Court Opinion

ID: 2968355
Source: CourtListenerOpinion
Date Created: 2015-09-22 04:55:53.704845+00
Date Added: 2024-06-11T15:28:33.846351
License: Public Domain

PUBLISHED

UNITED STATES COURT OF APPEALS
                 FOR THE FOURTH CIRCUIT

TELEBRANDS CORP., a corporation;         
TV SAVINGS, LLC, a limited liability
company; AJIT KHUBANI,
individually and as president of
Telebrands Corp. and sole member
of TV Savings, LLC,                             No. 05-2322
                          Petitioners,
                  v.
FEDERAL TRADE COMMISSION,
                      Respondent.
                                         
                On Petition for Review of an Order
                of the Federal Trade Commission.
                             (D09313)

                       Argued: May 23, 2006

                       Decided: August 7, 2006

  Before WILKINS, Chief Judge, DUNCAN, Circuit Judge, and
   Joseph R. GOODWIN, United States District Judge for the
    Southern District of West Virginia, sitting by designation.

Order enforced by published opinion. Judge Duncan wrote the opin-
ion, in which Chief Judge Wilkins and Judge Goodwin joined.

                             COUNSEL

ARGUED: Edward Francis Glynn, Jr., VENABLE, L.L.P., Washing-
ton, D.C., for Petitioners. Leslie R. Melman, FEDERAL TRADE
2                      TELEBRANDS CORP. v. FTC
COMMISSION, Washington, D.C., for Respondent. ON BRIEF:
Theodore W. Atkinson, VENABLE, L.L.P., Washington, D.C., for
Petitioners. James A. Kohm, Associate Director, Connie M. Vecellio,
Bureau of Consumer Protection, Walter Gross, III, Bureau of Con-
sumer Protection, William Blumenthal, General Counsel, John F.
Daly, Deputy General Counsel for Litigation, FEDERAL TRADE
COMMISSION, Washington, D.C., for Respondent.

                              OPINION

DUNCAN, Circuit Judge:

   The petitioners, Telebrands Corporation, TV Savings, LLC and
Ajit Khubani1 (collectively, "Telebrands"), challenge the scope of a
Federal Trade Commission ("FTC") Order containing an "all claims,
all products" fencing-in provision. We enforce the Order.

                                   I.

   Telebrands markets a wide variety of products to consumers using
direct-response advertising—product advertisements that offer the
consumer a vehicle, such as a telephone number, mailing address or
Internet site, to respond directly to the advertiser.2 It routinely
employs a "compare and save" strategy to select and market products.
In other words, Telebrands monitors trends in the marketplace and in
various advertising channels to identify popular items that it can repli-
cate cost effectively. Once it locates such a product, Telebrands enters
the market as a competitor, offering a comparable item at a lower
price.

    Telebrands employed this strategy when it introduced the Ab
    1
    Khubani is the president of Telebrands Corporation and the sole
member of TV Savings, LLC.
  2
    Some of Telebrands’s more successful products include Ambervision
Sunglasses, the Magic Hanger, Dental White Tooth Whitening System,
the Safety Can Opener, the Audubon Singing Bird Clock, the Better
Pasta Pot and the Roll-a-Hose Flat Hose.
                      TELEBRANDS CORP. v. FTC                         3
Force, an electronic muscle stimulation ("EMS") abdominal belt, in
December 2001. The Ab Force consisted of a small battery-powered
control unit held in place by an elastic belt worn around the abdomi-
nal area. The control unit cycled an electric current into the abdominal
muscles, causing them repeatedly to contract and release involuntar-
ily. When Telebrands introduced the Ab Force, several other EMS
products, including several abdominal belts, were already on the mar-
ket. In fact, Khubani first considered marketing an EMS abdominal
belt in early 2001 when he noticed the AbTronic abdominal belt in
J.W. Greensheet. J.W. Greensheet is a direct-response television
industry publication that generates weekly rankings of spots and
infomercials based on two sources of information: 1) media budget
data that it receives from advertisers; and 2) its own monitoring of
national cable and selected broadcast markets.3

   According to J.W. Greensheet, infomercials for three competing
EMS abdominal belts, AbTronic, Ab Energizer and Fast Abs, were
highly ranked before and during the time that the Ab Force was being
marketed. Those infomercials promoted the belts as a method to lose
weight, fat and inches, and to gain well-defined abdominal muscles,
all without the need for exercise. Advertisements that aired during
that time period for some other EMS abdominal belts contained simi-
lar claims.

