KCD Holdings, Inc., et al.; Interactive Medical Technologies, Ltd., et al.; William Pelzer, Jr.; and William E. Shell, M.D.; Analysis to Aid Public Comment

FEDERAL TRADE COMMISSION

[File No. 942-3237]

KCD Holdings, Inc., et al.; Interactive Medical Technologies,

Ltd., et al.; William Pelzer, Jr.; and William E. Shell, M.D.; Analysis

to Aid Public Comment

AGENCY: Federal Trade Commission.

ACTION: Proposed consent agreements.

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SUMMARY: In settlement of alleged violations of federal law prohibiting

unfair or deceptive acts or practices and unfair methods of

competition, the four consent agreements, accepted subject to final

Commission approval, would prohibit, among other things, the

California-based companies, which market cellulose-bile products, and

their officers from providing means and instrumentalities or

substantial assistance to any person who they know, or should know, is

making any false or unsubstantiated benefit, performance, efficacy or

safety claim for any weight loss, fat or cholesterol reduction product

or program. The consent agreements would require KCD, KCD Holdings and

Richards to pay $150,000 in consumer redress, in thirteen installments

over a period of one year, Interactive Medical and Effective Health to

pay $35,000 in consumer redress, and Dr. William E. Shell, a former

officer of Interactive Medical Technologies, Ltd., to pay $20,000 in

consumer redress.

DATES: Comments must be received on or before June 6, 1997.

ADDRESSES: Comments should be directed to: FTC/Office of the Secretary,

Room 159, 6th St. and Pa. Ave., N.W., Washington, D.C. 20580.

FOR FURTHER INFORMATION CONTACT:

Laureen France or Nadine Samter, Federal Trade Commission, Seattle

Regional Office, 915 Second Ave., Suite 2896, Seattle, WA. 98174. (202)

220-6350 or 220-4471.

SUPPLEMENTARY INFORMATION: Pursuant to Section 6(f) of the Federal

Trade Commission Act, 38 Stat. 721, 15 U.S.C. 46 and Section 2.34 of

the Commission's Rules of Practice (16 CFR 2.34), notice is hereby

given that the above-captioned consent agreements containing a consent

orders to cease and desist, having been filed with and accepted,

subject to final approval, by the Commission, have been placed on the

public record for a period of sixty (60) days. The following Analysis

to Aid Public Comment describes the terms of the consent agreements,

and the allegations in the complaints. An electronic copy of the full

text of the consent agreement package can be obtained from the FTC Home

page (for March 25, 1997), on the World Wide Web, at ``http://

www.ftc.gov/os/actions/htm.'' A paper copy can be obtained from the FTC

Public Reference Room, Room H-130, Sixth Street and Pennsylvania

Avenue, N.W., Washington, D.C. 20580, either in person or by calling

(202) 326-3627. Public comment is invited. Such comments or views will

be considered

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by the Commission and will be available for inspection and copying at

its principal office in accordance with Section 4.9(b)(6)(ii) of the

Commission's Rules of Practice (16 CFR 4.9(b)(6)(ii)).

Analysis of Proposed Consent Orders

The Federal Trade Commission (``Commission'') has accepted, subject

to final approval, agreements to proposed consent orders from KCD,

Incorporated (``KCD'') and KCD Holdings, Inc. (``KCD Holdings''), their

former officer, Clark M. Holcomb (``Holcomb''), and their current

officer, Bonnie L. Richards (``Richards'') (hereinafter ``KCD

respondents''), their advertising agency Deerfied Corporation

(``Deerfield''), and its owner, Gerald E. Hatto (``Hatto''). The KCD

respondents market and sell an over-the-counter weight loss product,

known as SeQuester, comprised of fiber and ox bile. The product

advertisements have represented that the product reduces the body's

absorption of fat and sugar from consumed food, thereby providing

weight loss and cholesterol lowering benefits. Respondents Deerfield

and Hatto assisted in the creation and dissemination of the SeQuester

advertisements.

