EPA formaldehyde saga continues

Back in January, the EPA published its final rule restricting formaldehyde emissions from composite wood. While the original rule set compliance dates starting December 12, 2017 (with additional dates in 2018 and 2023), the rule has undergone a tumultuous several months. Where it stands now is anybody’s guess, but the prudent course is to plan for December 2017 implementation.

First, the Trump administration regulatory freeze delayed the effective date by 30 days, but this delay did not impact the compliance dates, which were triggered by publication of the rule. Then EPA issued a new “direct final rule” extending the compliance dates by three months, meaning the rule bumped the first compliance deadline from December 12, 2017 to March 22, 2018 (and others to 2018 and 2024, respectively).

But that direct final rule had one big caveat – EPA conditioned it on not receiving any negative comments, stating:

If the Agency receives no adverse comments on the direct final rule or proposed rule, EPA will take no further action on the proposed rule, and the direct final rule will become effective. If EPA receives relevant, adverse comments on either rule, the Agency will withdraw the direct final rule and proceed with the proposed rule through the normal rulemaking process.

EPA did not expect any negative comments, but as you can guess, several commenters objected to the extensions. As a result, EPA withdrew the direct final rule, returning for now to the original December 2017 deadline.

EPA has stated that it will “proceed with a final rule based on the proposed rule after considering all public comments.” While EPA has said it will proceed as quickly as possible, it is unclear whether it can get through the regulatory process fast enough to make it meaningful for a December compliance date – we assume that many products for December sales have already been ordered and are in production.

In addition to controversy over compliance dates, substantive concerns over the rule still remain. For example, the rule’s labeling provision prohibits labeling products “manufactured before the manufactured-by date as TSCA Title VI compliant.” But the rule uses “manufacture” and “import” interchangeably. As a result, the rule can be read as prohibiting labeling of imported before December 12, but requires labeling on products imported on and after December 12, regardless of when the products were actually manufactured. Given the practical impossibility of complying with this, impacted parties and trade associations representing the composite wood industry have implored EPA to clarify the rule, but this has not yet occurred. If EPA takes this up in any new proposed rule, it could further delay implementation of compliance date extensions.

Specific jurisdiction ruling gives companies a new weapon in combatting mass consumer actions

On June 19, 2017, the United States Supreme Court limited the ability of plaintiffs to pursue mass consumer actions in state court. In Bristol-Myers Squibb Co. v. Superior Court, the Supreme Court limited personal jurisdiction over corporations in state courts on due process grounds, holding that persons purportedly injured outside of the forum state did not have jurisdiction to prosecute claims against a corporation who was not a resident or incorporated in that state.

The consolidated actions sought relief in California state court for 678 plaintiffs who used a BMS drug called Plavix – the vast majority of whom were not California residents. BMS is a Delaware corporation that maintains substantial operations in both New York and New Jersey. BMS moved to quash service of summons on the nonresidents’ claims for lack of personal jurisdiction.

The California Court of Appeal and California Supreme Court found that there was no general jurisdiction over BMS in the wake of the Supreme Court’s Daimler AG v. Bauman decision (limiting general jurisdiction to a company’s state of incorporation and principal place of business), but found that there was specific jurisdiction based on the similarity of the claims by California residents and the nonresidents, BMS’ “extensive contacts with California,” and the fact that the California distributor of Plavix was also a named defendant.

Reversing the California courts, the Supreme Court was clear that specific jurisdiction can only be exercised if the suit arises out of the defendant’s contacts with the forum, and here “the nonresidents were not prescribed Plavix in California, did not purchase Plavix in California, and were not injured by Plavix in California.” Because “all the conduct giving rise to the nonresidents’ claims occurred elsewhere,” California had no specific jurisdiction over BMS. Neither BMS’s “substantial” operations in the state, nor the fact that the Plavix distributor was a California corporation were relevant to establishing personal jurisdiction because BMS’s California operations were unrelated to Plavix and jurisdictional requirements cannot be met through a third-party.

This decision raises the question of whether nationwide class actions can proceed in jurisdictions where a defendant is not subject to general jurisdiction. Previously, and relying on the Court’s opinion in Phillips Petroleum Co. v. Shutts, it was taken for granted that so long as the forum state had personal jurisdiction over the named plaintiffs’ claims, it could also exercise jurisdiction over the out-of-state class members claims. The Court rejected that Shutts had any bearing on the issue here because “the authority of a State to entertain the claims of nonresident class members is entirely different from its authority to exercise jurisdiction over an out-of-state defendant.”