   Telebrands elected not to make such claims expressly but sug-
gested them implicitly by encouraging comparison to the products
that did so. For example, Ab Force advertisements referenced "those
fantastic electronic ab belt infomercials on TV." J.A. 991, 1014, 1015.
The initial television and radio advertisements for the Ab Force also
described abdominal belts as "the latest fitness craze to sweep the
country," J.A. 991, 1015, and the radio advertisement pointed out that
the other belts "promis[e] to get our abs into great shape fast—
without exercise." J.A. 1015. Fit, well-muscled models were shown
using the Ab Force in the television advertisements; some of those
  3
   Direct-response television types include both spots (also known as
short form), which are thirty seconds to two minutes in length, and
infomercials (also known as long form), which are typically twenty-eight
and one-half minutes in length.
4                        TELEBRANDS CORP. v. FTC
models also posed to show off lean physiques, while others performed
conventional abdominal exercises.

   The FTC issued an administrative complaint alleging that Tele-
brands had made false and misleading claims in violation of sec-
tions 5 and 12 of the Federal Trade Commission Act ("FTC Act"), 15
U.S.C. §§ 45, 52.4 Specifically, the complaint alleged that Telebrands
had made unsubstantiated claims that the Ab Force caused loss of
weight, inches or fat, caused well-defined abdominal muscles, and
was an effective alternative to regular exercise.

   An administrative law judge ("ALJ") found that Telebrands had
made the claims alleged in the complaint and that the claims were
material to consumers. Furthermore, the parties had stipulated that
Telebrands neither possessed nor relied on substantiation of the
alleged claims, and that, in fact, the use of the Ab Force did not result
in the claimed benefits. Therefore, the ALJ concluded that the claims
made by Telebrands were false and misleading in violation of the
FTC Act.

   The FTC complaint sought broad "fencing-in" relief,5 including a
provision requiring Telebrands to have "substantiation prior to adver-
tising ‘any other EMS device, or any food, drug, dietary supplement,
device, or any other product, service, or program.’" J.A. 717. How-
ever, the ALJ imposed a narrower provision:

        [Telebrands] . . . in connection with the manufacturing,
        labeling, advertising, promotion, offering for sale, sale, or
    4
     Section 5 of the FTC Act makes unlawful "[u]nfair methods of com-
petition in or affecting commerce, and unfair or deceptive acts or prac-
tices in or affecting commerce." 15 U.S.C. § 45(a)(1). Section 12 of the
FTC Act makes "[t]he dissemination or the causing to be disseminated
of any false advertisement within the provisions of [the] section . . . an
unfair or deceptive act or practice in or affecting commerce within the
meaning of section 5." 15 U.S.C. § 52(b).
   5
     "‘Fencing-in’ relief refers to provisions in a final [FTC] order that are
broader than the conduct that is declared unlawful. Fencing-in remedies
are designed to prevent future unlawful conduct." Telebrands Corp., No.
9313, 2005 FTC LEXIS 178, n.3 (F.T.C. Sept. 19, 2004).
                      TELEBRANDS CORP. v. FTC                         5
    distribution of Ab Force, any other EMS device, or any
    device, product, service or program promoting the efficacy
    of or pertaining to health, weight loss, fitness, or exercise
    benefits shall not make any representation, in any manner,
    expressly or by implication, about weight, inch, or fat loss;
    muscle definition; exercise benefits; or the health benefits,
    safety, or efficacy of any such product, service, or program,
    unless, at the time the representation is made, [Telebrands]
    possess[es] and rel[ies] upon competent and reliable scien-
    tific evidence that substantiates the representation.

J.A. 724. On appeal, the FTC affirmed the ALJ’s conclusion that
Telebrands had violated the FTC Act but entered a Final Order that
included a broader fencing-in provision:

    [Telebrands] . . . in connection with the manufacturing,
    labeling, advertising, promotion, offering for sale, sale, or
    distribution of Ab Force, any other EMS device, or any
    food, drug, dietary supplement, device, or any other prod-
    uct, service or program, shall not make any representation,
    in any manner, expressly or by implication, about weight,
    inch, or fat loss, muscle definition, exercise benefits, or the
    health benefits, safety, performance, or efficacy of any prod-
    uct, service, or program, unless, at the time the representa-
    tion is made, [Telebrands] possess[es] and rel[ies] upon
    competent and reliable evidence, which when appropriate
    must be competent and reliable scientific evidence, that sub-
    stantiates the representation.

