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Class Defense Blog

Cutting-Edge Issues in Class Action Law and Policy

ABA Journal Accepting Nominations for Blawg 100

Posted in Uncategorized

The ABA Journal is putting together its annual list of the 100 best legal blogs.  There are many great legal blogs out there; if you think this is one of them, we’d be grateful if you would consider nominating us for the list.

To put in a good word for us, please use this form on the ABA Journal’s website.  The deadline for nominations is August 8, 2014.

Many thanks in advance for your support!

Third Circuit to Consider FTC’s Authority Over Data Security Standards in FTC v. Wyndham

Posted in Class Action Trends

We have written previously about the FTC’s action arising out of the data breach suffered by the Wyndham hotel group, and the company’s petition for permission to pursue an interlocutory appeal regarding the FTC’s use of its “unfairness” jurisdiction to police data security standards. On Tuesday, the Third Circuit granted Wyndham’s petition. Even the FTC had agreed that the “the legal issues presented are ‘controlling question[s] of law,’ and they are undoubtedly important.”  Yesterday’s ruling promises that these questions soon will be considered by the Third Circuit.

Class Action Fairness Act Roundup

Posted in Motions Practice

Nine years after the Class Action Fairness Act of 2005 (“CAFA”) was enacted, parties continue to fight over when federal jurisdiction over significant class and mass actions is proper.

In this post, we provide a rundown of some of the most important recent cases involving CAFA.

Continue Reading

Upcoming Class Action Seminar in Washington, DC

Posted in Class Action Trends

Later this week, DRI—an important professional organization that serves as a leading voice for the defense bar and in-house counsel—will once again hold its annual seminar on class actions in Washington, D.C.  I will be one of the speakers, and will be discussing recent developments affecting arbitration and class actions.  I plan to preview some of the issues that I’ll be discussing on the blog in the weeks to come.   More information about the seminar is available here.  I look forward to seeing readers of our blog and other friends and colleagues.

Wyndham Seeks Immediate Appeal Over Whether FTC Has Authority To Regulate Data Security

Posted in Class Action Trends

We have written previously about FTC v. Wyndham Worldwide Corp., currently pending in federal district court in New Jersey, and its potential significance for data security class actions. A recent opinion in that case has brought it back into the news—and made clear that the stakes are as high as ever.

Over the FTC’s opposition, the district court certified an interlocutory appeal to the Third Circuit regarding its earlier denial of Wyndham’s motion to dismiss. Specifically, the district court certified two questions of law for appellate review: (1) whether the FTC has the authority under Section 5 of the FTC Act to pursue an unfairness claim involving data security; and (2) whether the FTC must formally promulgate regulations before bringing such an unfairness claim. Here is a copy of Wyndham’s petition to the Third Circuit to accept the certified appeal.

ERISA Stock-Drop Class Actions: As One Door Opens for Plaintiffs, Another Closes

Posted in Employment, Securities, U.S. Supreme Court

In ERISA stock-drop class actions, plaintiffs routinely allege that their employers breached a duty of prudence by permitting employees to invest their retirement assets in their company’s stock.  Until today, defendants typically defended against such claims by invoking a judicially crafted presumption that offering company stock was prudent.  Today, in Fifth Third Bancorp v. Dudenhoeffer, No. 12-751 (pdf), the Supreme Court rejected that presumption.

But all hope is not lost for stock-drop defendants.  Much of the work previously done by the presumption of prudence will now be done by the substantive requirements of the duty of prudence.  The Court offered guidance as to what plaintiffs must demonstrate to survive a motion to dismiss—and the standards suggested by the Court will not be easy to satisfy.

As a starting point, fiduciaries who administer retirement plans governed by the Employee Retirement Income Security Act (ERISA) owe a duty of prudence to plan participants.  See 29 U.S.C. § 1104(a).  To comport with that duty, fiduciaries are generally required to “diversify[] the investments of the plan so as to minimize large losses, unless under the circumstances it is clearly prudent not to do so.”  Id. § 1104(a)(1)(C).  But because Congress wanted to encourage employees to invest in their own companies, it waived the duty of prudence “to the extent it requires diversification” for fiduciaries of an “employee stock ownership plan” (ESOP).  Id. § 1104(a)(2).