The Commission has also accepted, subject to final approval,

agreements to proposed consent orders from Interactive Medical

Technologies, Ltd. (``IMT''), its wholly owned subsidiary, Effective

Health, Inc. (``EHI''), William Pelzer, Jr. (``Pelzer''), a former

officer of IMT and EHI, and William E. Shell, M.D. (``Shell''), also a

former officer of IMT (hereinafter ``IMT respondents''). These

respondents marketed and sold an over-the-counter weight loss product,

known as Lipitrol, also comprised of fiber and ox bile. The Lipitrol

product advertisements represented that the product reduced the body's

absorption of fat from consumed food, thereby providing weight loss and

cholesterol lowering benefits. The IMT respondents also provided means

and instrumentalities or substantial assistance to the KCD respondents'

marketing and sale of SeQuester.

The proposed consent orders have been placed on the public record

for sixty (60) days for receipt of comments by interested persons.

Comments received during this period will become part of the public

record. After sixty (60) days, the Commission will again review the

agreements and the comments received and will decide whether it should

withdraw from the agreements and take other appropriate action or make

final the proposed orders contained in the agreements.

The Proposed Complaints

The Commission's complaint against the KCD respondents, Deerfield

and Hatto, charges these respondents with making false and

unsubstantiated claims, in advertising and promotional materials,

regarding the efficacy of SeQuester as a weight loss, fat reduction and

cholesterol reduction product. Specifically, the complaint alleges that

the KCD respondents falsely represented, expressly or by implication,

that SeQuester prevents or significantly reduces the body's absorption

of fat and sugar from consumed food. The complaint also charges that

these respondents failed to possess and rely upon a reasonable basis

for these representations. The Complaint further alleges that these

respondents made false and deceptive representations that scientific

research demonstrates that SeQuester prevents or significantly reduces

the body's absorption of fat from consumed food and causes significant

weight loss.

In addition, the compliant alleges that the KCD respondents have

represented that SeQuester causes significant weight loss; allows

consumers to eat high-fat foods without gaining weight; causes

significantly greater weight loss than diet and exercise alone; allows

consumers to eat high-fat foods without increasing their risk of high

cholesterol, clogged arteries, heart disease and other health problems

associated with a high-fat diet; reduces the risk of high cholesterol,

clogged arteries, heart disease and other problems associated with a

high-fat diet; and is beneficial and safe when used in amounts

sufficient to cause diarrhea. The Complaint charges that these

respondents did not possess and rely upon a reasonable basis for these

representations.

The complaint also alleges that Deerfield and Hatto have

represented, expressly or by implication, that SeQuester causes

significant weight loss; allows consumers to eat high-fat foods without

gaining weight; allows consumers to eat high-fat foods without

increasing their risk of high cholesterol, clogged arteries, heart

disease and other health problems associated with a high-fat diet;

prevents or significantly reduces the body's absorption of fat and

sugar from consumed food; reduces the risk of high cholesterol, clogged

arteries, heart disease and other problems associated with a high-fat

diet; and significantly reduces the body's absorption of sugar from

consumed food. The compliant charges that Deerfield and Hatto did not

possess and rely upon a reasonable basis for these representations. The

complaint further alleges that Deerfield and Hatto falsely represented

that scientific research demonstrates that SeQuester prevents or

significantly reduces the body's absorption of fat from consumed food

and causes significant weight loss. The compliant also charges that

respondents Deerfield and Hatto knew or should have known that these

representations were false and misleading.

The Commission's complaint against the IMT respondents charges IMT,

EHI and Shell, with making false and unsubstantiated advertising claims

regarding the efficacy of Lipitrol as a weight loss, fat reduction and

cholesterol reduction product. Specifically, the complaint alleges that

IMT, EHI and Shell falsely represented, either expressly or by

implication, that Lipitrol prevents or significantly reduces the body's

absorption of fat from consumed food, and absorbs approximately 5.9

grams of fat per tablet from consumed food. The complaint also charges

that respondents IMT, EHI and Shell failed to possess and rely upon a

reasonable basis for these representations. The complaint further

alleges that these respondents made false and deceptive representations

that scientific research demonstrates that Lipitrol prevents or

significantly reduces the body's absorption of fat from consumed food,

absorbs approximately 5.9 grams of fat per tablet from consumed food,

causes significant weight loss and lowers blood cholesterol levels.

