FTC v. QT Inc ( 2008 )


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  •                             In the
    United States Court of Appeals
    For the Seventh Circuit
    ____________
    No. 07-1662
    FEDERAL TRADE COMMISSION,
    Plaintiff-Appellee,
    v.
    QT, INC., Q-RAY COMPANY, BIO-METAL,
    INC., and QUE TE PARK,
    Defendants-Appellants.
    ____________
    Appeal from the United States District Court for the
    Northern District of Illinois, Eastern Division.
    No. 03 C 3578—Morton Denlow, Magistrate Judge.
    ____________
    ARGUED OCTOBER 31, 2007—DECIDED JANUARY 3, 2008
    ____________
    Before EASTERBROOK, Chief Judge, and BAUER and
    WILLIAMS, Circuit Judges.
    EASTERBROOK, Chief Judge. WIRED Magazine recently
    put the Q-Ray Ionized Bracelet on its list of the top ten
    Snake-Oil Gadgets. See http://blog.wired.com/gadgets/
    2007/11/10-awesome-gadg.html.
    The “Gold Deluxe” Q-Ray Ionized Bracelet
    2                                             No. 07-1662
    The Federal Trade Commission has an even less honorable
    title for the bracelet’s promotional campaign: fraud. In
    this action under 15 U.S.C. §§ 45(a), 52, 53, a magistrate
    judge, presiding by the parties’ consent, concluded after
    a bench trial that the bracelet’s promotion has been
    thoroughly dishonest. The court enjoined the promo-
    tional claims and required defendants to disgorge some
    $16 million (plus interest) for the FTC to distribute to
    consumers who have been taken in. 
    448 F. Supp. 2d 908
    (N.D. Ill. 2006), modified in part by 
    472 F. Supp. 2d 990
    (N.D. Ill. 2007).
    According to the district court’s findings, almost every-
    thing that defendants have said about the bracelet is
    false. Here are some highlights:
    ! Defendants promoted the bracelet as a miracu-
    lous cure for chronic pain, but it has no thera-
    peutic effect.
    ! Defendants told consumers that claims of
    “immediate, significant or complete pain re-
    lief ” had been “test-proven”; they hadn’t.
    ! The bracelet does not emit “Q-Rays” (there are
    no such things) and is not ionized (the bracelet
    is an electric conductor, and any net charge
    dissipates swiftly). The bracelet’s chief pro-
    moter chose these labels because they are
    simple and easily remembered—and because
    Polaroid Corp. blocked him from calling the
    bangle “polarized”.
    ! The bracelet is touted as “enhancing the flow
    of bio-energy” or “balancing the flow of posi-
    tive and negative energies”; these empty
    phrases have no connection to any medical or
    scientific effect. Every other claim made about
    the mechanism of the bracelet’s therapeutic
    effect likewise is techno-babble.
    No. 07-1662                                               3
    ! Defendants represented that the therapeutic
    effect wears off in a year or two, despite know-
    ing that the bracelet’s properties do not
    change. This assertion is designed to lead
    customers to buy new bracelets. Likewise the
    false statement that the bracelet has a “mem-
    ory cycle specific to each individual wearer” so
    that only the bracelet’s original wearer can
    experience pain relief is designed to increase
    sales by eliminating the second-hand market
    and “explaining” the otherwise-embarrassing
    fact that the buyer’s friends and neighbors
    can’t perceive any effect.
    ! Even statements about the bracelet’s physical
    composition are false. It is sold in “gold” and
    “silver” varieties but is made of brass.
    The magistrate judge did not commit a clear error, or
    abuse his discretion, in concluding that the defendants
    set out to bilk unsophisticated persons who found them-
    selves in pain from arthritis and other chronic conditions.
