500

UNIT 9 Business and Its Product

CASE 9.2

Thinning Diet Industry

Oprah Winfrey started a diet craze when she appeared on her television show in 1988 in
her size ten Calvin Klein jeans and boasted of losing sixty-seven pounds by using Sandoz
Nutrition Corporations Optifast Program. The preventive medicine center at Philadelphias Graduate Hospital got 500 calls about Optifast on the day of Oprahs announcement. Since then, the diet industry has grown 15 percent per year with total annual
revenues topping $3 billion. The major competitors in 1992, at the height of the diet
market, were the following:
Weight Watchers International
NutriSystem, Inc.
Diet Center, Inc.
Thompson Medical Company (Slim-Fast)
Sandoz Nutrition (Optifast)

UNIT 9

Section A

$1.3 billion
$764 million
$275 million
$260 million
$120 million18

Diet programs are sold through celebrity endorsements and before-and-after ads.
Lynn Redgrave has represented Weight Watchers; Susan Saint James has appeared for
Diet Center; and Christina Ferrara, Tommy Lasorda, Kathie Lee Giord, Whoopi Goldberg, and others have endorsed Slim-Fast and Ultra Slim-Fast. For a time, NutriSystem
relied on radio disc jockeys to use its programs and then tell listeners about their weight
losses.
The CEO of Weight Watchers likened the diet craze to the excesses of the 1980s on
Wall Street: everything is more and more extreme.19 By midyear 1990, Representative
Ron Wyden of Oregon, then-chair of the House Small Business Subcommittee, asked industry representatives to explain their hard-sell tactics. Wydens hearings revealed that
fully 90 percent of those who lose weight rapidly on the quick-loss programs regain the
lost weight and often more within two years. Wyden asked why employees of these programs were referred to as weight-loss specialists when in fact they had no expertise and
were really sales personnel. Weight Watchers CEO Charles Berger testied,
Without touching on the issue of greed, some companies in our eld have overpromised quick
weight loss. And the promises have grown increasingly excessive.20

Just before the House hearings, nineteen women sued NutriSystem and Jenny Craig,
Inc., in Dade County (Miami), Florida, for gallbladder damage allegedly caused by the
programs diets. Seventeen of the women had had their gallbladders removed after participating in the Nutri/System program, even though they had no previous diagnosis of
gallbladder diculties.
In response to the suits and in the hearings, NutriSystem stated that obese people are
vulnerable to a variety of ailments, including gallbladder disease. The company labeled
the suits without merit and a carefully orchestrated campaign by the lawyers for the
nineteen women.
18
Kathleen Deveny, Blame It on Dashed Hopes (and Oprah): Disillusioned Dieters Shun Liquid Meals, The Wall Street Journal, October
13, 1992, pp. B1B11.
19
Julie Johnson, Bringing Sanity to the Diet Craze, Time, May 21, 1990, 74.
20
Id.

Section A CONTRACT RELATIONS

501

NutriSystem was forced into Chapter 11 bankruptcy but emerged in 1993 under new
ownership and a new weight-loss philosophy that included encouraging the use of exercise equipment in its facilities.
A marketing consultant has observed about the diet industry:
There is such a market for faddish nutritional services that even if you lose some customers
youll get new ones. To some extent in this industry, a lot more depends on how good your marketing is than your product.21

