Small Vitamin Firm in Torrance Wins $14 Million : General Nutrition Settles Lawsuit
A bitter seven-year antitrust battle was settled out of court this week when General Nutrition, the nation’s largest health-food chain, agreed to pay $14 million to a small California vitamin firm.
William T. Thompson Co., a family-run vitamin business based in Torrance, will receive the payment to drop its case against Pittsburgh-based General Nutrition, which runs a nationwide chain of 1,300 GNC stores selling health foods, vitamins, diet aids and food supplements.
The Thompson suit, filed in 1978, focused attention on questionable marketing practices in the health-food industry, led to an $800,000 court-ordered fine against General Nutrition for destroying key documents and embarrassed a prominent Los Angeles law firm.
Net Loss in Quarter
The settlement, which tops General Nutrition’s profits last year by $3 million, will result in a net loss for the company in the third quarter.
Thompson contended that General Nutrition was attempting to monopolize the health-food market. Thompson said the larger firm used bait-and-switch tactics of advertising well-known Thompson products while stocking few, if any, of them. The California company also alleged that General Nutrition advertised discounts on Thompson goods while selling them at or above regular retail prices.
A federal judge in Los Angeles last fall ruled General Nutrition in default on the case. A hearing on damages had been scheduled for Oct. 29.
Under terms of the out-of-court settlement reached late Thursday, General Nutrition neither admitted nor denied Thompson’s allegations.
“I’m obviously very pleased with the settlement. This has been a very long and difficult and costly litigation, both in human and financial terms,” Thompson Chairman William T. Thompson II said. “It’s a real pleasure to be able to concentrate our attention on the future and the marketplace rather than on the courts and the past.”
Thompson said his firm had no immediate expansion plans and would use the $14 million to fund its current marketing strategy. Legal fees will take a relatively small fraction of the total, he said.
Charles A. Koempel, General Nutrition’s executive vice president, said Friday that the $14-million payment will result in a $7-million after-tax charge against third-quarter earnings, assuring a net loss for the period. The company had net profits of $11 million for the fiscal year ended Jan. 31.
“My view is it’s really a relief to have the thing settled. It eliminates one of the major clouds hanging over the company. Our legal costs should be substantially reduced,” Koempel said.
General Nutrition paid $3.5 million earlier this year to settle a similar case filed by Boston-based Nature’s Food Centers, which accused General Nutrition of unfair trade practices.
Several other legal matters are still pending, including a federal action against the company and three current or former officers alleging that they sold an unapproved drug and a Federal Trade Commission complaint alleging false advertising.
The Thompson case gained notoriety in legal circles in 1982 when former Los Angeles Superior Court Judge Parks Stillwell, sitting as a court-appointed master to hear preliminary testimony, ordered exceptionally heavy sanctions against General Nutrition and its lawyers on grounds that the Pittsburgh company and its lawyers had made the case a “mockery” of justice.
In a stinging order, Stillwell ordered General Nutrition and two law firms to pay fines that eventually reached almost $800,000 for “willfully destroying critical evidence” that presumably would have helped Thompson’s case.
The fine was assessed against General Nutrition, its Pittsburgh lawyers and the large and prestigious Los Angeles law firm of Gibson, Dunn & Crutcher. It is not known how the fines were shared among the three parties.
A year ago, U.S. District Judge Cynthia Holcomb Hall upheld the penalties, saying, “Imposition of severe sanctions is required in this case by the severity of the abuses that took place.”
Hall, now a member of the U.S. 9th Circuit Court of Appeals, criticized Gibson, Dunn for defense maneuvers that she called “frivolous” and “calculated to cause delay.”
Gibson, Dunn has denied the two judges’ charges.
“This case is a small triumph for justice, a small triumph for the spirit behind the antitrust laws and a major triumph for the consumer,” said Thompson’s attorney, Les J. Weinstein, of the Los Angeles firm of Blecher, Collins & Weinstein. “It shows that little people can not only get their day in court but can get justice even in a David and Goliath situation.”
The privately held Thompson firm has 230 employees and annual sales of about $20 million. General Nutrition, which is listed on the New York Stock Exchange, employs more than 8,000 people and had revenue last year of $390 million.
General Nutrition was founded by David B. Shakarian, who built a single health-food store in downtown Pittsburgh into a nationwide empire and a personal fortune estimated at $530 million. He died in September, 1984.