    Defendants maintain that the magistrate judge sub-
    jected their statements to an excessively rigorous stand-
    ard of proof. Some passages in the opinion could be read
    to imply that any statement about a product’s thera-
    peutic effects must be deemed false unless the claim
    has been verified in a placebo-controlled, double-blind
    study: that is, a study in which some persons are given
    the product whose effects are being investigated while
    others are given a placebo (with the allocation made at
    random), and neither the person who distributes the
    product nor the person who measures the effects knows
    which received the real product. Such studies are ex-
    pensive, not only because of the need for placebos and
    keeping the experimenters in the dark, but also because
    they require large numbers of participants to achieve
    4                                              No. 07-1662
    statistically significant results. Defendants observe that
    requiring vendors to bear such heavy costs may keep
    useful products off the market (this has been a problem
    for drugs that are subject to the FDA’s testing protocols)
    and prevent vendors from making truthful statements
    that will help consumers locate products that will do
    them good.
    Nothing in the Federal Trade Commission Act, the
    foundation of this litigation, requires placebo-controlled,
    double-blind studies. The Act forbids false and misleading
    statements, and a statement that is plausible but has
    not been tested in the most reliable way cannot be con-
    demned out of hand. The burden is on the Commission to
    prove that the statements are false. (This is one way in
    which the Federal Trade Commission Act differs from the
    Food and Drug Act.) Think about the seller of an adhesive
    bandage treated with a disinfectant such as iodine. The
    seller does not need to conduct tests before asserting
    that this product reduces the risk of infection from cuts.
    The bandage keeps foreign materials out of the cuts and
    kills some bacteria. It may be debatable how much the
    risk of infection falls, but the direction of the effect
    would be known, and the claim could not be condemned
    as false. Placebo-controlled, double-blind testing is not a
    legal requirement for consumer products.
    But how could this conclusion assist defendants? In our
    example the therapeutic claim is based on scientific
    principles. For the Q-Ray Ionized Bracelet, by contrast, all
    statements about how the product works—Q-Rays, ioniza-
    tion, enhancing the flow of bio-energy, and the like—are
    blather. Defendants might as well have said: “Beneficent
    creatures from the 17th Dimension use this bracelet as
    a beacon to locate people who need pain relief, and
    whisk them off to their homeworld every night to pro-
    vide help in ways unknown to our science.”
    No. 07-1662                                                5
    Although it is true, as Arthur C. Clarke said, that “[a]ny
    sufficiently advanced technology is indistinguishable
    from magic” by those who don’t understand its principles
    (“Profiles of the Future” (1961)), a person who promotes
    a product that contemporary technology does not under-
    stand must establish that this “magic” actually works.
    Proof is what separates an effect new to science from a
    swindle. Defendants themselves told customers that the
    bracelet’s efficacy had been “test-proven”; that state-
    ment was misleading unless a reliable test had been used
    and statistically significant results achieved. A placebo-
    controlled, double-blind study is the best test; something
    less may do (for there is no point in spending $1 million
    to verify a claim worth only $10,000 if true); but defen-
    dants have no proof of the Q-Ray Ionized Bracelet’s
    efficacy. The “tests” on which they relied were bunk. (We
    need not repeat the magistrate judge’s exhaustive evalua-
    tion of this subject.) What remain are testimonials, which
    are not a form of proof because most testimonials repre-
    sent a logical fallacy: post hoc ergo propter hoc. (A person
    who experiences a reduction in pain after donning the
    bracelet may have enjoyed the same reduction without
    it. That’s why the “testimonial” of someone who keeps
    elephants off the streets of a large city by snapping
    his fingers is the basis of a joke rather than proof of
    cause and effect.)
    To this defendants respond that one study shows that
    the Q-Ray Ionized Bracelet does reduce pain. This study,
    which the district court’s opinion describes in detail,
    compared the effects of “active” and “inactive” bracelets
    (defendants told the experimenter which was which), with
    the “inactive” bracelet serving as a control. The study
    found that both “active” and “inactive” bracelets had a
    modest—and identical—effect on patients’ reported levels
    of pain. In other words, the Q-Ray Ionized Bracelet
    exhibits the placebo effect. Like a sugar pill, it alleviates
    6                                               No. 07-1662
    symptoms even though there is no apparent medical
    reason. The placebo effect is well established. See, e.g.,
    Anne Harrington, The Placebo Effect: An Interdisciplinary
    Exploration (1999); Asbjorn Hrobjartsson & Peter C.