In 1991, the Federal Trade Commission (FTC) charged Optifast 70, Medifast 70, and
Ultrafast with making marketing claims that were deceptive and unsubstantiated
hype.22 The agency called the statement Youll have all you need to control your
weight for the rest of your life unsubstantiated.23 The FTC also announced it was investigating other diet programs. Representative Wyden said the FTCs complaints against
the three companies were only the tail of the elephant; the real test is whether these
standards will be applied throughout the industry.24
By mid-1992, the FTC completed its investigation of misleading advertising by more
than a dozen diet chains and promulgated guidelines for such advertising.25 Before-andafter testimonials must include pictures of typical clients, not just the most successful
ones, and claims of keeping the weight o must be documented. The FTCs guidelines
were the result of the National Institutes of Healths ndings that virtually all dieters
regain two thirds of their weight within a year and all of it within ve years.26
As the FTC was promulgating these rules, the Food and Drug Administration (FDA)
announced that it would decide whether phenylpropanolamine, an amphetamine-like
stimulant, could continue to be used in appetite-suppressant products, such as Acutrim
and Dexatrim. Further, lawsuits based in product liability on the inherent dangers of these
diet pills (including wrongful death actions) began popping up around the country.27
Meanwhile, Oprah Winfrey, alarmed by illnesses and deaths around the country that
were caused by rapid weight-loss programs, announced that she would never again use a
liquid diet, and an Alabama jury awarded $15 million to the mother of a twenty-threeyear-old bride-to-be who died of heart failure after losing twenty-one pounds in six
weeks under the supervision of the Physicians Weight Loss Center.
Several sociological issues surround weight loss. Susie Orbach, author of Fat Is a Feminist Issue, observes that 50 million Americans begin diets every year: When I started
working in this eld 22 years ago, eating problems aected a limited group, women in
their 30s and 40s. Now, we know from studies that girls of 9 and women of 60 are all
obsessed with the way they look.28
The top two companies in the diet industryJenny Craig and Weight Watcherswere
cited by the FTC in October 1993 for falsely advertising the success of their programs.29
Three other companies (Diet Center, NutriSystem, and Physicians Weight Loss Centers
of America) settled with the FTC by agreeing to (1) not misrepresent program performance in ads, (2) gather and make available supporting data, and (3) include disclosures
Alix Freedman and Udayan Gupta, Lawsuits May Trim Diet Firms, Wall Street Journal, March 23, 1990, p. B1.
Jeanne Saddler, Three Diet Firms Settle False Ad Case: Two Others Vow to Fight FTC Charges, Wall Street Journal, October 1, 1993,
p. B8.
23
Molly ONeill, Five Diet Companies Ask U.S. for Uniform Rules on Ads, New York Times, August 25, 1992, pp. C1, C2.
24
Jeanne Saddler, FTC Targets Thin Claims of Liquid Diets, Wall Street Journal, October 17, 1991, pp. B1, B6.
25
Mike Snider, FTC Weighs Claims of Diet Program Ads, USA Today, March 26, 1993, p. 1D.
26
Mike Snider, FTC Cites Diet Firms for False Claims, USA Today, October 1, 1993, p. 1D.
27
Joseph Weber, The Diet Business Takes It on the Chin, Business Week, April 16, 1990, 8687.
28
Larry Armstrong and Maria Mallory, The Diet Business Starts Sweating, Business Week, June 22, 1992, 3233.
29
Amy Barrett, How Can Jenny Craig Keep on Gaining? Business Week, April 12, 1993, 5253.
21
22

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UNIT 9 Business and Its Product

that most weight loss is temporary and say whether a testimonial is typical or not, to wit,
Your weight loss may vary, a disclosure akin to the gas mileage disclaimers on autos.30
The New York City Department of Consumer Aairs was the rst in the nation to issue
truth-in-dieting regulations for diet centers, violations of which carry a $500 ne:
1. Centers must post a prominent Weight-Loss Consumer Bill of Rights sign in every room
where a sales presentation is made. The sign informs consumers there may be serious
health problems associated with rapid weight loss and that only lifestyle changes, such as
healthy eating and exercise, promote permanent weight loss.
2. All centers must also give every potential client a palm-size Consumer Bill of Rights card.
3. All centers must inform potential clients of hidden costs of products or laboratory tests
that may be part of the program.
4. All centers must tell dieters the expected duration of the program.

UNIT 9

Section A

The FTC actions against false advertising led to a 15 percent reduction in diet industry revenues in 1994.31,32
In 1997, just as the industry was recovering, the American Society of Bariatric Physicians released a list of its concerns about the industrys usage of obesity drugs such as
Redux and fen-Phen along with promises of permanent weight loss.33 The presence of the
new prescription obesity drugs produced new weight-loss clinics focusing entirely on the
pills and prescriptions, with a total of 18 million monthly prescriptions in 1996 given, in
many cases, not to the clinically obese but to those seeking to lose ve to ten pounds.34,35
A 1997 study found the presence of heart valve damage among users of fen-Phen, and
the FDA withdrew the diet drugs from the market.36 Those who had been using the diet
drugs began litigation. By 2000, American Home Products had agreed to a $4.8 billion
settlement with 11,000 class action litigants.37 Since the time of the FDA ban on the
drugs, those companies with alternative diet drugs without as much risk have had a dicult time selling even prescription drugs. Sales of anti-obesity drugs reached almost
$500 million in 1996, but by 1998 had fallen to $28.8 million, a level at which they remain.38 There are still cases pending involving those who did not settle with the class as
part of the nationwide litigation. For example, a jury awarded Gloria Lopez, a cafeteria
supervisor who took Pondimin, the fenuramine portion of fen-Phen, for ve months
and lost ten pounds, $54 million because her aortic valve was damaged and will eventually require replacement.39
Diet centers relying on the two drugs have also been named in the litigation and
many, based solely on the prescription approach, have closed.40,41 Customers who have
become plaintis are complaining about the lack of warnings given to them by these diet
centers.
In early 1998, a study of 1,072 people, sponsored by the parent company of the manufacturers of Redux and Pondimin, found only a 6.5 to 7.3 percent rate of heart valve problems in patients who took the drugs, as opposed to a 4.5 percent rate in patients who
30
31
32
33
34
35
36
37
38
39
40
41