J.A. 773 (emphasis added).

   Telebrands appeals this fencing-in provision, which it refers to as
an "all claims, all products" provision and the FTC refers to as "com-
prehensive coverage." Telebrands requests that we modify the FTC’s
Final Order to replace the challenged provision with the more narrow
provision imposed by the ALJ or remand to the FTC for the purpose
of determining the appropriate scope of the provision in light of our
opinion. Significantly, Telebrands does not appeal the FTC’s conclu-
sion that Telebrands violated sections 5 and 12 of the FTC Act.
6                     TELEBRANDS CORP. v. FTC
                                  II.

   Telebrands argues that the FTC lacked authority to issue the
broader fencing-in provision because no reasonable relation exists
between that provision and Telebrands’s violation of sections 5 and
12. Specifically, it argues that substantial evidence does not support
two FTC findings relied upon as a foundation for the provision: 1)
Telebrands intended to make false advertising claims; and 2) Tele-
brands’s conduct in making implied claims in the marketing of the Ab
Force is transferable to other product advertising. It also argues that
the FTC erred as a matter of law in finding that Telebrands’s entry
into three prior consent orders for unrelated alleged violations on
unrelated products, and with no admission of liability, constitutes a
history of prior violations that supports the imposition of the broad
fencing-in language.

   Congress has "empowered and directed" the FTC to prevent the use
of "unfair or deceptive acts or practices in or affecting commerce." 15
U.S.C. § 45(a)(2). In line with that directive, Congress has given the
FTC primary responsibility for devising orders to address those
deceptive practices, and the FTC has broad discretion in doing so.
FTC v. Colgate-Palmolive Co., 380 U.S. 374, 392 (1965). The FTC’s
factual findings are conclusive if supported by substantial evidence.
El Moro Cigar Co. v. FTC, 107 F.2d 429, 431-32 (4th Cir. 1939).
Moreover, courts will interfere with the remedy selected by the FTC
"only where there is no reasonable relation between the remedy and
the violation." Atlantic Ref. Co. v. FTC, 381 U.S. 357, 377 (1965).

   The FTC considers three factors in determining whether order cov-
erage bears a reasonable relationship to the violation it is intended to
remedy: "(1) the seriousness and deliberateness of the violation; (2)
the ease with which the violative claim may be transferred to other
products; and (3) whether the respondent has a history of prior viola-
tions." Stouffer Foods Corp., 118 F.T.C. 746, 811 (1994). In review-
ing FTC orders for the existence of a reasonable relationship between
the remedy and the violation, courts have relied on these same factors.
See, e.g., Sears, Roebuck & Co. v. FTC, 676 F.2d 385, 392 (9th Cir.
1982); see also, e.g., Kraft, Inc. v. FTC, 970 F.2d 311, 326 (7th Cir.
                        TELEBRANDS CORP. v. FTC                           7
1992); Bristol-Myers Co. v. FTC, 738 F.2d 554, 561 (2d Cir. 1984).
We do likewise.6

   The reasonable relationship analysis operates on a sliding scale—
any one factor’s importance varies depending on the extent to which
the others are found. In other words, the more serious a violation, the
less important transferability and prior history become. See Sears, 676
F.2d at 392 ("The more egregious the facts with respect to a particular
element, the less important it is that another negative factor be pres-
ent."). All three factors need not be present for a reasonable relation-
ship to exist. See id. We discuss each factor in turn.

                                    A.

   We first consider the seriousness and deliberateness of the viola-
tion. Substantial evidence supports the FTC’s finding that Tele-
brands’s violations of sections 5 and 12 were serious. As noted by the
FTC, Telebrands’s violations did not involve overselling some aspect
of a product that was essentially fit for the advertised purpose. Rather,
the violations involved claiming, with no substantiation, that the Ab
Force could deliver certain results that Telebrands later admitted were
beyond the device’s capabilities. Telebrands stipulated before the ALJ
that "[t]he Ab Force does not cause loss of weight, inches or fat; [t]he
Ab Force does not cause well-defined abdominal muscles; [u]se of the
Ab Force is not an effective alternative to regular exercise; [and Tele-
brands] did not possess and rely upon substantiation for [claims that
the Ab Force could deliver those benefits]." J.A. 791.

