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Attorneys

“Buckyballs” and The Perils of Challenging Federal Powers Of Advertising Regulation

June 16 2014

By: David Gabor

As someone who has litigated extensively against federal regulators on advertising issues, I have first-hand knowledge of how difficult it is to prevail in a case brought by the feds. For example, the FTC’s “win percentage” is astonishing; some have rated it over 99% of all cases brought. It is fair to say that the deck is stacked against the target of any such litigation.

Typically, in order to prevail against a case brought by a federal regulator, it takes deep pockets and patience. The deck is stacked. Not only does the federal government, including regulators such as the FTC, have the power to freeze assets on a pretrial basis – thereby potentially depriving their targets of the funds to right to counsel – but the legal standards limiting the FTC’s powers are significantly lower than the standards for other non-government civil litigants. For example, the standard for the FTC to obtain a civil preliminary injunction is lower than that used for other federal litigants. For a more detailed discussion of the history and background of the FTC’s powers and the lax injunction standards it enjoys, seehttp://anantitrust.wordpress.com/2014/04/09/the-ftc-at-100-now-doj-jr/.

Although the linked article, directly above, deals with the FTC’s considerable antitrust powers under section 13(b) of the FTC Act, its powers under Section 5 of the FTC Act (covering nebulous and elastically worded “unfair or deceptive acts or practices”) are no less. Additionally, government “enforcers” acting under Section 5 often trumpet the filing of a lawsuit in public PR releases, which alone is often enough to put a target out of business. The take-away is that advertisers and manufacturers need to be careful when making advertising claims because if the federal regulators decide to target you or your company, there is relatively little that can be done without deep pocketbooks and the will to take on a massive and powerful bureaucracy that has the legal power to inflict crippling litigation costs — win or lose.

In one recent case, a challenger did, in fact, arise to take on the mighty regulators. Craig Zucker, owner of a company that manufactured a novelty product called Buckyballs, fought the regulators as long and as hard as he could, before succumbing to the litigation pressures and taking the product off the market. Seehttp://www.getbuckyballs.com/blog/tag/cpsc/.

In that case, the federal Consumer Products Safety Commission (“CPSC”) targeted first the maker of Buckyballs, and then its individual owner. Buckyballs were magnetized balls, the size of marbles, that could be formed into various shapes and sizes and were meant as a desk-top novelty for office workers. They were not sold or marketed to children. The CPSC argued that the desk-top product was dangerous to children because the balls posed a ingestion risk (and in fairness, there was evidence of numerous actual incidents involving the ingestion of the balls). Consumer groups, such as the Consumer Federation of America, quickly piled-on and argued that the balls looked like shiny candy and that “it’s incredibly important for a manufacturer to take responsibility for how their product is used in the marketplace.” (Neither the Consumer Federation of America nor the CPSC, however, has taken a position on shiny coins or other workaday items that might also be attractive for little kids to swallow.)

The case was prosecuted despite the fact that Buckyballs were not marketed to children, came with consumer warnings and were not sold in children’s stores. Nevertheless, the CPSC sought to force a recall of the products. A recall would have cost the company in the range of over $50 million and put it out of business. The regulator also sought a significant fine against the company. Craig Zucker, the owner of Buckyballs, took issue with the regulatory overreach and decided to fight it. Of course, he had relatively little choice as not fighting it would have put him and his business out of business, causing a loss of jobs, tax revenue and all of the business goodwill that he had worked hard to create. In the end, given the bad publicity, he had to tank the business. But that was not the end of the story.

Among the costs of choosing to fight the CPSC (no one else had fought a recall case for decades), was that Zucker ended up being named personally in the suit under the precedent known as the Park Doctrine. The Park doctrine allows the federal government to criminally prosecute corporate officers for failing to prevent violations of the Food Drug and Cosmetic Act. The results of his conviction would then not only be financial ruin, but personal ruin as well. The CPSC was able to name him in the lawsuit, despite all rules of corporate separation having been adhered to. The decision to name him personally in a criminal suit is a prime example of the power that the government holds over the individual business owner/advertiser that does not exist in the “regular” civil litigation universe. In the “regular/level playing field” circumventing the significant rules related to alter ego liability are significant. The government faces no such hurdles. Worse, the very threat of its ability to name individuals in criminal lawsuits as a matter of course is a tool to extract large settlements from frightened business owners who thought they were dealing with products liability issues. It is an unfair advantage and is not a power lightly to be trifled with, which is why most lawyers would advise clients to settle rather than fight.

Zucker, however, chose to fight – both in the courts, as well as in the “court of public opinion.” He started a website with the tongue in cheek name of, “save our balls.” See above. In the end, after having been put out of business, Mr. Zucker settled for $375,000 and he was liberated from the threat of a jail term for his business conduct. No doubt the regulators at the CPSC will argue that this was an example of the system working. They will say that they examined the facts and came to a reasonable settlement that protected all parties, including the public in whose name it acts. In reality, anyone who has actually litigated against federal regulators, sees this for what it is: a federal cave-in that avoided a court test of its theory of individual criminal liability.

As argued before in certain of my earlier articles, no one who has read Upton Sinclair’s The Jungle wants to go back to the days of eating tainted meat and having workers work in virtual slavery. Regulation of food and other products can be a good thing and limited regulation is arguably an important government function to protect the public health. The question here, as it is in many other contexts of government regulatory expansion and power, however, is limits. There has to be a balance between the use of the fearsome federal powers wielded by administrative officers and the protection of the public good in selecting litigation targets. In this context, the CPSC would likely argue that naming Zucker personally in a criminal action where thousands of children were placed in harm’s way, was part of their “core” regulatory oversight and was in no way pay-back/retribution for Zucker’s choice to fight — despite all appearances to the contrary.