In addition, the complaint alleges that respondents IMT, EHI and

Shell have represented that Lipitrol causes significant weight loss;

lowers blood cholesterol levels; reduces, or reduces the risks

associated with, high cholesterol, including clogged arteries, high

blood pressure, diabetes, breast cancer and heart disease; causes

significantly greater weight loss than diet and exercise alone; and is

beneficial and safe when taken in amounts sufficient to cause diarrhea.

The complaint charges that these respondents did not possess and rely

upon a reasonable basis for these representations.

Respondent William Pelzer, Jr. in not included in the above-

mentioned allegations because he had no involvement in the advertising,

marketing or sale of Lipitrol.

In addition, the complaint charges that the IMT respondents,

including respondent Pelzer, provided means and instrumentalities and/

or substantial assistance to others who respondents knew or should have

known were making false and deceptive or

[[Page 16589]]

unsubstantiated claims for the product, sold under the name SeQuester.

Specifically, the complaint alleges that the respondents licensed to

KCD, its holding company, KCD Holdings, those companies' former

principal, Holcomb, and current principal, Richards, the exclusive

rights to market the product.

The complaint alleges that the IMT respondents knew or should have

known that the KCD respondents made false and deceptive or

unsubstantiated representations similar to those made for Lipitrol, in

advertisements for SeQuester. The complaint charges that despite the

fact that respondents knew or should have known that KCD was making the

false and deceptive, and/or unsubstantiated representations in the

marketing and sale of SeQuester, the IMT respondents nevertheless

provided various services and promotional materials to the KCD

respondents in furtherance of the KCD respondents' efforts to

disseminate these false claims, including providing the KCD respondents

with studies purporting to show that SeQuester effectively reduces the

body's absorption of fat from consumed food and causes significant

weight loss; the licensing rights to market and sell the product to

consumers; technical information regarding the product; and various

promotional materials and information for marketing the product.

The Proposed Orders

The Commission has accepted four separate consent orders in this

matter. The proposed orders contain provisions designed to remedy the

alleged violations. The proposed orders against respondents KCD

Holdings, Inc., KCD, Incorporated and Bonnie L. Richards; IMT and EHI;

and Shell provide for the payment of consumer redress in installments

over a period of one year from the date the proposed orders become

final. In the event that consumer redress is not feasible, the proposed

orders provide that the funds will be deposited in the United States

Treasury. In addition, the proposed order against respondent Shell

requires him to post a performance bond of either $250,000 or

$1,000,000, depending on the circumstances of his activities.

Proposed Consent Order with the KCD Respondents, Deerfield and

Hatto

Part I of the proposed consent order against the KCD respondents,

Deerfield and Hatto bars them from making representations that SeQueter

or any product or program prevents or reduces the body's absorption of

fat or sugar from consumed food unless the representation is true at

the time it is made and is supported by competent and reliable

scientific evidence.

Part II of the proposed consent order against the KCD respondents,

Deerfield and Hatto prohibits them from representing that Sequester or

any product or program provides any weight loss benefit; causes greater

loss of body fat than diet and exercise alone; allows consumers to eat

high-fat foods without increasing their risk of high cholesterol,

clogged arteries, heart disease or other health problems associated

with a high-fat diet; or reduces, or reduces the risk of, high

cholesterol, clogged arteries, heart disease and other health problems

associated with a high-fat diet, unless respondents can substantiate

these representations with competent and reliable scientific evidence.

Part III of the proposed consent order against the KCD respondents

prevents them from representing that SeQuester or any product or

program can be used beneficially and safely, in amounts or with

frequency sufficient to cause diarrhea, unless, at the time the

representation is made, they possess and rely upon competent and

reliable scientific evidence that substantiates the representation,

which when appropriate, must be competent and reliable scientific

evidence.

Part IV of the proposed consent order against the KCD respondents,

Deerfield and Hatto bars them from misrepresenting the existence,

contents, validity, results, conclusions or interpretations of any

test, study or research.

Part V of the proposed consent order against the KCD respondents,

Deerfield and Hatto prohibits them from making representations about

the benefits, performance, efficacy or safety of SeQuester or any

product or program unless competent and reliable evidence substantiates

any such representation.