The ruling therefore appears to give defendants another weapon for challenging the scope of state court class actions. Cutting down the size of the class is one of the primary goals during class certification, and this ruling could give defendants a means for doing so much earlier in the case.

In single defendant cases, it could push mass or class action matters to states where the defendant is unquestionably a citizen, and away from preferred jurisdictions favored by the plaintiffs’ bar, like California. Alternatively, it could cause counsel to limit the plaintiffs to state residents and file multiple cases in preferred jurisdictions. In multiple defendant cases where general jurisdiction over each defendant is not appropriate in a single state, plaintiffs must now decide whether they really want the headache of prosecuting multiple suits against multiple defendants in differing jurisdictions.

On the other hand, the decision could also create headaches for defendants, potentially forcing them to defend multiple suits across many states. Moreover, it could complicate settling national class actions, as defendants will have trouble arguing that jurisdiction is not appropriate in the first instance but that a national settlement should be approved if it ultimately suits them.

Washington restricts flame retardants in children’s products and upholstered furniture

On July 1, 2017, Washington’s “Toxic-Free Kids and Families Act” goes into effect, restricting the use of the following five flame retardants in children’s products and residential upholstered furniture:

  • Additive TBBPA
  • Deca-BDE
  • HBCD (HBCDD)
  • TDCPP
  • TCEP

Under the Act, manufacturers, wholesalers, and retailers are prohibited from manufacturing, knowingly selling, offering for sale, or distributing for sale or use in Washington children’s products and residential upholstered furniture containing these five flame retardants in amounts greater than 1,000 ppm in any product component.

While the impact may be muted because several states, including California, New York, Vermont and Maryland, have already passed laws more or less regulating Deca-BDE, TDCPP and TCEP out of the market, the Act presents two concerns.

First, Washington is the first state to restrict TBBPA. Manufacturers, wholesalers, and retailers may need to do some prep work to determine whether this substance is in their covered products.

Second, the Act contains no sell through period or “manufactured by” date. The restriction applies to covered products whether or not they were manufactured prior to July 1, 2017, including any existing inventory retailers have on sales floors or available on ecomm sites.

In addition, the Act directs the Washington Departments of Health and Ecology to evaluate six additional flame retardants (IPTPP, TBB, TBPH, TCPP, TPP and V6) and make recommendations to the Washington Legislature for possible future restrictions.

Drone registry rule grounded by court

Updating our previous post about the Federal Aviation Administration’s rules and regulations regarding the use of drones, an appeals court has struck down one of the more hotly disputed aspects of the program – the FAA’s registration requirement for recreational drone owners.

As part of the FAA’s drone program, FAA regulations require recreational drone users to register their drones. Registration requires users to provide their names, email and physical addresses, pay a $5 registration fee, and display a unique ID number on their drones. Nearly 300,000 drone owners registered within a month of the program’s unveiling.

The registration rule was controversial, not only because drone hobbyists complained that the requirement was burdensome, but also because many argued that 2012 legislation directing the FAA to safely integrate drones into national airspace specifically exempted model aircraft, including recreational drones, from any requirements.

The controversy ultimately led drone user John Taylor to sue the FAA. In a decision published late last week, the D.C. Court of Appeals agreed.  As the opinion states:

The FAA’s 2015 registration rule, which applies to model aircraft, directly violates that clear statutory prohibition.  We therefore grant Taylor’s petition and vacate the registration rule to the extent it applies to model aircraft.

Note that this decision applies only to recreational drone users – not commercial drone users, who are subject to more stringent standards, including pilot certification requirements.

The full decision is available here. The FAA has 90 days to either ask for a rehearing from the D.C. Circuit or appeal to the Supreme Court.  We will keep you updated with any developments. If the decision stands, recreational drones of any size will not be subject to registration (currently, recreational drones under 0.55 lbs are exempt from registration, but recreational drones between 0.55 and 55 lbs must be registered).

Your product labels could be deceptive based on what’s on a competitor’s labels

In what seems to be an ever-expanding zone of liability for false advertising claims on food products, the Ninth Circuit ruled this week that “external facts” – aka what a competitor does or does not put on their labels – can make the labels of another product misleading by implication.