Several federal courts of appeals had inferred from this exemption that an ESOP fiduciary’s decision to hold or buy employer stock should be presumed prudent, and that the fiduciary could not be held liable unless the company was in such dire financial straits that its viability as a going concern was in doubt.  In today’s unanimous opinion by Justice Breyer, the Court held that ERISA’s text provides no presumption—in particular, although Section 1104(a)(2) expressly exempts ESOP fiduciaries from the duty of prudence, to the extent that duty requires diversification, it makes no reference to any special presumption.

Having resolved the question presented, the Court proceeded to “consider more fully one important mechanism for weeding out meritless claims, the motion to dismiss for failure to state a claim,” and explained how, in light of the substance of the duty of prudence, motions to dismiss should be assessed.

The Court effectively ruled out stock-drop claims based on publicly available information, invoking its two-day-old decision in Halliburton Co. v. Erica P. John Fund, Inc. (pdf) (previously discussed on the blog), in which the Court opined that investors may reasonably rely on the market to incorporate public information into a stock’s price.  For circumstances in which fiduciaries are alleged to possess nonpublic information that suggests it was imprudent to hold company stock, the Court held that “a plaintiff must plausibly allege an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.”  The Court emphasized that ERISA fiduciaries cannot be required to trade on insider information in violation of the securities laws.  And the Court cast doubt on other theories sometimes offered by ERISA stock-drop plaintiffs—that fiduciaries should have ceased making new investments in company stock or disclosed the previously nonpublic information.  The Court noted that ERISA’s requirements must be in harmony with “the complex insider trading and corporate disclosure requirements imposed by the federal securities laws” and the objectives of those laws, and indicated that ERISA’s fiduciary breach requirements do not require plan fiduciaries to take actions that “would do more harm than good to the fund by causing a drop in the stock price and a concomitant drop in the value of the stock already held by the fund.”

The Court’s decision fundamentally reconfigures the landscape for ERISA stock-drop class actions.  Although the rejection of the presumption of prudence is likely to result in more suits against retirement plan fiduciaries, the Court’s substantive guidance arms class-action defendants with potent defenses that can be invoked at the motion-to-dismiss stage.  The main issue left open by the Court—when, if at all, fiduciaries must act on nonpublic information—will be litigated extensively in the lower courts, and may ultimately percolate back up to the Supreme Court again.

Why The Supreme Court’s Decision in Halliburton Is Bad News For Investors And The Public

Posted in Class Certification, Securities, U.S. Supreme Court

Yesterday’s Supreme Court ruling in the Halliburton case leaves the securities class action system pretty much unchanged. And that isn’t because the Supreme Court examined the system and concluded it is working well and makes sense.  Instead,  the Court simply didn’t address those questions.

That’s very good news for the lawyers who make their living representing plaintiffs and defendants in these cases.  The gravy train will continue:  $1.1 billion in fees and expenses awarded to plaintiffs’ counsel in 2013, with hourly rates up to $1370.  Defense counsel likely took home a multiple of that amount, given that securities class actions routinely target multiple defendants with separate counsel, and that defense fees pile up in those cases that don’t reach the settlement stage.

But it’s very bad news for investors, who are forced to foot the bill for this economically-irrational litigation system that—in the words of Joseph Grundfest, former SEC Commissioner and current Stanford Law professor— “is broken” because it “fails to efficiently . . . deter fraud and fails [to] rationally compensate those harmed by fraud.”  Professor Donald Langevoort of Georgetown has said: “Were this system sold as an insurance product, consumer-protection advocates might have it banned as abusive because the hidden costs are so large.”  (More information about the dysfunctionality of the securities class action system is collected here.)

Indeed, the Court’s decision almost certainly will make this litigation even more expensive by increasing the scope of the class certification inquiry (while not changing the result in many cases).  That means even more money out of the pockets of shareholders and into the pockets of lawyers and economic experts.