Keith L. Alexander, A Health Kick at Weight Watchers, Business Week, January 16, 1995, 36.
Weber, The Diet Business Takes It on the Chin, 8687.
Ellen Neuborne, Weight-Loss Programs Going Hungry, USA Today, July 28, 1994, pp. 1C, 2C.
Laura Johannes, New Diet-Drug Data Spark More Controversy, Wall Street Journal, October 1, 1997, pp. B1, B12.
Robert Langreth and Laura Johannes, Redux Diet Pill Receives a Boost in New Study, Wall Street Journal, April 1, 1998, pp. B1, B4.
Gina Kolata, Companies Recall 2 Top Diet Drugs at F.D.A.s Urging, Wall Street Journal, September 16, 1997, p. A1.
Jeanne Saddler, Diet Firms Weight-Loss Claims Are Being Investigated by FTC, Wall Street Journal, March 26, 1993, pp. B1, B5.
Steve Sternberg, Lawsuits: Drug Developments Big Side Effect, USA Today, January 12, 2000, p. 10D.
Dana Canedy, Predecessors Woes Make Diet Drug a Tough Sell, New York Times, April 11, 1998, p. B1.
Margaret Cronin Fisk, Fen-Phen Jury Awards $56 Million, National Law Journal, April 23, 2001, A10.
A Bill of Rights for Dieters, Shape, November 1993, 30.
Freedman and Gupta, Lawsuits May Trim Diet Firms, pp. B1, B2.

Section A CONTRACT RELATIONS

took the dummy pill. A cardiologist labeled the dierence in rates not statistically signicant. However, the FDA ban remained and the litigation continued.42
New products for weight reduction that speed up metabolism and suppress appetite
continue to come to market. Metabolife International, Inc., ran an aggressive web-based
campaign to counter negative media reports about side eects for its Metabolife dietary
supplement that the company says speeds up metabolism and reduces the appetite.43 In
2002, the FDA began an investigation of Metabolife and other products with the ingredient called Ephedra, also known as ma huang, an herbal supplement, which is very common in many weight-loss products. Metabolife sales peaked at $1 billion in the late
1990s. In 1999, more than 12 million people used products containing Ephedra, but the
FDA became concerned when at least seventy deaths and more than 1,400 adverse
events were linked to Ephedra. Adverse eects included high blood pressure, insomnia,
nervousness, tremors, headaches, seizures, heart attacks, and strokes.44 Baltimore Orioles
pitcher Steve Bechler, twenty-three, died in 2003, a death rumored to be caused by his
taking Ephedra. The FDA placed a ban on Ephedra that would continue until 2005. The
Ephedra Industry Council (created by Metabolife) released information indicating that
in many of these cases the problem was not Ephedra but rather the poor-quality
manufacturing and production involved in cheap dietary pills and products. The Rand
Institute conducted a study of Ephedra to determine whether these eects are caused by
Ephedra and, if so, how extensive they are. The FDA ban on Ephedra was lifted in 2005,
at least partially. There are limits on the use of Ephedra in other products as well as limits on
the amounts available to consumers. A federal court of appeals has upheld the ban that was
challenged by several diet pill manufacturers.45
In the meantime, the FDA discovered that Metabolife failed to turn over 13,000
health complaints about Ephedra products, and the lawsuits began to erupt all over the
country. In 2004, the largest jury verdict to date of $7.4 million was awarded by a Texas
jury to a woman who suered a stroke and brain damage after taking Metabolife. The
herbal stimulant is now banned by the FDA. Michael Ellis, the founder and CEO of
Metabolife, was indicted in July 2004 for lying to the FDA and also for income tax evasion.46 The indictment charged Ellis and Metabolife, Inc., with six counts of making
false, ctitious, and fraudulent representations to the FDA and two counts of corruptly
endeavoring to inuence, obstruct, and impede proceedings being conducted by the
FDA concerning the regulation of dietary supplements containing Ephedra.
Ellis, who is a former police ocer, had been convicted years earlier of a misdemeanor drug charge related to the production of methamphetamine. Metabolife founder
Michael Blevins was charged at the same time based on the police nding that the two
were working out of a home to produce at least fty pounds of methamphetamine. Ellis
served probation for his guilty plea, but Blevins did prison time. Through his lawyer,
Ellis responded to the FDAs criminal charges, The government has concocted a
hypertechnical violation by taking statements to a regulatory agency out of context.47
Metabolife declared Chapter 11 bankruptcy, and, unable to secure a buyer for the company, continues in business, with a new CEO, Ronald Cunningham, a former executive
with UGG Holdings, the company now known for its furry boots. Metabolife no longer
42
43
44
45
46
47

