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[Federal Register Volume 62, Number 66 (Monday, April 7, 1997)]
[Notices]
[Pages 16587-16590]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-8802]

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FEDERAL TRADE COMMISSION

[File No. 942-3237]

KCD Holdings, Inc., et al.; Interactive Medical Technologies, 
Ltd., et al.; William Pelzer, Jr.; and William E. Shell, M.D.; Analysis 
to Aid Public Comment

AGENCY: Federal Trade Commission.

ACTION: Proposed consent agreements.

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SUMMARY: In settlement of alleged violations of federal law prohibiting 
unfair or deceptive acts or practices and unfair methods of 
competition, the four consent agreements, accepted subject to final 
Commission approval, would prohibit, among other things, the 
California-based companies, which market cellulose-bile products, and 
their officers from providing means and instrumentalities or 
substantial assistance to any person who they know, or should know, is 
making any false or unsubstantiated benefit, performance, efficacy or 
safety claim for any weight loss, fat or cholesterol reduction product 
or program. The consent agreements would require KCD, KCD Holdings and 
Richards to pay $150,000 in consumer redress, in thirteen installments 
over a period of one year, Interactive Medical and Effective Health to 
pay $35,000 in consumer redress, and Dr. William E. Shell, a former 
officer of Interactive Medical Technologies, Ltd., to pay $20,000 in 
consumer redress.

DATES: Comments must be received on or before June 6, 1997.

ADDRESSES: Comments should be directed to: FTC/Office of the Secretary, 
Room 159, 6th St. and Pa. Ave., N.W., Washington, D.C. 20580.

FOR FURTHER INFORMATION CONTACT:
Laureen France or Nadine Samter, Federal Trade Commission, Seattle 
Regional Office, 915 Second Ave., Suite 2896, Seattle, WA. 98174. (202) 
220-6350 or 220-4471.

SUPPLEMENTARY INFORMATION: Pursuant to Section 6(f) of the Federal 
Trade Commission Act, 38 Stat. 721, 15 U.S.C. 46 and Section 2.34 of 
the Commission's Rules of Practice (16 CFR 2.34), notice is hereby 
given that the above-captioned consent agreements containing a consent 
orders to cease and desist, having been filed with and accepted, 
subject to final approval, by the Commission, have been placed on the 
public record for a period of sixty (60) days. The following Analysis 
to Aid Public Comment describes the terms of the consent agreements, 
and the allegations in the complaints. An electronic copy of the full 
text of the consent agreement package can be obtained from the FTC Home 
page (for March 25, 1997), on the World Wide Web, at ``http://www.ftc.gov/os/actions/htm.'' A paper copy can be obtained from the FTC 
Public Reference Room, Room H-130, Sixth Street and Pennsylvania 
Avenue, N.W., Washington, D.C. 20580, either in person or by calling 
(202) 326-3627. Public comment is invited. Such comments or views will 
be considered

[[Page 16588]]

by the Commission and will be available for inspection and copying at 
its principal office in accordance with Section 4.9(b)(6)(ii) of the 
Commission's Rules of Practice (16 CFR 4.9(b)(6)(ii)).

Analysis of Proposed Consent Orders

    The Federal Trade Commission (``Commission'') has accepted, subject 
to final approval, agreements to proposed consent orders from KCD, 
Incorporated (``KCD'') and KCD Holdings, Inc. (``KCD Holdings''), their 
former officer, Clark M. Holcomb (``Holcomb''), and their current 
officer, Bonnie L. Richards (``Richards'') (hereinafter ``KCD 
respondents''), their advertising agency Deerfied Corporation 
(``Deerfield''), and its owner, Gerald E. Hatto (``Hatto''). The KCD 
respondents market and sell an over-the-counter weight loss product, 
known as SeQuester, comprised of fiber and ox bile. The product 
advertisements have represented that the product reduces the body's 
absorption of fat and sugar from consumed food, thereby providing 
weight loss and cholesterol lowering benefits. Respondents Deerfield 
and Hatto assisted in the creation and dissemination of the SeQuester 
advertisements.
    The Commission has also accepted, subject to final approval, 
agreements to proposed consent orders from Interactive Medical 
Technologies, Ltd. (``IMT''), its wholly owned subsidiary, Effective 
Health, Inc. (``EHI''), William Pelzer, Jr. (``Pelzer''), a former 
officer of IMT and EHI, and William E. Shell, M.D. (``Shell''), also a 
former officer of IMT (hereinafter ``IMT respondents''). These 
respondents marketed and sold an over-the-counter weight loss product, 
known as Lipitrol, also comprised of fiber and ox bile. The Lipitrol 
product advertisements represented that the product reduced the body's 
absorption of fat from consumed food, thereby providing weight loss and 
cholesterol lowering benefits. The IMT respondents also provided means 
and instrumentalities or substantial assistance to the KCD respondents' 
marketing and sale of SeQuester.
    The proposed consent orders have been placed on the public record 
for sixty (60) days for receipt of comments by interested persons. 
Comments received during this period will become part of the public 
record. After sixty (60) days, the Commission will again review the 
agreements and the comments received and will decide whether it should 
withdraw from the agreements and take other appropriate action or make 
final the proposed orders contained in the agreements.