Why did the Court refuse to revisit the correctness of the fraud-on-the-market presumption recognized in Basic Inc. v. Levinson and decline even to consider the mountain of evidence that securities class actions hurt shareholders?  And why is the Court’s tweak of the presumption unlikely to have any real-world effect?

The Punt to Congress

Stare decisis—respect for precedent—is the reason why this potential blockbuster case fizzled.  Ordinarily, the Supreme Court is very reluctant to overrule a prior decision interpreting a federal statute. The Court’s view is that Congress has the power to correct errors in statutory construction.

But Basic is far from a conventional statutory interpretation case: courts, not Congress, created the private cause of action for securities fraud; courts, not Congress, specified the elements that a plaintiff must prove to recover damages; and courts, not Congress, formulated the fraud-on-the market presumption as a substitute for proof of reliance.  For that reason, many observers (including me) thought that the Supreme Court would examine Basic under the different, more flexible stare decisis standard applicable to judge-made federal common law (and decisions under statutes like the antitrust laws that delegate common-law authority to courts). That standard permits the overruling of precedent in a broader range of circumstances, recognizing that Congress has allocated to the courts principal responsibility for supervising those areas of law.

Justice Thomas, writing for himself and Justices Scalia and Alito, applied that more expansive approach.  As he explained, Basic “concerned a judge-made evidentiary presumption for a judge-made element of the implied 10b−5 private cause of action, itself ‘a judicial construct that Congress did not enact in the text of the relevant statutes.’”  For that reason the high bar to overruling precedent that governs statutory construction cases should not apply:

[W]hen it comes to judge-made law like “implied” private causes of action, which we retain a duty to superintend[,] . . . . we ought to presume that Congress expects us to correct our own mistakes—not the other way around. That duty is especially clear in the Rule 10b–5 context, where we have said that “[t]he federal courts have accepted and exercised the principal responsibility for the continuing elaboration of the scope of the 10b–5 right and the definition of the duties it imposes.”

Indeed, Justice Thomas pointed out that Congress in the Private Securities Litigation Reform Act had expressly declined to ratify the courts’ creation of a private cause of action, stating that “[n]othing in this Act . . . shall be deemed to create or ratify any implied private right of action.”  That language makes clear that Congress intended that questions regarding the standards for establishing liability remain the province of the courts.  In Justice Thomas’s words, “Basic’s presumption of reliance remains our mistake to correct.”

The majority in Halliburton did not even respond to these arguments, relying instead on the general rule that “[t]he principle of stare decisis has ‘“special force”’ ‘in respect to statutory interpretation,’” and citing a decision involving the interpretation of statutory language enacted by Congress, not a case relating to judge-made law.

Most importantly, the majority did not assess the merits of the arguments challenging Basic—instead dismissing them because they had been considered and rejected by the four-Justice majority in Basic or because they did not “so discredit[] Basic as to constitute ‘special justification’ for overruling the decision.” With respect to the harm to investors from the securities class action system, the Court also refused to engage, saying that “[t]hese concerns are more appropriately addressed to Congress.”

The three Justices concurring in the judgment did address these issues.  They determined that the two assumptions underlying Basic’s presumption of class-wide reliance simply “do not provide the necessary support” for that presumption:

The first assumption—that public statements are “reflected” in the market price—was grounded in an economic theory that has garnered substantial criticism since Basic. The second assumption—that investors categorically rely on the integrity of the market price—is simply wrong.

Moreover, they recognized the reality that “in practice, the so-called ‘rebuttable presumption’ is largely irrebuttable”—“[o]ne search for rebuttals on individual-reliance grounds turned up only six cases out of the thousands of Rule 10b-5 actions brought since Basic,” likely because of the “substantial in terrorem settlement pressures brought to bear by [class] certification.”  That is a critical failing, because “without a functional reliance requirement, the ‘essential element’ that ensures the plaintiff has actually been defrauded, Rule 10b–5 becomes the very ‘“scheme of investor’s insurance”’ [that] the rebuttable presumption was supposed to prevent.”