Part VI of the proposed consent order against the KCD respondents

provides Deerfield and Hatto with a defense to Parts I, II and V of the

order if they neither knew nor had reason to know of an inadequacy of

substantiation for any representation covered by those parts of the

order; and a defense to Part IV of the order if they neither knew nor

had reason to know that the test, study or research did not prove,

demonstrate or confirm any representation covered by that part of the

order.

Part VII of the proposed order against the KCD respondents requires

KCD, KCD Holdings and Richards to pay $150,000 in consumer redress, in

thirteen installments over a period of one year. If consumer redress is

impracticable, Part VII provides that these funds will be paid to the

United States Treasury. Part VII(C) requires KCD, KCD Holdings and

Richards to provide the Commission with a security interest in certain

property to insure full payment of the $150,000 of consumer redress.

Parts VIII and IX of the proposed order against the KCD

respondents, Deerfield and Hatto contain provisions permitting certain

claims that are approved for labeling by the FDA, either under the

Nutrition Labeling and Education Act, a tentative final or final

monograph or under any new drug application approved by the FDA.

Parts X, XI, XII, XIII and XIV of the proposed order against the

KCD respondents, Deerfield and Hatto contain compliance reporting

provisions requiring respondents to: retain records that bear on their

compliance with the order; distribute copies of the order to those

persons having responsibility with respect to the subject matter of the

order; notify the Commission of any changes in the structure of the

corporate respondents that may affect their compliance obligations

under the order, or any changes in the business affiliations of the

individual respondents; and report to the Commission their compliance

with the terms of the order.

Part XV of the proposed order against the KCD respondents,

Deerfield and Hatto contains a provision automatically terminating the

order twenty (20) years from the date that it becomes final.

Proposed Consent Order With IMT, EHI, Shell and Pelzer

Part I of the proposed consent order against respondents IMT and

EHI bars them from making representations that LIPITROL or any weight

loss, fat reduction or cholesterol reduction product or program

prevents or reduces the body's absorption of fat from consumed food or

absorbs any amount of fat from consumed food unless the representation

is true and supported by competent and reliable scientific evidence.

Part I of the proposed order against respondent Shell contains the same

bar, but covers representations for Lipitrol or any product or program.

Part II of the proposed order against respondents IMT and EHI

prohibits them from representing that Lipitrol or any weight loss, fat

reduction or cholesterol reduction product or program, or any food,

drug or dietary supplement, provides any weight loss benefit; lowers

blood cholesterol levels; reduces, or reduces the risks associated

with, high cholesterol, including clogged arteries, high blood

pressure, diabetes, breast cancer and heart

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disease; or can be used, beneficially and safely, in amounts or with

frequency sufficient to cause diarrhea, unless respondents can

substantiate these representations with competent and reliable

scientific evidence. Again, the same prohibition is contained in Part

II of the proposed order against respondent Shell, but covers

representations for Lipitrol or any product or program.

Part III of the proposed order against respondents IMT and EHI

prohibits them from misrepresenting the existence, contents, validity,

results, conclusions or interpretations of any test, study or research

in connection with Lipitrol or any weight loss, fat reduction or

cholesterol reduction product or program, or any food, drug or dietary

supplement. Part IV of the proposed order prohibits respondents IMT and

EHI from making representations about the benefits, performance,

efficacy or safety of Lipitrol or any weight loss, fat reduction or

cholesterol reduction product or program, or any food, drug or dietary

supplement unless competent and reliable scientific evidence

substantiates any such representation. Parts III and IV of the proposed

order against respondent Shell are the same except that the

prohibitions apply to representations for Lipitrol or any product or

program.

Part V of the proposed orders against respondents IMT, EHI and

Shell, and Part I of the proposed order against respondent Pelzer, bars

each of these respondents from providing means and instrumentalities or

substantial assistance or support to any person or entity who they know

or should know is making any false or misleading or unsubstantiated

claim for any weight loss, fat reduction or cholesterol reduction

product or program. The proposed orders define ``assistance'' to

include providing: tests, analyses, studies or research to determine

the benefits, performance, efficacy or safety of the product or

program; licensing or other contractual rights to market any such

product or program; technical assistance; or advertising, labeling or

promotional materials for the marketing and sale of any such product or

program.