In Bruton v. Gerber, plaintiff Natalia Bruton alleged that labels on Gerber baby food products advertising nutrient and sugar content were impermissible under FDA regulations (thereby creating a UCL unlawful advertising claim). Bruton’s theory of deception was a combination of two factors: 1) presence of “attractive label” claims such as “Supports Health Growth & Development” or “As Healthy As Fresh” violate strict FDA regulations regarding health content and 2) the lack of similar claims on competitors’ products (in compliance with FDA regulations) made Gerber products appear superior.

The district court, among other holdings, dismissed UCL claims because there was no genuine dispute of material fact regarding deception. The court held that Bruton’s evidence of consumer deception – FDA warning letters and her own testimony that she was deceived – did not establish that a reasonable consumer was likely to be deceived by the representations.

Overturning the lower court’s dismissal of these claims, the Ninth Circuit held that a viable claim of consumer deception was alleged because “when the maker of one product complies with a ban on attractive label claims, and its competitor does not do so, the normal assumptions no longer, and consumers will possibly be left deceived.” The Court also determined that simply the labels themselves were enough to create a triable issue of fact because, when comparing the labels to other products, a reasonable jury could conclude that Gerber’s labels were deceptive.

The major takeaway from this decision is that so-called “attractive labels” cannot only subject a manufacturer to strict scrutiny from the FDA (and penalties, etc.), but can also give rise to actions for liability for false advertising. Even though the statements may be true (even if not strictly compliant with tight restrictions from the FDA), the fact that other FDA-compliant products do not have such statements means the product quality could be unnecessarily inflated in the eyes of the consumer.

Bottom line: false advertising liability is not only based on what is on your product’s label, but can now depend on the absence of similar statements on other labels.

ALERT: Merchants face new wave of class actions alleging excessive shipping charges

Recently filed complaints seemingly forecast a new type of class action in California courts: consumer protection claims based on allegations that merchants are overcharging consumers for shipping and delivery charges. Such claims have the potential to affect all companies selling consumer goods online or by mail order.

Even though there is no specific statute forbidding merchants from charging delivery fees that exceed the actual costs of shipping, the new complaints assert that the practice violates California Unfair Competition Law and Consumer Legal Remedy Act, based on ethical guidelines promulgated by the Direct Marketing Association, which state that “shipping or handling charges, if any, should bear a reasonable relationship to the actual costs incurred.”

As we saw over a number of years with Song-Beverly Act litigation addressing collection of ZIP codes and other personal information in connection with credit card transactions, it is likely that retailers will face increased exposure and uncertainty over these new claims for the foreseeable future.

Click here for an in-depth examination on the basis of the legal claims asserted and an identification of the issues that are likely to be pivotal as these cases proceed.

Do California 998 settlement offers have legs in class actions?

If you litigate in California, chances are you have come across the CCP 998 settlement offer. Presenting the proverbial “carrot and stick,” 998 offers force plaintiffs to effectively “bet”  on their success in a case. If a plaintiff refuses a 998 settlement offer, their ability to recover costs and attorneys’ fees (if available) will be cut off after the date of the offer if they do not receive an award higher than the amount of the 998 offer. Not surprisingly, such offers can be important tools in aggressively pursuing settlement and forcing plaintiffs to realistically evaluate the worth of their claims.

But how do these offers play out in class actions? Are they even allowed?

The statute is silent as to whether these offers can be used in class actions. There is also no guidance from any California court specifically addressing whether or not a 998 offer can be made to a named plaintiff, or even to an entire putative class.

So far, the decision that comes closest to discussing the availability of 998 offers in class actions is the Court of Appeal decision in Nelson v. Pearson Ford Co. In Nelson, a class action involving claims that a Ford dealership illegally backdated contracts and improperly added insurance premiums to vehicle purchase prices, the defendant made a lump sum 998 offer after two classes were certified (with the same named plaintiff representing both). After a trial verdict in an amount less than the 998 offer was awarded, defendant attempted to enforce the 998 offer to cut off plaintiff’s attorneys’ fees. The trial court refused, finding the 998 offer invalid.

The Court of Appeal, while “assuming” the 998 offer could be made to the class without actually reaching the question, affirmed the trial court’s decision that the 998 offer was invalid on other grounds.

The opinion reasoned that because the offer was a “lump-sum offer to multiple classes, which are the equivalent of separate parties,” it violated 998’s mandate that, in a multi-plaintiff case, the offer is only valid if it is expressly apportioned between plaintiffs.