The Proposed Complaints

    The Commission's complaint against the KCD respondents, Deerfield 
and Hatto, charges these respondents with making false and 
unsubstantiated claims, in advertising and promotional materials, 
regarding the efficacy of SeQuester as a weight loss, fat reduction and 
cholesterol reduction product. Specifically, the complaint alleges that 
the KCD respondents falsely represented, expressly or by implication, 
that SeQuester prevents or significantly reduces the body's absorption 
of fat and sugar from consumed food. The complaint also charges that 
these respondents failed to possess and rely upon a reasonable basis 
for these representations. The Complaint further alleges that these 
respondents made false and deceptive representations that scientific 
research demonstrates that SeQuester prevents or significantly reduces 
the body's absorption of fat from consumed food and causes significant 
weight loss.
    In addition, the compliant alleges that the KCD respondents have 
represented that SeQuester causes significant weight loss; allows 
consumers to eat high-fat foods without gaining weight; causes 
significantly greater weight loss than diet and exercise alone; allows 
consumers to eat high-fat foods without increasing their risk of high 
cholesterol, clogged arteries, heart disease and other health problems 
associated with a high-fat diet; reduces the risk of high cholesterol, 
clogged arteries, heart disease and other problems associated with a 
high-fat diet; and is beneficial and safe when used in amounts 
sufficient to cause diarrhea. The Complaint charges that these 
respondents did not possess and rely upon a reasonable basis for these 
representations.
    The complaint also alleges that Deerfield and Hatto have 
represented, expressly or by implication, that SeQuester causes 
significant weight loss; allows consumers to eat high-fat foods without 
gaining weight; allows consumers to eat high-fat foods without 
increasing their risk of high cholesterol, clogged arteries, heart 
disease and other health problems associated with a high-fat diet; 
prevents or significantly reduces the body's absorption of fat and 
sugar from consumed food; reduces the risk of high cholesterol, clogged 
arteries, heart disease and other problems associated with a high-fat 
diet; and significantly reduces the body's absorption of sugar from 
consumed food. The compliant charges that Deerfield and Hatto did not 
possess and rely upon a reasonable basis for these representations. The 
complaint further alleges that Deerfield and Hatto falsely represented 
that scientific research demonstrates that SeQuester prevents or 
significantly reduces the body's absorption of fat from consumed food 
and causes significant weight loss. The compliant also charges that 
respondents Deerfield and Hatto knew or should have known that these 
representations were false and misleading.
    The Commission's complaint against the IMT respondents charges IMT, 
EHI and Shell, with making false and unsubstantiated advertising claims 
regarding the efficacy of Lipitrol as a weight loss, fat reduction and 
cholesterol reduction product. Specifically, the complaint alleges that 
IMT, EHI and Shell falsely represented, either expressly or by 
implication, that Lipitrol prevents or significantly reduces the body's 
absorption of fat from consumed food, and absorbs approximately 5.9 
grams of fat per tablet from consumed food. The complaint also charges 
that respondents IMT, EHI and Shell failed to possess and rely upon a 
reasonable basis for these representations. The complaint further 
alleges that these respondents made false and deceptive representations 
that scientific research demonstrates that Lipitrol prevents or 
significantly reduces the body's absorption of fat from consumed food, 
absorbs approximately 5.9 grams of fat per tablet from consumed food, 
causes significant weight loss and lowers blood cholesterol levels.
    In addition, the complaint alleges that respondents IMT, EHI and 
Shell have represented that Lipitrol causes significant weight loss; 
lowers blood cholesterol levels; reduces, or reduces the risks 
associated with, high cholesterol, including clogged arteries, high 
blood pressure, diabetes, breast cancer and heart disease; causes 
significantly greater weight loss than diet and exercise alone; and is 
beneficial and safe when taken in amounts sufficient to cause diarrhea. 
The complaint charges that these respondents did not possess and rely 
upon a reasonable basis for these representations.
    Respondent William Pelzer, Jr. in not included in the above-
mentioned allegations because he had no involvement in the advertising, 
marketing or sale of Lipitrol.
    In addition, the complaint charges that the IMT respondents, 
including respondent Pelzer, provided means and instrumentalities and/
or substantial assistance to others who respondents knew or should have 
known were making false and deceptive or