Part VI of the proposed orders against respondents IMT, EHI and

Shell, and Part II of the proposed order against respondent Pelzer,

require these respondents to monitor business practices of certain

parties to whom they provide assistance. To the extent that any such

party is engaged in the marketing and sale of any weight loss, fat

reduction or cholesterol reduction product or program, these

respondents must make an effort to determine whether false or

misleading or unsubstantiated claims are being made with respect to any

such product or program. Specifically, these respondents must review

all advertisements and promotional materials and all tests, reports,

studies, surveys, demonstrations or other evidence that any such person

relies upon in making any claims to consumers. In addition, these

respondents are required to terminate their business relationship with

any person whom they know or should know is making any false or

misleading or unsubstantiated claims.

Part VII of the proposed order against respondents IMT and EHI

requires them to pay $35,000 in consumer redress in three installments

over a period of one year. If consumer redress is impracticable, Part

VII provides that these funds will be paid into the United States

Treasury. Part VII(C) requires IMT and EHI to provide the Commission

with a security interest in certain property to insure full payment of

the $35,000 of consumer redress.

Part VII(A)(1) and (2) of the proposed order against respondent

Shell requires him to obtain a performance bond for $1,000,000 before

he markets, sells or holds any ownership interest or official position

in any business that advertises or sells Lipitrol or any other weight

loss, fat reduction or cholesterol reduction product composed of fiber

and bile extract. Part VII(A)(3) and (4) of the proposed order also

requires respondent Shell to obtain a performance bond of $250,000

before he markets, sells or holds an ownership interest or official

position in any business that advertises or sells any weight loss, fat

reduction or cholesterol reduction product or program to consumers,

other than his treatment of patients in connection with his private

medical practice. Parts VII(B) through (F) require respondent Shell to

provide a copy of the bond to the FTC; prohibit him from disclosing the

existence of the bond to any consumer; and describe the period during

which the bond must remain effective, the bond's coverage, the bond's

potential beneficiaries and certain other administrative requirements.

Part VIII of the proposed order against respondent Shell requires

him to pay consumer redress in the amount $20,000 in four installments

over a period of one year. In the event that consumer redress is

impractical, this Part provides that these funds will be paid into the

United States Treasury. Part VII(C) requires Shell to provide the

Commission with a security interest in certain property to insure full

payment of the $20,000 of consumer redress.

Parts VIII and IX of the proposed order against respondents IMT and

EHI, Parts IX and X of the proposed order against respondent Pelzer,

contain provisions permitting certain claims that are approved for

labels by the FDA, either under the Nutrition Labeling and Education

Act, a tentative final or final monograph or under a new drug

application approved by the FDA.

Parts X, XI, XII and XIII of the proposed order against respondents

IMT and EHI, Parts XI, XII, XIII and XIV of the proposed order against

respondent Shell, and Parts V, VI, VII and VIII of the proposed order

against respondent Pelzer, contain compliance reporting provisions

requiring these respondents to: retain all records that would bear on

their compliance with the respective orders; notify the Commission of

any changes in the structure of the corporate respondents that may

affect their compliance obligations under the orders, or any changes in

the business affiliations of the individual respondents relating to the

advertising, offering for sale, sale or distribution of any weight

loss, fat reduction or cholesterol reduction product or program;

distribute copies of the orders to those persons having responsibility

with respect to the subject matter of the respective orders; and report

to the Commission their compliance with the terms of the respective

orders.

Part XIV of the proposed order against respondents IMT and EHI,

Part XV of the proposed order against respondent Shell, and Part IX of

the proposed order against respondent Pelzer contain a provision

automatically terminating the order twenty (20) years from the date

that they become final.

The purpose of this analysis is to facilitate public comment on the

proposed orders. It is not intended to constitute an official

interpretation of the agreements and proposed orders or to modify their

terms in any way.

Donald S. Clark,

Secretary.

[FR Doc. 97-8802 Filed 4-4-97; 8:45 am]

BILLING CODE 6750-01-M