Hi-Tech Executives End Up in Jail; District Court Imposes Incarceration as a Coercive Sanction in Civil Contempt Proceedings

By Riëtte van Laack –

This case dates back to November 2004, when the FTC filed a complaint in the United States District Court for the Northern District of Georgia, alleging that defendants, including the National Urological Group, Inc., Hi-Tech Pharmaceuticals, Inc., Jared Wheat and Stephen Smith, violated the FTC Act by marketing various dietary supplements with unsubstantiated weight loss claims.  In 2008, the Court entered final judgment and permanent injunctions against the Defendants.  Under the injunction the Defendants were prohibited from advertising weight-loss products with certain claims unless those claims were substantiated by competent and reliable scientific evidence.

In August 2013, the Court entered an order finding that Hi-Tech, Wheat and Smith were in contempt of the permanent injunction because Defendants continued to market supplements with weight loss claims that were not supported by competent and reliable scientific evidence.  In May 2014, the Court issued a sanctions order deciding that Defendants were to pay compensatory damages of $ 40,120,950 (the amount of gross receipts of the alleged violative products) and to recall all products bearing the alleged violative packaging and labels at the retail level. 

In the sanctions order, the Court expressed concern about the Defendants’ lack of diligence and good faith compliance with the permanent injunction.  The Court found that the Defendants ignored advice by counsel that the claims violated the Court’s order, continued to market the alleged violative products even after the Court entered its contempt order, and did not correct the advertising claims on their website until the second day of the sanctions hearing (which was more than 7 months after the contempt order had been issued).  It stated that it would “order coercive incarceration if a complete recall [was] not completed.”

In August 2014, the Court found that Defendants did not complete the ordered recall.  The Court ruled that the evidence showed that it was not until forty-one days after the sanctions order was entered that Defendants began their recall.  Moreover, the Court concluded that there was evidence suggesting that additional products with violative claims entered the market after the sanctions order had been entered.  The Court concluded that Defendants’ actions demonstrate an unwillingness to comply with the sanctions order and that coercive incarceration was needed.  It ordered Wheat and Smith, the Hi-Tech executives with the authority to effectuate a recall, incarcerated until they “purge themselves of their contempt.”  Under the Court’s ruling, they will be incarcerated until they provide evidence that four conditions have been met:

1. No more violative products are available for purchase at retail stores;
2. A recall notice, identifying what is being recalled and including details about the return procedure, is in use.
3. The recall notice has been distributed (via letter or e-mail) to all relevant parties.
4. The recall notice is prominently displayed on each page of the company’s website.  (The order details the manner of display).

The executives were ordered by the District Court to voluntarily surrender themselves last Friday, September 5, 2014.   Nevertheless, the Defendants made one last ditch effort to avoid jail.  They filed an emergency motion for a stay pending appeal and for a writ of mandamus with the United States Court of Appeals for the Eleventh Circuit.  However, on September 4, 2014, that court denied both motions.  (Additional information on the case is available here.)