While there is no subsequent case law using the Nelson decision to determine the validity of a 998 offer in a class action, the holding does give some hope that 998 offers can be used to pursue settlement in such cases, albeit cautiously.

On its face, a 998 offer made to settle with a single named plaintiff, prior to class certification, seems to be a pretty safe bet. If class certification is ultimately denied, a defendant could be sitting pretty.

However, given the holding in Nelson, a single plaintiff offer could become moot if certification is granted. In this scenario, a court might determine that the expansion of the action from single plaintiff to class requires that a 998 offer be apportioned across all class members, rendering the prior offer invalid.

While the dearth of case law interpreting the applicability of 998 offers to class actions means little is certain, defendants would be best served to appreciate the risk a pre-certification offer could be invalidated, and consider making a renewed offer in the event a class is certified to preserve any attorneys’ fees limitations.

Shedding some light on BPA settlements

In our post last week, we outlined the terms of the first two published Proposition 65 BPA settlements, for polycarbonate drinkware. We explained that we don’t know if these settlement terms would become a standard for future settlements and compliance because of the nature of the settlements – out-of-court, with the same plaintiff and Proposition 65 plaintiffs firm. After some consideration, it’s our belief that these settlements will not be particularly useful in guiding companies who seek to avoid Proposition 65 warnings for polycarbonate, whether in drinkware or other products.

The settlements require either reformulation to 1,000 parts per million or a Proposition 65 warning. At first blush, this 1,000 ppm limit might look like a reformulation standard. But upon further review, the settlements may be better understood as an option to warn or cease selling polycarbonate drinkware in California. This is because BPA is the primary ingredient in polycarbonate and the monomer remains after the reaction with phosgene. Therefore, it’s not a matter of just setting polycarbonate specs with less BPA, and one cannot manufacture polycarbonate without BPA.

As a result, the 1,000 ppm limit here seems borrowed from the phthalates settlement limits, which were based on a California statute that itself borrowed the 1,000 ppm standard from EU regulation. The EU regulation was itself based on a determination that chemicals present under 1,000 ppm are contaminants not intentionally added to products, and that phthalates present at that level were not likely to cause significant risk of harm.

These settlements would have been of far more interest had they either:

  • limited the amount of BPA migration from polycarbonate,
  • addressed directly the amount of BPA in polycarbonate that required a warning for ingestion (with no MADL having been set by OEHHA), or
  • set contaminant levels of BPA in any hard plastic used to make the drinkware at issue in the notices, whether made from polycarbonate or otherwise.

They do not give us any information to handicap what amount of BPA in polycarbonate will ultimately be deemed to fall under the safe harbor MADL for dermal exposure of 3 μg/day. As written, these settlements seem to simply say: if you make drinkware out of polycarbonate, provide a Proposition 65 warning. We will continue to track the various BPA cases to see if future settlements address these issues.

2017 marks first year all companies must provide UK Modern Slavery Act disclosure

2017 marks the first year when all companies covered by the UK Modern Slavery Act 2015 must publish a statement.

Under section 54 of the Act – which is similar to the California Transparency in Supply Chains Act – commercial organizations that do business in the UK and have a global turnover of at least £36 million in any financial year are required to publish a slavery and human trafficking statement. The statement must state the steps they have taken to eradicate slavery and human trafficking in their operations and supply chains for each financial year. The statement must be published on the organization’s website, with a link to the statement in a prominent place on their homepage.

When is the ‘deadline’?

The Act does not specify a deadline for publishing the statement, but the Government has encouraged organizations to publish statements within six months of their financial year-end. The first Businesses with a financial year-end on or after March 31, 2016 were the first to publish statements, for the financial year 2015-2016. Businesses with a financial year-end between October 29 and March 30, 2016 were not required to publish a statement for that financial year of the organization under the transitional provisions of the Act. This year marks the first year when all companies covered by the Act must publish a statement.

What needs to be included?

The Act does not contain specific requirements, but states that the following information may be included:

  • the organization’s structure, its business and its supply chains;
  • its policies in relation to slavery and human trafficking;
  • its due diligence processes in relation to slavery and human trafficking in its business and supply chains;
  • the parts of its business and supply chains where there is a risk of slavery and human trafficking taking place, and the steps it has taken to assess and manage that risk;
  • its effectiveness in ensuring that slavery and human trafficking is not taking place in its business or supply chains, measured against performance indicators as it considers appropriate; and
  • the training about slavery and human trafficking available to its staff.