[[Page 16589]]

unsubstantiated claims for the product, sold under the name SeQuester. 
Specifically, the complaint alleges that the respondents licensed to 
KCD, its holding company, KCD Holdings, those companies' former 
principal, Holcomb, and current principal, Richards, the exclusive 
rights to market the product.
    The complaint alleges that the IMT respondents knew or should have 
known that the KCD respondents made false and deceptive or 
unsubstantiated representations similar to those made for Lipitrol, in 
advertisements for SeQuester. The complaint charges that despite the 
fact that respondents knew or should have known that KCD was making the 
false and deceptive, and/or unsubstantiated representations in the 
marketing and sale of SeQuester, the IMT respondents nevertheless 
provided various services and promotional materials to the KCD 
respondents in furtherance of the KCD respondents' efforts to 
disseminate these false claims, including providing the KCD respondents 
with studies purporting to show that SeQuester effectively reduces the 
body's absorption of fat from consumed food and causes significant 
weight loss; the licensing rights to market and sell the product to 
consumers; technical information regarding the product; and various 
promotional materials and information for marketing the product.

The Proposed Orders

    The Commission has accepted four separate consent orders in this 
matter. The proposed orders contain provisions designed to remedy the 
alleged violations. The proposed orders against respondents KCD 
Holdings, Inc., KCD, Incorporated and Bonnie L. Richards; IMT and EHI; 
and Shell provide for the payment of consumer redress in installments 
over a period of one year from the date the proposed orders become 
final. In the event that consumer redress is not feasible, the proposed 
orders provide that the funds will be deposited in the United States 
Treasury. In addition, the proposed order against respondent Shell 
requires him to post a performance bond of either $250,000 or 
$1,000,000, depending on the circumstances of his activities.