Kolata, Companies Recall 2 Top Diet Drugs at F.D.A.s Urging, p. A1.

Bruce Orwall, Diet-Pill Maker Battles a Report before It Airs, Wall Street Journal, October 6, 1999, pp. B1, B4.
http://www.cnn.com/2002/HEALTH/diet.tness/08/15/ephedra.investigatio/.
Nutraceutical Corp. v. Von Eschenbach, 459 F.3d 1033, (C.A.10 2006).
http://www.cbsnews.com/stories/2004/07/23/health/main631424.shtml.
http://story.news.yahoo.com/news?tmpl5story&u5/ap/20040723/ap_on_he_me/metabolife&e51&ncid5.

503

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manufacturers Ephedra products but does produce other types of diet and herbal products. Blevins and Ellis remain on the board of Metabolife. In 2004, the IRS investigated
the company, as well as Ellis and Blevins, for alleged siphoning of millions of corporate
funds into oshore accounts to shelter the revenues from taxes.48
On November 6, 2007, Mr. Ellis entered a guilty plea of lying to the FDA by claiming
that Metabolife had no claims made against the company regarding its products
when, in fact, Metabolife had had claims from consumers regarding ill-eects from
Ephedra. The plea indicated that Ellis withheld from the FDA information on more
than 10,000 customer claims by stating on the FDA disclosures that Metabolife was
claims-free. 49
Jenny Craig began using a celebrity strategy for marketing its weight-loss program.
One of its rst high-prole clients was Monica Lewinsky. Actresses Kirstie Alley and
Valerie Bertinelli also signed on with Jenny Craig. These high-prole clients then allow
the company to follow their progress in losing weight. Jenny Craig uses the womens
photos in their ads, but the media also cover their weight loss, allowing Jenny Craig
additional free publicity.
The search for the miracle diet continues, once again, via Oprah. In 2007, a green
tea product and its help in curbing appetite were a topic on the Oprah Winfrey show.
The product is also advertised in O magazine.

Discussion Questions
UNIT 9

Section A

1. Assume that you get a part-time job as a

weight counselor with a quick-weight-loss
program. Would you have any ethical constraints in performing your job?
2. Dont people just want to lose weight quickly? What if you told them they would gain it
back and face health risks but they decided to
go forward anyway? Would you and your
product be adhering to a proper moral standard of full disclosure and freedom of
choice?
3. Does the diet industry make money from temporary motivation? Or does the diet industry
provide only temporary motivation?
4. Are the weight-loss ads misleading?
5. Weight Watchers, which posted a $50 million
loss in 1994, has begun a new program
emphasizing health foods, heart disease

48
49

prevention, and exercise. Will this type of program avoid the ethical issues of rapid-weightloss programs?
6. Given the Redux and fen-Phen problems, what
can be safely concluded about the diet industry? What would be an ethical approach to
running a weight-loss clinic? Is there an inherent conict between the quick-weight-loss
approach and the reality of weight loss and
management?
7. What do you learn about the industry from
Metabolife, the ban, the suits, and the
indictment?
8. Why do you think diet products continue
to have a place on the Oprah Winfrey
show? What liability is there for advertising
claims by diet products companies and
programs?

Nathan VardiKolata, Poison Pills,Forbes, April 19, 2004, at www.forbes.com. (cover story for print edition).
www.insidesupplements.com.