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.

First Proposition 65 BPA settlements hit

After months of speculation about the first BPA settlement reformulation standards, we have our first clue: 1,000 parts per million with an option to warn.

Serial polycarbonate drinking glass user Anthony Ferreiro resolved his allegations of BPA exposure without a warning from polycarbonate drinkware through two out-of-court settlements (1) (2), which recently became available on the California Attorney General Proposition 65 website. Both settlements apply to polycarbonate drinkware and provide an option for a 1,000 ppm reformulation standard (using the test method ATS 367 Rev) or a standard Proposition 65 warning for reproductive toxins.

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We caution that because these are out-of-court settlements and only involve one Proposition 65 plaintiff group, we do not yet know whether it will become the de facto compliance limit for BPA. We have no way of knowing whether the 1,000 ppm level is supported by an exposure analysis, and CEH still has complaints pending for BPA exposure from polycarbonate drinkware and thermal receipt paper. Until we see what happens with those cases, it is prudent to maintain labeling and other BPA warnings.

 

 

California Court of Appeal refuses to honor jury trial waiver

In today’s business world, companies frequently enter into contractual provisions with their customers to limit jury trial exposure as part of managing future risks. However, if you think that agreeing that any dispute can be resolved without a jury trial is enough to insulate you and your business from this threat – THINK AGAIN.

Just last month, the California Court of Appeal overturned a contractual provision waiving the parties’ right to a jury trial, despite the fact that such waiver was fully enforceable under New York, the law agreed to in the contract’s choice of law section.

In Rincon EV Realty LLC et al. v. CP III Rincon Towers, Inc., et al., plaintiffs entered into a loan agreement for the purchase of real estate. Ultimately, the parties disagreed as to the terms of the loan maturity date, and plaintiffs filed suit in California state court alleging, among other things, breach of the loan agreement.

The initial loan agreement included a New York choice-of-law provision, specifying that plaintiffs waived any claim that California law (or the law of any state other than New York) govern their agreements. The agreement also expressly waived any parties’ right to seek a jury trial.

Nevertheless, plaintiffs filed a jury demand in California state court, which was challenged by the defendant. The trial court agreed with defendants’ motion to strike the jury demand based on the contractual agreement, but the Court of Appeal overturned this ruling, applying choice of law principles set forth in section 187 of the Restatement Second of Conflict Laws.

Although the Court of Appeal recognized that New York had a substantial interest in the transaction (plaintiffs’ principal place of business was in New York, the agreements were negotiated in New York, the loan was made, accepted, and the proceeds were distributed there),it held that the New York law on jury waivers was contrary to California’s fundamental policy of granting an “inviolate right” to a jury trial, waivable in only six specific ways. The Court then found that, California, the forum state, had a greater interest in having its law applied because of its interest in “enforcing its policy that only the Legislature can determine the permissible methods for waiving the right to jury trial….”

The take away from this decision is that jury trial waivers in contracts and agreements are likely unenforceable should a lawsuit be filed in California. Here, it didn’t matter that the relevant actions took place in New York, that the parties (arguably sophisticated) specifically agreed that New York choice of law should apply. Nor did it matter that the parties knew and understood that they were waiving the right to a jury trial. By simple virtue of the fact that the case was filed in California, a state deemed to have the greater interest in have its jury waiver laws applied, the parties’ express agreement was invalidated.

Bottom line: don’t get too comfortable that you’ve made an agreement to waive a jury trial in advance of litigation. If the lawsuit is filed in California, you may very well find yourself conducting voir dire.  It also remains to be seen whether this holding is expanded to find other “procedural” contract provisions unenforceable.

Chicago checkout bag tax set to begin

For retailers and other companies doing business in the Windy City, the Chicago Checkout Bag Tax Ordinance implements a $0.07 tax on “the retail sale or use” of paper or plastic checkout bags. It goes into effect on February 1, 2017. The new tax accompanies the repeal of the city’s reusable bag ordinance.