    Gotzsche, Is the Placebo Powerless? An Analysis of
    Clinical Trials Comparing Placebo with No Treatment,
    344 New England J. Medicine 1594 (2001); Ted Kaptchuk,
    Intentional Ignorance: A History of Blind Assessment and
    Placebo Controls in Medicine, 72 Bulletin of the History
    of Medicine 389 (1998). Defendants insist that the
    placebo effect vindicates their claims, even though they
    are false—indeed, especially because they are false, as the
    placebo effect depends on deceit. Tell the patient that
    the pill contains nothing but sugar, and there is no pain
    relief; tell him (falsely) that it contains a powerful analge-
    sic, and the perceived level of pain falls. A product that
    confers this benefit cannot be excluded from the market,
    defendants insist, just because they told the lies neces-
    sary to bring the effect about.
    Yet the Federal Trade Commission Act condemns
    material falsehoods in promoting consumer products; the
    statute lacks an exception for “beneficial deceit.” We
    appreciate the possibility that a vague claim—along the
    lines of “this bracelet will reduce your pain without the
    side effects of drugs”—could be rendered true by the
    placebo effect. To this extent we are skeptical about
    language in FTC v. Pantron I Corp., 
    33 F.3d 1088
    (9th
    Cir. 1994), suggesting that placebo effects always are
    worthless to consumers. But our defendants advanced
    claims beyond those that could be supported by a placebo
    effect. They made statements about Q-Rays, ionization,
    and bio-energy that they knew to be poppycock; they stated
    that the bracelet remembers its first owner and won’t work
    for anyone else; the list is extensive.
    One important reason for requiring truth is so that
    competition in the market will lead to appropriate prices.
    No. 07-1662                                                7
    Selling brass as gold harms consumers independent of any
    effect on pain. Since the placebo effect can be obtained
    from sugar pills, charging $200 for a device that is repre-
    sented as a miracle cure but works no better than a
    dummy pill is a form of fraud. That’s not all. A placebo
    is necessary when scientists are searching for the mar-
    ginal effect of a new drug or device, but once the study
    is over a reputable professional will recommend what-
    ever works best.
    Medicine aims to do better than the placebo effect, which
    any medieval physician could achieve by draining off a
    little of the patient’s blood. If no one knows how to cure
    or ameliorate a given condition, then a placebo is the
    best thing going. Far better a placebo that causes no harm
    (the Q-Ray Ionized Bracelet is inert) than the sort of
    nostrums peddled from the back of a wagon 100 years ago
    and based on alcohol, opium, and wormwood. But if a
    condition responds to treatment, then selling a placebo
    as if it had therapeutic effect directly injures the con-
    sumer. See Kraft, Inc. v. FTC, 
    970 F.2d 311
    , 314 (7th Cir.
    1992) (a statement violates the FTC Act “if it is likely
    to mislead consumers, acting reasonably under the cir-
    cumstances, in a material respect”).
    Physicians know how to treat pain. Why pay $200 for a
    Q-Ray Ionized Bracelet when you can get relief from an
    aspirin tablet that costs 1¢? Some painful conditions do not
    respond to analgesics (or the stronger drugs in the phar-
    macopeia) or to surgery, but it does not follow that a
    placebo at any price is better. Deceit such as the tall tales
    that defendants told about the Q-Ray Ionized Bracelet
    will lead some consumers to avoid treatments that cost
    less and do more; the lies will lead others to pay too much
    for pain relief or otherwise interfere with the matching
    of remedies to medical conditions. That’s why the placebo
    effect cannot justify fraud in promoting a product. Doctor
    Dulcamara was a charlatan who harmed most of his
    8                                             No. 07-1662
    customers even though Nemorino gets the girl at the end of
    Donizetti’s L’elisir d’amore.
