC Sends Refund Checks to Consumers Who Bought Dietary Supplements (September 12, 2013)
- FTC Sends Refunds to Consumers Who Purchased Disney- or Marvel Hero-themed Children’s Vitamins (August 8, 2013)
- Marketers of Unproven Bed Bug and Head Lice Treatments Settle FTC Charges (July 16, 2013)
- FTC Mails Refund Checks to Consumers Who Bought Skechers’ Shape-Ups and Other “Toning” Shoes (July 11, 2013)
- FTC Approves Modified Final Order Settling Charges against Marketer of Four Loko Malt Beverage (February 12, 2013)
- FTC Permanently Stops Fake News Website Operator that Allegedly Deceived Consumers about Acai Berry Weight-Loss Products (February 7, 2013)
- FTC Commissioners Uphold Trial Judge Decision that POM Wonderful, LLC; Stewart and Lynda Resnick; Others Deceptively Advertised Pomegranate Products by Making Unsupported Health Claims (January 16, 2013)
- FTC to Consumers: You May be Due a Refund for Dietary Supplements (January 7, 2013)
- FTC Approves Final Order Settling Charges Against Marketer Brain-Pad, Inc. for Allegedly Deceptive Claims that Its Mouthguards Can Reduce Risk of Concussions (November 29, 2012)
- Marketers Behind Fake News Sites Settle FTC Charges of Deceptive Advertising (November 14, 2012)
- FTC Tells Consumers They May Be Due a Refund If They Purchased Walgreens “Wal-Born” Cold and Flu Supplements (November 1, 2012)
- Fake News Site Operator to Surrender Assets Totaling More than $2 Million (October 19, 2012)
- FTC Charges Second “Affiliate Network” of Internet Advertisers with Deceiving Consumers by Using Fake News Sites to Market Acai Berry Weight-Loss Products and Colon Cleansers(September 12, 2012)
- FTC Takes Action Against Companies Marketing Allegedly Unproven Natural Bed Bug and Head Lice Treatments (September 10, 2012)
- Subsidiary of Diet Plan Marketer Medifast Inc. to Pay $3.7 Million to Settle FTC Charges(September 10, 2012)
- FTC Refunds $6 Million to Consumers Who Bought Deceptively Advertised Supplements that Were Supposed to Cause Weight Loss and Treat Erectile Dysfunction (August 28, 2012)
- Ads Touting “Your Baby Can Read” Were Deceptive, FTC Complaint Alleges (August 28, 2012)
- Marketers of ‘Ab Circle Pro’ Device to Pay as Much as $25 Million in Refunds to Settle FTC Charges (August 23, 2012)
- Settlement with FTC Prohibits Marketer Brain-Pad, Inc. from Claiming that Its Mouthguards Can Reduce Risk of Concussions (August 16, 2012)
- FTC Tells Consumers They May Be Due a Refund If They Purchased Disney- or Marvel Hero-themed Children’s Vitamins (August 14, 2012)
- Refunds Stemming From Reebok’s Settlement With FTC Mailed to Consumers Who Bought EasyTone and RunTone Shoes and EasyTone Apparel (August 7, 2012)
- FTC and Florida Attorney General Win Court Judgment of More Than $700,000 in Bogus Alcoholism Cure Scheme (July 19, 2012)
- Administrative Law Judge Upholds FTC’s Complaint that POM Deceptively Advertised Its Products as Treating, Preventing, or Reducing the Risk of Heart Disease, Prostate Cancer, and Erectile Dysfunction (May 21, 2012)
- Consumers Who Bought Two Oreck Products Will Receive FTC Refunds (May 21, 2012)
- Skechers Will Pay $40 Million to Settle FTC Charges That It Deceived Consumers with Ads for “Toning Shoes” (May 16, 2012)
- FTC Permanently Stops Two More Operations Charged with Using Fake News Sites to Deceive Consumers about Acai Berry Products, Defendants will Pay Nearly $1.5 Million to Settle Charges(March 21, 2012)
- FTC Permanently Stops Six Operators from Using Fake News Sites that Allegedly Deceived Consumers about Acai Berry Weight-Loss Products (January 25, 2012)
- Lane Labs Found in Contempt of Court Order Barring Deceptive Health Claims (December 14, 2011)
- In FTC Hoodia Weight Loss Case, Settlement Requires Defendants to Turn Over Assets(November 3, 2011)
- FTC Requires Packaging Changes for Fruit-Flavored Four Loko Malt Beverage (October 3, 2011)
- Reebok to Pay $25 Million in Customer Refunds To Settle FTC Charges of Deceptive Advertising of EasyTone and RunTone Shoes (September 28, 2011)
- FTC Settlement Requires Internet Marketer to Stop Selling Cosmetic Contact Lenses without Prescriptions (July 20, 2011)
- FTC Settlement Prohibits Marketer from Claiming that Nivea Skin Cream Can Help Consumers Slim Down (June 29, 2011)
- FTC Returns More Than $11.8 Million to Consumers Defrauded by Q-Ray Bracelet Scam (May 6, 2011)
- FTC Seeks to Halt 10 Operators of Fake News Sites from Making Deceptive Claims About Acai Berry Weight Loss Products (April 19, 2011)
- FTC Settlement Requires Oreck Corporation to Stop Making False and Unproven Claims That Its Ultraviolet Vacuum and Air Cleaner Can Prevent Illness (April 7, 2011)
- Dannon Agrees to Drop Exaggerated Health Claims for Activia Yogurt and DanActive Dairy Drink(December 15, 2010)
- FTC Settlement Prohibits Marketers of Children’s Vitamins from Making Deceptive Health Claims about Brain and Eye Development (December 13, 2010)
- FTC Charges Marketer for Making Phony Claims That Dietary Supplements Can Treat and Prevent Diabetes (October 28, 2010)
- FTC Complaint Charges Deceptive Advertising by POM Wonderful (September 27, 2010)
- Court Orders Internet Marketers of Acai Berry Weight-Loss Pills and “Colon Cleansers” to Stop Deceptive Advertising and Unfair Billing Practices (August 16, 2010)
- Dietary Supplement Maker to Pay $5.5 Million to Settle FTC False Advertising Charges (July 14, 2010)
- Nestle Subsidiary to Settle FTC False Advertising Charges; Will Drop Deceptive Health Claims for BOOST Kid Essentials (July 14, 2010)
- FTC Investigation of Ad Claims that Rice Krispies Benefits Children’s Immunity Leads to Stronger Order Against Kellogg (June 3, 2010)
- FTC Warns Marketers of Children’s Omega-3 Fatty Acid Supplements That Claims About Brain and Vision Benefits May Be Deceptive (February 16, 2010)
- Kellogg Settles FTC Charges That Ads for Frosted Mini-Wheats Were False (April 20, 2009)
- FTC Charges Marketers of Kinoki Foot Pads With Deceptive Advertising; Seeks Funds for Consumer Redress (January 28, 2009)