  Moreover, Telebrands mounted an expensive, nationwide advertis-
  6
    Our sister circuits have sometimes considered additional factors based
on the facts of the cases before them. See, e.g., Removatron Int’l Corp.
v. FTC, 884 F.2d 1489, 1499 (1st Cir. 1989) (relying on FTC factors plus
potential for health hazards, duration of deceptive advertisement’s use,
average consumer’s ability to evaluate violator’s claims, and extent of
government regulation of advertised product); Am. Home Prods. Corp.
v. FTC, 695 F.2d 681, 706 (3d Cir. 1982) (relying on FTC factors plus
potential for health hazards). The parties before us do not urge the adop-
tion of any additional factors, and the FTC factors are sufficient to deter-
mine whether a reasonable relationship exists on these facts.
8                      TELEBRANDS CORP. v. FTC
ing campaign for the Ab Force that was highly successful. Telebrands
spent over four million dollars on the multimedia advertising cam-
paign for the Ab Force, which included spots that aired more than ten
thousand times on cable, satellite and broadcast television outlets in
major national markets. That campaign resulted in the sale of approxi-
mately 747,000 units with gross sales, including accessories, exceed-
ing nineteen million dollars. These facts militate in favor of a finding
that the violations were serious. See Kraft, 970 F.2d at 326 (approving
FTC use of size and duration of advertising campaign as basis for
seriousness finding).

   Substantial evidence also supports the FTC’s deliberateness find-
ing. Telebrands’s execution of the compare and save strategy, when
considered in light of its extensive experience with direct-response
advertising in general and with that strategy in particular, negates any
suggestion that it unintentionally made the false and misleading
claims found by the FTC. Telebrands employed the compare and save
strategy to market the Ab Force because it wanted to capitalize on the
popularity of existing EMS abdominal belts, devices that its advertise-
ments referred to as "fantastic." It knew that the infomercials for those
devices, which it referenced in its advertisements, had claimed that
they caused the loss of weight, inches or fat, developed well-defined
abdominal muscles, and offered an effective alternative to regular
exercise. Telebrands’s assertion that, because it did not explicitly
make those same claims in the Ab Force advertisements, it did not
intend for consumers to believe that the Ab Force provided those
same benefits strains credulity. In fact, Telebrands calculatedly fos-
tered such beliefs through its choice of visual images for the televi-
sion advertisements.

    Telebrands, relying on evidence that Khubani rejected a script for
the Ab Force television advertisements that referred to "get[ting] into
shape fast without exercise," and "hav[ing] a flatter tummy without
painful sit-ups," J.A. 512, claims that it intended to make comparisons
based solely on price and technology. Although this evidence sug-
gests that Telebrands sought to avoid making explicit health claims,
it fails to contradict the finding that Telebrands intended to make the
same claims implicitly. Ab Force television and radio advertisements
touted the device as being "just as powerful and effective" as the EMS
abdominal belts sold in infomercials. J.A. 1000, 1015. Those same
                       TELEBRANDS CORP. v. FTC                         9
advertisements lacked any explicitly identified purpose for using the
Ab Force. That omission left consumers to infer, based on knowledge
of the infomercials for the other EMS abdominal belts and, in the case
of the television advertisements for the Ab Force, the visual images
of fit models with well-defined abdominal muscles using the device,
the benefit associated with the Ab Force’s power and effectiveness.

   Telebrands also attempts to undermine the FTC’s deliberateness
finding by raising tangential issues that have little or no bearing on
that finding. According to Telebrands, the FTC concluded that Tele-
brands intended for consumers to associate the Ab Force with false
claims made in the AbTronic, Ab Energizer and Fast Abs advertise-
ments. Telebrands claims that the FTC premised that conclusion on
three "linked inferences:" 1) the benefit claims made in the advertise-
ments for those devices were, in fact, false; 2) the infomercials for
those devices were among the most frequently aired during the time
period immediately before and during the Ab Force marketing cam-
paign; and 3) the existence of other EMS products on the market at
the time of the Ab Force marketing campaign was irrelevant. It then
challenges the validity of each inference. Telebrands’s focus on these
tangential issues appears to be nothing more than an indirect attack
on the FTC’s conclusion that Telebrands violated sections 5 and 12
of the FTC Act, a conclusion that Telebrands did not appeal. Never-
theless, we briefly address each of Telebrands’s arguments.

