It seems Pom Wonderful is not as wonderful as the name, or the company's ads, suggest. In January, the U.S. Court of Appeals for the D.C. Circuit upheld a 2010 order by the Federal Trade Commission, which found that the company's advertising was misleading regarding the alleged health benefits of its products.
From 2003 to 2010, Pom Wonderful used advertising saying that daily consumption of the company's products could fight serious health conditions, such as heart disease, prostate cancer, and erectile dysfunction. Healthy nutrition is one of the most important drivers for consumers nowadays, so this can be a powerful sales argument.
However, in 2010, the FTC filed an administrative complaint charging that Pom Wonderful had made false, misleading, and unsubstantiated representations. The FTC ordered Pom Wonderful to cease and desist from making claims about the health benefits of its products.
The latest decision from the U.S. Court of Appeals was a broad victory for the FTC in this case, except for the fact that the court said the FTC went too far in requiring two human clinical trial studies to support any health-related claims in advertising. Based on the court's decision, one clinical trial is enough, unless the agency can provide better justification for why another one would be needed in a particular case.
The gold standard of evidence
Pom Wonderful says its advertising claims were based on the best science available for a reasonable cost. However, the FTC believes company-funded research doesn't provide enough competent and reliable scientific evidence.
Consumers usually find it difficult to evaluate whether there's enough good science behind a company's claims that its products have positive health consequences. Thus, it's important to know what to look for when trying to tell whether a product is truly healthy according to scientific evidence.
Randomized controlled trials are the gold standard of scientific testing for new drugs and medical interventions, and Pom Wonderful will need to provide at least one such study before making disease prevention or treatment claims in the future.
While the name sounds quite sophisticated, the concept behind randomized controlled trials is quite simple. The term "randomized" is used because the decision about whether a patient in the trial receives the treatment or the placebo is made randomly, as opposed to having researchers choose the specific patients.
This is a key element providing validity to the study. This way, the results are free from any bias that might otherwise be introduced by the people involved. If patients are chosen to receive a treatment that the researchers really hope will work, the researchers may have an incentive to offer such treatment to patients who have a less severe disease, or some other factor that may improve the the product's chances of success.
For consumers looking for well-grounded research behind a company's claim that its foods, drinks, or drugs have clear health benefits, randomized controlled trials are the kind of studies you should be looking for.
What investors need to watch
Healthy nutrition is a booming trend, and many companies are reaping big benefits from it. Consumers are willing to pay extra money for tasty products with a better health impact than traditional food and drinks. As a result, smart businesses are investing big sums of money to capitalize on this opportunity. However, as more eyes are focused on this trend, investors should expect increased scrutiny from regulatory authorities.
Coca-Cola (NYSE:KO) itself lost a big legal battle against Pom Wonderful last June. The U.S. Supreme Court allowed Pom Wonderful to proceed with a false-advertising lawsuit against Coca-Cola regarding Coca-Cola's Minute Maid-brand Pomegranate Blueberry Blend of Five Juices product.
The drink is just 0.3% pomegranate juice and 0.2% blueberry juice, but the label highlights the words "Pomegranate" and "Blueberry." Also, the liquid is colored a bluish-purple, altering the natural look of the less pricey apple and grape juices that make up most of the content in the bottle.
Coca-Cola is also facing considerable legal pressure over its Vitaminwater brand. The Center for Science in the Public Interest, a consumer advocacy group, sued the company in 2009. Coca-Cola agreed to pay $1.2 million to end a class action lawsuit last year, but nonprofit organization Truth In Advertising is calling on consumers to contest that settlement.
While Coca-Cola claims it never specifically promoted the health benefits of those products, many people argue that the name Vitaminwater sounds rather self-explanatory. The company labels Vitaminwater as a "nutrient-enhanced water beverage," with names for the various flavors including "Defense," "Revive," and "Endurance."
Regardless of how things may end for Coca-Cola in this particular case, the long-term implications for investors look quite clear. Both consumers and regulators are increasingly paying more attention to the fine print when it comes to alleged health benefits of foods and drinks, so you need to be very careful when picking the right stocks to capitalize on the trend toward healthier nutrition.
Andrés Cardenal owns shares of Apple. The Motley Fool recommends Apple and Coca-Cola. The Motley Fool owns shares of Apple and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.