Sequels are seldom as interesting as the original. Rocky is a classic, but Rocky II, III, IV . . . UUUGGGHHH! The original Star Wars also falls into the classic category (and I might take some flak for this), but all subsequent Star Wars films didn't quite live up to the original. But in the law, sequels have a role other than to attract box office sales; new developments can make a repeat analysis necessary – and usually more interesting.
In October 2006, I wrote about the Third Party Labeling Exemption (TPLE) to the Dietary Supplement Health and Education Act ("DSHEA"). The thesis of the article was that a misuse of the TPLA has evolved among dietary supplement marketers in direct selling channels, and that it is simply a matter of time until the shoe drops on the practice. Two days after the article went to press, the Salt Lake Tribune reported that Xango received a warning letter from the FDA relating to third party material that Xango distributors were using to sell Xango's products and recruit new distributors. So in this case, recent developments call for a sequel.
Here's a quick summary of the facts as gleaned from the FDA's warning letter and the article published in The Salt Lake Tribune. Xango held a recruiting function at which corporate employees told attendees where and how to obtain third party sales tools for Xango's products. A question exists as to just how "independent" the third party material was, since it was authored by relatives of Xango's founders. Xango acknowledged that the material made drug claims, but disclaimed responsibility for the content because the company had no financial affiliation with the publisher. The publisher and the FDA claim that Xango at least tacitly approved the use of the material as promotional tools for Xango's sales force. The publisher stated that Xango acquiesced in their attendance at Xango functions, and the FDA states that Xango employees told attendees at the recruiting meeting how and where to obtain the tools from the publisher. For those interested in the specifics, the warning letter is available at http://www.fda.gov/foi/warning_letters/g6031d.htm and The Salt Lake Tribune article is available at http://www.sltrib.com/Search//ci_4421792.
Before diving into an analysis, understand that this article is not about Xango. While Xango is an example of a supplement marketer that has made aggressive use of the TPLE, the FDA could have just as easily looked at the "third party" material of a dozen or more multilevel marketing companies and issued a similar warning letter. Rather, my point in citing the FDA warning letter to Xango is that it is a wake-up call to those MLMs marketing dietary supplements that make aggressive use of the TPLE. Pay attention to the FDA's message, because the next time this becomes an issue, the consequences are likely to be much more severe than a warning letter.
All this leads to the questions: "What can we do with third party material?" and "What constitutes proper third party material?" We must first answer the question: "what can we do with third party material?" because MLM companies and distributors alike usually want to use the material as part of their product advertising campaign. The Federal Trade Commission has addressed this issue in Dietary Supplements: An Advertising Guide for Industry http://www.ftc.gov/bcp/conline/pubs/buspubs/dietsupp.htm. The FTC states:
Although the FTC does not regulate the content or accuracy of statements made in independently written and published books, articles, or other non-commercial literature, FTC law does prohibit the deceptive use of such materials in marketing products. The determination of whether the mate- rials will be subject to FTC jurisdiction turns largely on whether the materials have been created or are being used by an advertiser specifically for the purpose of promoting the product.
Therefore, if a company spends great energy and resources developing third party material with the intent of using it as promotional advertising, it is likely that the material will not pass FTC scrutiny. The reason is that for the material to comply with the TPLE, it must be stripped of content that would make it effective as a marketing tool. The bottom line is that to avoid FTC scrutiny, the material must be for scientific or educational purposes rather than promotional purposes.
In the real world, the distinction between educational and promotional material is fuzzy. An article from a reputable medical journal that is undeniably published for its scientific value can nevertheless help boost sales of a product if it reports favorable clinical results on the product. If used properly (i.e., distributed for educational purposes without distributor provided editorial comment such as "See – this stuff cures cancer"), it is unlikely that an MLM company that makes the article available to its distributors will be challenged. With this in mind, it is necessary to analyze each of the components to the TPLE.
A publication, including an article, a chapter in a book, or an official abstract of a peer-reviewed scientific publication that appears in an article and was prepared by the author or the editors of the publication, which is reprinted in its entirety, shall not be defined as labeling when used in connection with the sale of a dietary supplement to consumers when it -
(1) is not false or misleading;
(2) does not promote a particular manufacturer or brand of a dietary supplement;
(3) is displayed or presented, or is displayed or presented with other such items on the same subject matter, so as to present a balanced view of the available scientific information on a dietary supplement;
(4) if displayed in an establishment, is physically separate from the dietary supplements; and
(5) does not have appended to it any information by sticker or any other method.
The first article in this series discussed the importance that the material be written by bona fide independent authors. To recap, if the author has a material connection to the marketer, it creates a suspicion in the eyes of the FDA and FTC that the material is actually intended for promotional rather than educational or scientific purposes. Nothing in the statute demands autonomy between the author and the marketer, but the FTC has raised this point in Dietary Supplements: An Advertising Guide for Industry, and this is undoubtedly an issue underlying the Xango warning letter as the authors of the questionable material are relatives of Xango's founders. The key point is that if there is a material connection between the author and the marketer, it will be used as evidence that the material is actually part of a marketing campaign.