Proposed Consent Order with the KCD Respondents, Deerfield and 
Hatto

    Part I of the proposed consent order against the KCD respondents, 
Deerfield and Hatto bars them from making representations that SeQueter 
or any product or program prevents or reduces the body's absorption of 
fat or sugar from consumed food unless the representation is true at 
the time it is made and is supported by competent and reliable 
scientific evidence.
    Part II of the proposed consent order against the KCD respondents, 
Deerfield and Hatto prohibits them from representing that Sequester or 
any product or program provides any weight loss benefit; causes greater 
loss of body fat than diet and exercise alone; allows consumers to eat 
high-fat foods without increasing their risk of high cholesterol, 
clogged arteries, heart disease or other health problems associated 
with a high-fat diet; or reduces, or reduces the risk of, high 
cholesterol, clogged arteries, heart disease and other health problems 
associated with a high-fat diet, unless respondents can substantiate 
these representations with competent and reliable scientific evidence.
    Part III of the proposed consent order against the KCD respondents 
prevents them from representing that SeQuester or any product or 
program can be used beneficially and safely, in amounts or with 
frequency sufficient to cause diarrhea, unless, at the time the 
representation is made, they possess and rely upon competent and 
reliable scientific evidence that substantiates the representation, 
which when appropriate, must be competent and reliable scientific 
evidence.
    Part IV of the proposed consent order against the KCD respondents, 
Deerfield and Hatto bars them from misrepresenting the existence, 
contents, validity, results, conclusions or interpretations of any 
test, study or research.
    Part V of the proposed consent order against the KCD respondents, 
Deerfield and Hatto prohibits them from making representations about 
the benefits, performance, efficacy or safety of SeQuester or any 
product or program unless competent and reliable evidence substantiates 
any such representation.
    Part VI of the proposed consent order against the KCD respondents 
provides Deerfield and Hatto with a defense to Parts I, II and V of the 
order if they neither knew nor had reason to know of an inadequacy of 
substantiation for any representation covered by those parts of the 
order; and a defense to Part IV of the order if they neither knew nor 
had reason to know that the test, study or research did not prove, 
demonstrate or confirm any representation covered by that part of the 
order.
    Part VII of the proposed order against the KCD respondents requires 
KCD, KCD Holdings and Richards to pay $150,000 in consumer redress, in 
thirteen installments over a period of one year. If consumer redress is 
impracticable, Part VII provides that these funds will be paid to the 
United States Treasury. Part VII(C) requires KCD, KCD Holdings and 
Richards to provide the Commission with a security interest in certain 
property to insure full payment of the $150,000 of consumer redress.
    Parts VIII and IX of the proposed order against the KCD 
respondents, Deerfield and Hatto contain provisions permitting certain 
claims that are approved for labeling by the FDA, either under the 
Nutrition Labeling and Education Act, a tentative final or final 
monograph or under any new drug application approved by the FDA.
    Parts X, XI, XII, XIII and XIV of the proposed order against the 
KCD respondents, Deerfield and Hatto contain compliance reporting 
provisions requiring respondents to: retain records that bear on their 
compliance with the order; distribute copies of the order to those 
persons having responsibility with respect to the subject matter of the 
order; notify the Commission of any changes in the structure of the 
corporate respondents that may affect their compliance obligations 
under the order, or any changes in the business affiliations of the 
individual respondents; and report to the Commission their compliance 
with the terms of the order.
    Part XV of the proposed order against the KCD respondents, 
Deerfield and Hatto contains a provision automatically terminating the 
order twenty (20) years from the date that it becomes final.

Proposed Consent Order With IMT, EHI, Shell and Pelzer

    Part I of the proposed consent order against respondents IMT and 
EHI bars them from making representations that LIPITROL or any weight 
loss, fat reduction or cholesterol reduction product or program 
prevents or reduces the body's absorption of fat from consumed food or 
absorbs any amount of fat from consumed food unless the representation 
is true and supported by competent and reliable scientific evidence. 
Part I of the proposed order against respondent Shell contains the same 
bar, but covers representations for Lipitrol or any product or program.
    Part II of the proposed order against respondents IMT and EHI 
prohibits them from representing that Lipitrol or any weight loss, fat 
reduction or cholesterol reduction product or program, or any food, 
drug or dietary supplement, provides any weight loss benefit; lowers 
blood cholesterol levels; reduces, or reduces the risks associated 
with, high cholesterol, including clogged arteries, high blood 
pressure, diabetes, breast cancer and heart

[[Page 16590]]