The Practical Guidance provided by the Government states that it expects organizations to build on their statements year on year, and it expects the statements to evolve and improve over time.

Enforcement

There are no direct sanctions for failure to publish a statement under the Act. However, if a business fails to produce a slavery and human trafficking statement for a financial year, the Secretary of State may seek an injunction requiring the organization to comply. If the organization fails to comply with the injunction, it will be in contempt of a court order, which is punishable by an unlimited fine.

The Government states that it will be for consumers, investors and NGOs to engage or apply pressure where they believe a business has not taken sufficient steps to eradicate slavery and human trafficking from its operations and supply chains. In response to this, the Business & Human Rights Resource Centre runs a dedicated online registry of statements where investors, NGOs, journalists and other stakeholders can scrutinize the quality of statements by industry sector. An organization should therefore consider the potential reputation risk in not publishing a statement on time or disclosing that it has taken no steps to eradicate slavery and human trafficking from its operations and supply chains.

Further developments

The UK Parliament is in the midst of discussing the Modern Slavery (Transparency in Supply Chains) Bill [HL] 2016-17. The Bill, which is set to have its second reading in the House of Commons this month, will extend the requirements in section 54 of the Act to public bodies and will require commercial organizations and public bodies to include a statement on slavery and human trafficking in their annual report and accounts. The Bill also requires contracting authorities to exclude from procurement procedures economic operators who have not provided such a statement. If the Bill is approved, this would put further pressure on companies to produce timely and adequate slavery and human trafficking statements.

Discount class action theories broaden in California

The plaintiffs’ bar has a new angle on retailer discounting cases, which attack California retailers who discount merchandise by showing an “original” or “former” price next to a much lower, discounted price to imply tremendous savings.

Initially, plaintiffs relied on California’s False Advertising Law, Unfair Competition Law, and the Consumer Legal Remedies Act to allege that consumers are deceived into purchasing items based on allegedly “false” discounts. The FAL specifically prohibits discount “advertising” of this sort unless the former price was “the prevailing market price… within three months” prior.

Using these cases as a springboard, plaintiffs have recently developed a new liability theory – attacking percentage discount sales – which is proving difficult for defendants to shake.

For example, in Knapp v. Art.com, Inc., plaintiff alleged he was enticed to purchase framed artwork during a 40% off sale ending at midnight that day, only to later learn that a 45% off sale commenced at 12:01 a.m. Plaintiff further urged that defendant consistently offered discounts ranging from 30 to 50 percent, rarely offering goods at the full retail price, thereby falsely inducing consumers to purchase under the mistaken belief they were receiving a bargain.

Even though plaintiff admitted that a special discount code had to be entered to receive the sale price, meaning some consumers were paying full price, the district court denied the defendant’s motion to dismiss based on pure allegations that the 40% off sale was illusory.

In Veera v. Banana Republic, LLC, two sets of plaintiffs launched another attack on a 40% off sale, alleging it was misleading because the sale signs did not disclose that the discount did not apply to everything in the store. In each instance, plaintiffs claimed they were lured into the store by the 40% off signage, selected numerous items for purchase, only to be informed at checkout that the discount only applied to select items. Plaintiffs claimed they ended up buying non-sale items anyway to avoid embarrassment in front of their children and other customers waiting in line behind them, and out of frustration over wasted time spent in the store.

While the trial court granted summary judgment for defendant because plaintiffs knew that the items were not on sale and purchased them anyway, the court of appeal reversed, finding that whether the signage induced plaintiffs to enter the store – thereby creating a “bait and switch” scenario where plaintiffs were caught up in “the momentum to buy” – was an issue of fact for the jury.

The take away? Aside from the fact that it increasingly seems that no good deed – or offer of a bargain – will go unpunished in California, how often a retailer can offer sales and how little “momentum to buy” is required to establish reliance and a potential injury is less clear after these decisions.  The comparative price cases at least set forth a statutory standard for retailers. Knapp and Veera, on the other hand, put forward ambiguous and inconsistent standards that – as the dissent in Veera observed – “will invite exhaustive litigation” as plaintiffs continue to push the envelope against retailers.

LexBlog