Marketing material must be concise and punchy because most consumers will not read a detailed scientific report before making a decision to buy a product. Therefore, network marketers want something short and simple that emphatically delivers the point that their product has specific beneficial properties. But the material also must exude a degree of authority. To accomplish these competing objectives, supplement marketers often select choice snippets from favorable articles on their ingredients. It is a great marketing approach, but it doesn't comply with the TPLE. The TPLE requires that the material be reprinted in its entirety. Its an all-or-nothing decision that is not marketing friendly; but that's the point – under the TPLE, the third party material is not supposed to be for marketing purposes. One side-note to the reprint-in-entirety requirement. If a marketer elects to reprint an article or other material, it must make sure that it has secured the appropriate licenses from the copyright holder and paid any applicable license fees.
This seems obvious, but it is often overlooked by those who want to self-publish third party material. The most common flaw in this regard comes in the form of consumer testimonials. A consumer will talk about how a product cured his cancer, and proclaim that its not false or misleading because it really happened to him. While the consumer may believe that his testimonial is not false or misleading, it must be evaluated in conjunction with the FTC's requirements under the Testimonials and Endorsements Guidelines. Failure to comply with these measures will cause the material to fall outside of the TPLE.
In addition, there is always the requirement that any type of claim be supported by competent and reliable scientific evidence. The FTC and FDA have consistently taken the position that testimonials, no matter how compelling, do not constitute competent and reliable scientific evidence. They are great for marketing, but they do not constitute scientific evidence.
If third party material promotes a specific brand or manufacturer, it obviously looks and sounds like advertising material. As the saying goes, if it looks like a duck, and walks like a duck, … it's a duck! In fact, if material promotes a specific brand, it is a relatively simple matter to establish that the material is for promotional purposes. However, there is a misconception that this TPLE requirement prohibits all mention of a brand in an article or other material. In fact, third party material can identify a specific brand of supplement, it just cannot promote a specific brand. The Commission on Dietary Supplement Labels recognized that the mention of a supplement brand is appropriate in an author's documentation of a clinical study in its report to the President in 1997. As an example, if the author of the study documents in her protocol that she used brand X herbs in a 1500 mg dosage, this should not constitute promotion of the brand as it is necessary for the proper documentation of the study. If however, the author went further and laces the report with unnecessary references to brand X, this would become promotional material.
The TPLE does not define how far one must go in presenting a balanced view on a subject, and there have been no court decisions to provide guidance. Direct Sellers must therefore use their best judgment as to how far to go in presenting a balanced view. As a general rule, if there is inconclusive or negative published materials relating to the efficacy or safety of a dietary supplement in addition to favorable materials, the perspectives of this material must also be presented. This does not mean that the supplement seller must reprint the negative or inconclusive materials (and pay the corresponding license fees), but they should at least clearly and conspicuously disclose the existence of these alternate views along with summaries and citations.
This requirement has not been a major issue for multilevel marketing companies since they seldom sell their products through retail establishments. But for every rule there is an exception, and I am aware of a few companies that allow their sales force to operate retail outlets. Those that allow this to occur should ensure that their sales force who operate retail outlets have a library section of their store that is physically separate from the supplement section.
The internet also presents a common issue on this point. Is an internet website an "establishment?" DSHEA was enacted in 1994, prior to the internet explosion. In 1994 corporate MLM websites were the exception rather than the rule. Today, the opposite is true. Without a guiding court decision, we cannot say with absolute certainty whether a website is an "establishment" contemplated by the TPLE, but prudence would dictate that supplement sellers treat their websites as an "establishment." Therefore, the company should separate the library section on its website from other sections of its site.
The final requirement of the TPLE is that the literature contain no other information attached to it. At first look this is another seemingly straightforward and easy element to comply with, but on closer inspection it is clouded by the interent. Do links from the third party literature to the company's products constitute prohibited appendices? Again, we are guided by prudence since the statute was enacted before the internet had a dominant commercial role and is therefore silent on this point. Taking this approach, best practice dictates that once a company links to the library section of its website, there be no link returning the reader to the company's product information and the "back" button on the browser be disabled.
The TPLE is a great way for multilevel marketing companies to disseminate useful information about dietary supplements. While there is little guidance from the courts interpreting the boundaries of the TPLE, the FDA has sent a clear message on its position with its warning letter to Xango. The FTC has yet to directly address the issue in litigation, but by all indications, if (when) the Commission brings a case, it will closely scrutinize the relationships between the authors of third party material and the company disseminating it. If there is a material connection, the FTC will treat it as all other dietary supplement advertising cases by demanding that there be competent and reliable scientific evidence to support the claims contained in the third party material.
The warning signals from the FDA and FTC are clear. Supplement marketers are cautioned to pay close attention to these signs and conduct themselves cautiously. So far the FDA has only issued a warning letter, but if gun-slinging network marketers continue to press the limits of the TPLE, we will certainly see more stringent measures from the government. When this occurs another sequel to this article will follow, but like Ali vs. Frazier II and III, the sequels should prove more and more interesting as the stakes are raised.
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