    Now for the remedy. Defendants do not contest the
    terms of the injunction. They do, however, say that the
    financial award was excessive. The magistrate judge set
    as his goal the disgorgement of the profits that defend-
    ants made while the Q-Ray Ionized Bracelet was heavily
    promoted with infomercials on late-night television.
    Disgorging profits is an appropriate remedy. See FTC v.
    Febre, 
    128 F.3d 530
    , 534 (7th Cir. 1997); FTC v. Amy
    Travel Service, Inc., 
    875 F.2d 564
    , 571–72 (7th Cir. 1989).
    But defendants say that the record does not contain
    evidence about their profits. True, the FTC compiled
    balance sheets showing profits running in the millions
    every year. These should not be considered, defendants
    insist, because when Que Te Park (defendants’ principal
    investor and CEO) testified about the subject, he was
    asked only whether he could “see” the enterprise’s net
    income (he conceded that he could), not whether the
    figures are correct, and the FTC’s lawyer then forgot to
    offer the balance sheets themselves as evidence.
    This is too clever by half. The FTC made estimates of
    profits from the Q-Ray Ionized Bracelet business and
    gave defendants an opportunity to respond. They chose
    not to do so. Park’s noncommittal answers avoided any
    risk of prosecution for perjury but did not meet the FTC’s
    prima facie showing. The magistrate judge was entitled
    to treat the evasion as an admission that the FTC’s
    computation is in the ballpark. A monetary award often
    depends on estimation, for defendants may not keep (or
    may conceal) the data required to make an exact calcula-
    tion. Defendants’ business was a profitable one; that
    much, at least, they concede. (It is so profitable that
    they continue to carry it on despite the injunction that
    requires them to stop making most of their old claims
    for its efficacy. Today it is sold with testimonials and
    No. 07-1662                                                 9
    vaporous statements.) A court is entitled to proceed with
    the best available information; if defendants thought
    that their profits for these years were below $16 million,
    they should have produced their own figures—for once
    the FTC produces a reasonable estimate, the defendants
    bear the burden of showing that the estimate is inac-
    curate. 
    Febre, 128 F.3d at 536
    .
    Although defendants complain that the magistrate judge
    failed to separate ill-got gains from legitimate profits, they
    offer no reason to think that any of their profits are
    “legitimate.” Defendants’ sole business is the sale of Q-Ray
    products.
    On top of paying $16 million (plus interest) into a fund
    for distribution to all of their customers, defendants
    must refund the full purchase price of some bracelets
    purchased over the Internet. Defendants’ infomercials
    promised buyers that the purchase price would be re-
    funded any time during 30 days after the sale if the
    buyers were not satisfied with their bracelets. Defendants
    honored that promise for bracelets purchased by telephone
    but not for bracelets purchased from their web sites.
    Internet purchasers were allowed only 10 days to return
    their bracelets. The district court held that defendants
    must refund the purchase price of anyone who bought
    from the web sites and returned the merchandise be-
    tween days 11 and 30. Defendants protest that their web
    sites disclosed the 10-day refund period, but this does not
    meet the FTC’s point. The infomercials promised a 30-day
    return period, then suggested that customers purchase
    online. Anyone who followed that advice received only
    a 10-day return period. The disclosure of this shorter
    period was buried several clicks away in the web site. The
    district court was entitled to conclude the switch deceived
    reasonable persons who relied on what the infomercials
    told them.
    10                                            No. 07-1662
    Finally, Park contends that he should not have been
    held jointly and severally responsible for the financial
    aspects of the judgment. Yet he not only participated in
    the false promotional activities but also had the authority
    to control them. Either participation or control suffices.
    Amy 
    Travel, 875 F.2d at 573
    . Park insists that he believed
    the representations to be accurate (or at least thought
    them to be such transparent prattle that they could not
    be false), but the district court found otherwise—and
    sensibly.
    AFFIRMED
    A true Copy:
    Teste:
    ________________________________
    Clerk of the United States Court of
    Appeals for the Seventh Circuit
    USCA-02-C-0072—1-03-08