   Telebrands argues that the FTC’s failure to introduce evidence that
the weight loss and exercise claims made in the Ab Energizer,
AbTronic and Fast Abs advertisements were false precludes the con-
clusion that references to those advertisements demonstrated Tele-
brands’s intent to make false claims. We disagree. The issue is
whether Telebrands intended to make false and misleading claims.
Substantial evidence supports the fact that it intended to insinuate that
the Ab Force could deliver the same weight loss and exercise benefits
claimed in the advertisements for the other EMS abdominal belts.
Even if the AbTronic, Ab Energizer and Fast Abs could deliver those
benefits, the claims would be false as applied to the Ab Force because
Telebrands stipulated that "[t]he Ab Force does not cause loss of
weight, inches or fat; [t]he Ab Force does not cause well-defined
abdominal muscles; [u]se of the Ab Force is not an effective alterna-
tive to regular exercise; [and Telebrands] did not possess and rely
10                    TELEBRANDS CORP. v. FTC
upon substantiation for [claims that the Ab Force could deliver those
benefits]." JA 791.

   Telebrands challenges the validity of the second and third infer-
ences, arguing that it did not intend to refer to the AbTronic, Ab Ener-
gizer and Fast Abs, and thus, to the benefit claims made in the
infomercials for those devices, when it referenced "those fantastic
electronic ab belt infomercials on TV." It argues that the FTC’s find-
ing that the AbTronic, Ab Energizer and Fast Abs infomercials were
among the most frequently aired on television lacks support in the
record, and that the FTC gave insufficient weight to the fact that other
EMS products were being marketed during the same time period as
those devices. Whether the AbTronic, Ab Energizer and Fast Abs
infomercials were the most frequently aired on television is irrelevant.
Khubani admitted that Telebrands used J.W. Greensheet to get a gen-
eral idea of what was on television, even though he did not necessar-
ily believe the absolute order of the rankings was reliable. That
publication highly ranked the infomercials for the AbTronic, Ab
Energizer and Fast Abs. Moreover, Khubani admitted that seeing the
AbTronic in the publication’s rankings influenced Telebrands’s deci-
sion to market the Ab Force. To be effective, the compare and save
strategy requires a point of reference with which the consumer is
familiar. This evidence suggests that Telebrands believed that the
AbTronic, Ab Energizer and Fast Abs infomercials aired frequently
enough to provide that familiarity. The fact that other EMS products
were being marketed during that same time period fails to advance
Telebrands’s claim that its violations were not deliberate, especially
given the fact that at least some, if not all, of the advertisements for
other EMS abdominal belts made health claims similar to those made
in the AbTronic, Ab Energizer and Fast Abs infomercials.

                                  B.

   We next consider the second factor relevant to the existence of a
reasonable relationship between the remedy and the violation, the
transferability of Telebrands’s conduct to other products. Substantial
evidence supports the FTC’s finding that Telebrands’s conduct is
transferable. The FTC found that the marketing strategy for the Ab
Force has potential applicability to almost any kind of product or ser-
vice, including many that Telebrands already markets. Indeed, the
                       TELEBRANDS CORP. v. FTC                          11
compare and save strategy is one of Telebrands’s standard marketing
tools. An unfair practice is transferable when other products can be
marketed using similar techniques. See Sears, 676 F.2d at 392, 394-
95.