disease; or can be used, beneficially and safely, in amounts or with 
frequency sufficient to cause diarrhea, unless respondents can 
substantiate these representations with competent and reliable 
scientific evidence. Again, the same prohibition is contained in Part 
II of the proposed order against respondent Shell, but covers 
representations for Lipitrol or any product or program.
    Part III of the proposed order against respondents IMT and EHI 
prohibits them from misrepresenting the existence, contents, validity, 
results, conclusions or interpretations of any test, study or research 
in connection with Lipitrol or any weight loss, fat reduction or 
cholesterol reduction product or program, or any food, drug or dietary 
supplement. Part IV of the proposed order prohibits respondents IMT and 
EHI from making representations about the benefits, performance, 
efficacy or safety of Lipitrol or any weight loss, fat reduction or 
cholesterol reduction product or program, or any food, drug or dietary 
supplement unless competent and reliable scientific evidence 
substantiates any such representation. Parts III and IV of the proposed 
order against respondent Shell are the same except that the 
prohibitions apply to representations for Lipitrol or any product or 
program.
    Part V of the proposed orders against respondents IMT, EHI and 
Shell, and Part I of the proposed order against respondent Pelzer, bars 
each of these respondents from providing means and instrumentalities or 
substantial assistance or support to any person or entity who they know 
or should know is making any false or misleading or unsubstantiated 
claim for any weight loss, fat reduction or cholesterol reduction 
product or program. The proposed orders define ``assistance'' to 
include providing: tests, analyses, studies or research to determine 
the benefits, performance, efficacy or safety of the product or 
program; licensing or other contractual rights to market any such 
product or program; technical assistance; or advertising, labeling or 
promotional materials for the marketing and sale of any such product or 
program.
    Part VI of the proposed orders against respondents IMT, EHI and 
Shell, and Part II of the proposed order against respondent Pelzer, 
require these respondents to monitor business practices of certain 
parties to whom they provide assistance. To the extent that any such 
party is engaged in the marketing and sale of any weight loss, fat 
reduction or cholesterol reduction product or program, these 
respondents must make an effort to determine whether false or 
misleading or unsubstantiated claims are being made with respect to any 
such product or program. Specifically, these respondents must review 
all advertisements and promotional materials and all tests, reports, 
studies, surveys, demonstrations or other evidence that any such person 
relies upon in making any claims to consumers. In addition, these 
respondents are required to terminate their business relationship with 
any person whom they know or should know is making any false or 
misleading or unsubstantiated claims.
    Part VII of the proposed order against respondents IMT and EHI 
requires them to pay $35,000 in consumer redress in three installments 
over a period of one year. If consumer redress is impracticable, Part 
VII provides that these funds will be paid into the United States 
Treasury. Part VII(C) requires IMT and EHI to provide the Commission 
with a security interest in certain property to insure full payment of 
the $35,000 of consumer redress.
    Part VII(A)(1) and (2) of the proposed order against respondent 
Shell requires him to obtain a performance bond for $1,000,000 before 
he markets, sells or holds any ownership interest or official position 
in any business that advertises or sells Lipitrol or any other weight 
loss, fat reduction or cholesterol reduction product composed of fiber 
and bile extract. Part VII(A)(3) and (4) of the proposed order also 
requires respondent Shell to obtain a performance bond of $250,000 
before he markets, sells or holds an ownership interest or official 
position in any business that advertises or sells any weight loss, fat 
reduction or cholesterol reduction product or program to consumers, 
other than his treatment of patients in connection with his private 
medical practice. Parts VII(B) through (F) require respondent Shell to 
provide a copy of the bond to the FTC; prohibit him from disclosing the 
existence of the bond to any consumer; and describe the period during 
which the bond must remain effective, the bond's coverage, the bond's 
potential beneficiaries and certain other administrative requirements.
    Part VIII of the proposed order against respondent Shell requires 
him to pay consumer redress in the amount $20,000 in four installments 
over a period of one year. In the event that consumer redress is 
impractical, this Part provides that these funds will be paid into the 
United States Treasury. Part VII(C) requires Shell to provide the 
Commission with a security interest in certain property to insure full 
payment of the $20,000 of consumer redress.
    Parts VIII and IX of the proposed order against respondents IMT and 
EHI, Parts IX and X of the proposed order against respondent Pelzer, 
contain provisions permitting certain claims that are approved for 
labels by the FDA, either under the Nutrition Labeling and Education 
Act, a tentative final or final monograph or under a new drug 
application approved by the FDA.
    Parts X, XI, XII and XIII of the proposed order against respondents 
IMT and EHI, Parts XI, XII, XIII and XIV of the proposed order against 
respondent Shell, and Parts V, VI, VII and VIII of the proposed order 
against respondent Pelzer, contain compliance reporting provisions 
requiring these respondents to: retain all records that would bear on 
their compliance with the respective orders; notify the Commission of 
any changes in the structure of the corporate respondents that may 
affect their compliance obligations under the orders, or any changes in 
the business affiliations of the individual respondents relating to the 
advertising, offering for sale, sale or distribution of any weight 
loss, fat reduction or cholesterol reduction product or program; 
distribute copies of the orders to those persons having responsibility 
with respect to the subject matter of the respective orders; and report 
to the Commission their compliance with the terms of the respective 
orders.
    Part XIV of the proposed order against respondents IMT and EHI, 
Part XV of the proposed order against respondent Shell, and Part IX of 
the proposed order against respondent Pelzer contain a provision 
automatically terminating the order twenty (20) years from the date 
that they become final.
    The purpose of this analysis is to facilitate public comment on the 
proposed orders. It is not intended to constitute an official 
interpretation of the agreements and proposed orders or to modify their 
terms in any way.
Donald S. Clark,
Secretary.
[FR Doc. 97-8802 Filed 4-4-97; 8:45 am]
BILLING CODE 6750-01-M
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