The tax operates like a typical product stewardship fee – wholesalers of paper or plastic checkout bags must collect the tax when supplying checkout bags to stores in the city and then pass the additional cost down the supply chain.  Wholesalers are responsible for remitting the tax to the city and filing required tax returns.  Retailers who sell checkout bags to customers must assess the tax at checkout and separately state it on the receipt with a line item “Checkout Bag Tax.” Retailers who give checkout bags to customers must either charge the tax and separately state it on the receipt, or not charge the tax and absorb it themselves.

The city has established a webpage with information on the tax.

Who’s covered

The tax applies to stores, which the ordinance defines as any person who “engages in the business of selling tangible personal property.” This means that anyone who sells a physical good is subject to the ordinance – unlike most existing checkout bag restrictions, Chicago’s is not limited only to grocery stores or drugstore chains.

What’s covered

The ordinance limits the definition of “checkout bags” to paper or plastic carryout bags “provided by a store to a customer for the purpose of carrying goods out of a store.” The ordinance exempts bags used inside the store to:

  • Package loose bulk items, including fruit, vegetables, nuts, grains, candy, cookies or small hardware items
  • Contain or wrap frozen foods, meat or fish
  • Contain or wrap flowers, potted plants or other damp items
  • Separate food or merchandise that could damage or contaminate other food or merchandise if placed together in a single bag
  • Contain unwrapped prepared foods or bakery goods.

The tax also exempts the following categories:

  • Prescription drug bags
  • Packages of garbage bags
  • Dine-in “doggie bags” or take-out restaurant bags for food or drink purchased by customers
  • Newspaper bags
  • Dry cleaning or garment bags
  • Plastic liners permanently fixed or intended to be permanently fixed to the inside of a bag
  • Plastic bags with a retail price of at least $0.50 each
  • Checkout bags used to carry items under governmental food assistance programs like SNAP.

Collecting the tax

Of the $0.07 collected, retail stores may keep $0.02, while the wholesaler must remit the remaining $0.05 cents to the city. If a wholesaler does not collect from retailers, retail stores must still collect the tax, with the added burden of remitting it to the city themselves. If the wholesaler sells checkout bags to a purchaser that is not a retail store, the wholesaler must still obtain the $0.07 tax, but it is eligible to retain $0.02 per bag as a commission.

For exempt bags, the city’s FAQ states that retailers should take credits on their payments to wholesalers on a going forward basis to account for exempt bags from the prior month, and in turn wholesalers should claim a credit when submitting their tax payments.

In an added wrinkle, the ordinance requires stores to ascertain their on-hand inventory of paper and plastic checkout bags by COB on Tuesday, January 31, 2017 and pay $0.05 for the existing inventory by mail, postmarked on or before Friday, March 3, 2017 (a late fee of $100 applies). Wholesalers and retailers must keep detailed records and make them available for inspection upon request.

Trump administration ices EPA formaldehyde in composite wood rule

Following up our recent post on EPA’s publication of its formaldehyde in composite wood rule, the Trump administration has delayed the rule’s effective date from February 10, 2017 to March 21, 2017. This delay is part of the administration’s “Regulatory Freeze Pending Review.” It is unclear what impact this freeze will have on the rule’s implementation, as the “manufactured by” date that triggers compliance is based on EPA publication (December 12, 2016), not the original effective date (February 10, 2017). But the “freeze” is intended to prevent implementation of EPA regulations without review, and directs agencies to:

…consider proposing for notice and comment a rule to delay the effective date for regulations beyond … [the current delay]. In cases where the effective date has been delayed in order to review questions of fact, law, or policy, you should consider potentially proposing further notice-and-comment rulemaking. Following the delay in effective date

  1. for those regulations that raise no substantial questions of law or policy, no further action needs to be taken; and
  2. for those regulations that raise substantial questions of law or policy, agencies should notify the OMB Director and take further appropriate action in consultation with the OMB Director.

We assume that until further notice, implementation is on hold. We will continue tracking this issue and providing updates as they develop.

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