   Telebrands argues that the FTC’s factual findings are insufficient
to justify the Order’s broad fencing-in language because those find-
ings relied upon a peculiar fact pattern surrounding the marketing of
the Ab Force that is unlikely to be repeated. Specifically, it contends
that the circumstances were unique because it marketed the Ab Force
at the same time as three competing products that 1) were substan-
tially similar in appearance, 2) were advertised on frequently aired
infomercials using similar visual images of attractive men and
women, and 3) made claims that were subsequently the subject of
FTC enforcement action.7

   Again, Telebrands attempts to shift the focus of our analysis to
minutiae. The circumstances that enabled Telebrands to mount such
an effective marketing effort for the Ab Force are immaterial to our
analysis of transferability, except in as much as they reflect on Tele-
brands’s ability to recognize and use such circumstances to its advan-
tage in making false and misleading claims. The pertinent issue with
respect to transferability is whether Telebrands’s conduct—evoking
explicit benefit claims made in the advertisements for other products
and using visual images to imply, without substantiation, that the
Telebrands product will produce those same benefits—can be used by
Telebrands to sell other goods and services. The record amply sup-
ports the FTC’s conclusion that it can.

   Khubani acknowledged that one of Telebrands’s modes of opera-
tion involves targeting existing products that it can imitate profitably.
  7
   The FTC filed actions seeking permanent injunctive and equitable
monetary relief against the marketers of the Ab Energizer, AbTronic and
Fast Abs, "alleging that their advertisements made false representations
that the devices were an effective alternative to exercise and caused users
to lose weight, inches, and fat." J.A. 732. It settled separately with the
marketers of the Ab Energizer and Fast Abs for permanent injunctions
and equitable monetary relief. It was awarded a permanent injunction
and a judgment of monetary relief in the AbTronic case.
12                     TELEBRANDS CORP. v. FTC
Indeed, this approach is one reason that Telebrands incurs the expense
of subscribing to publications that monitor direct-response advertis-
ing. In implementing the compare and save strategy for the Ab Force,
Telebrands deliberately selected a popular product category with fre-
quently advertised comparative products. The product category
became popular due, at least in part, to the claims that were subse-
quently the subject of FTC enforcement action. Frequent advertising
of the comparative products created consumer familiarity, an element
essential to the compare and save strategy. Because the other devices
were already on the market, Telebrands controlled the degree of simi-
larity between the Ab Force and the other EMS devices and between
the visual images used in the Ab Force campaign and those used for
advertising the other devices. Thus, the fact pattern surrounding the
marketing of the Ab Force does not represent a unique set of circum-
stances that is unlikely to be repeated; it represents a concerted effort
by Telebrands to recognize, create and use circumstances to competi-
tive advantage. Only Telebrands’s imagination and budget would
limit its ability to use similar tactics in the future.

   Telebrands also argues that the FTC’s Order attempts to fence-in
a legal practice, the compare and save strategy, "on the theory that the
practice could be used deceptively at some point in the future."
Appellant’s Br. at 53. This argument is simply inaccurate. The FTC
Order does not prohibit Telebrands from employing a compare and
save strategy. It only places off-limits Telebrands’s use of the com-
pare and save strategy, or any other strategy, to make representations
about its products without competent and reliable evidence to sub-
stantiate those representations. In other words, the Order only prohib-
its the use of the compare and save strategy in a manner that violates
the FTC Act.

                                   C.

   Finally, Telebrands challenges the FTC’s application of the third
factor in determining whether a reasonable relationship exists
between the remedy and the violation, the existence of any history of
prior violations. Telebrands argues that the FTC erred as a matter of
law in finding that Telebrands’s entry into three prior consent orders
for unrelated alleged violations on unrelated products, and with no
                       TELEBRANDS CORP. v. FTC                        13
admission of liability, supports the imposition of the broad fencing-in
language.

   The FTC concluded that the first "two factors—the serious and
deliberate nature of [Telebrands’s] violations and the ease with which
they can be transferred to any one of the myriad of services and prod-
ucts offered by [Telebrands]—are sufficient, without more, to justify
comprehensive coverage in [the] final order." J.A. 765. Nevertheless,
it proceeded to conclude that Telebrands’s history of entering into
multiple prior consent orders with the FTC supported such coverage.

   We agree with the FTC’s conclusion that the extent of the first two
factors establishes that a reasonable relationship exists between the
remedy and the violation. See Kraft, 970 F.2d at 327 (holding that
seriousness, deliberateness and transferability of violations were suffi-
cient to establish reasonable relationship between remedy and viola-
tion despite no history of prior violations). Accordingly, we need not
reach the issue of whether the FTC erred as a matter of law in consid-
ering the consent orders.

                                  III.

   For the foregoing reasons, we deny Telebrands’s petition to modify
the FTC’s Final Order. The Order is

                                                          ENFORCED.