Of course, the economic burden of this “insurance” falls squarely on investors.  One recent study found that investors’ “total wealth loss” from securities class actions “averages to about $39 billion per year, in order to collect an average of $6 billion in settlements per year ($5 billion per year after plaintiff attorneys’ fees). In other words, because of the filing of securities class actions, shareholders incrementally lost more than six times the settlement amount (or more than seven and half times the amount that shareholders would receive after plaintiffs’ attorneys’ fees).”

The majority’s decision to disclaim responsibility for addressing these very real—and very harmful—consequences of judge-made law “‘places on the shoulders of Congress the burden of the Court’s own error.’”

The Tweak With Little Real-World Impact

After declining to reconsider Basic, the Supreme Court majority addressed what has been labeled the “middle ground” argument in the case:  whether the Court should modify the factual showing that a plaintiff must make at the class certification stage in order to gain the benefit of the fraud-on-the-market presumption.

Some news reports have called the Court’s decision on this point a “new burden” on securities class action plaintiffs or a “new hurdle” to obtaining class certification.  But the consensus of informed observers is that the Court’s ruling means more litigation and cost with little ultimate difference in the results of class certification decisions.  Perhaps in some cases class certification may become more difficult, but the big picture is bleak:  The securities class action engine will roll along essentially unchanged, continuing to drain away billions of dollars in shareholder value each year.

To begin with, here’s a bit of background on the Basic presumption.  The Court held in that case that, as an alternative to proving actual reliance on the defendant’s false material misstatement, a plaintiff may—as the Halliburton majority explained—“invok[e] a rebuttable presumption of reliance” by showing that the misrepresentations were publicly known and material, that the security purchased or sold by the plaintiff “traded in an efficient market” and that the plaintiff traded in the security “between the time the misrepresentations were made and when the truth was revealed.”

In that situation, the fraud-on-the-market theory holds that the market price “‘reflects all publicly available information, and, hence, any material misrepresentations’”; that “the typical ‘investor who buys or sells stock at the price set by the market does so in reliance on’ . . . the belief that it reflects all material public information”; and that the investor therefore may be presumed to rely on any misrepresentations.  The presumption can be rebutted “if a defendant could show that the alleged misrepresentation did not, for whatever reason, actually affect the market price, or that a plaintiff would have bought or sold the stock even had he been aware that the stock’s price was tainted by fraud.”

Halliburton’s “middle ground” argument—strongly supported by an amicus brief filed by law professors Adam Pritchard and Todd Henderson—was that Basic’s focus on market efficiency was misplaced, and that plaintiffs should be required to prove “price impact”—meaning that the defendant’s alleged misrepresentation actually affected the stock price—in order to invoke the presumption of reliance.  “In light of the [courts’] difficulties in evaluating efficiency,” the brief argued, “the Court should shift the focus of fraud on the market inquiries from a market’s overall efficiency to the question whether the alleged fraud affected market price.” (emphasis added) Pritchard and Henderson further urged the Court to “limit[]” the “out-of-pocket measure of damages . . . to cases in which the plaintiff can show actual reliance or that a material misstatement has distorted the market price for a security. If a plaintiff cannot make that showing, the remedy should be limited to disgorgement.”

The Supreme Court majority rejected these arguments and refused to alter the proof needed to invoke the presumption.  It held only that a defendant may submit price impact evidence prior to class certification to demonstrate “that the alleged misrepresentation did not actually affect the stock’s market price and, consequently, that the Basic presumption does not apply.”

Most observers believe that this ruling—which places the burden on the defendant to introduce price impact evidence sufficient to rebut the presumption—will do little to change class certification results, but definitely will increase the cost and complexity of the fight over class certification as defendants submit expert analyses demonstrating the lack of price impact and plaintiffs commission their own studies to prove the opposite.  (Economic consulting firms will do better than ever given the inevitable demand for competing price impact studies.  Come to think of it, investing in one might be a good bet—particularly a firm that is not publicly traded, and therefore would not likely be subject to a class action lawsuit.)

As Professor Henderson, one of the two proponents of the price impact approach, explained:

The ruling will make these cases more expensive…without targeting the worst corporate actors….My prediction is that the average case will get longer and cost more, since defendant corporations will put on evidence that plaintiffs will have to respond to….So, all in all, I think this is very disappointing.

His co-author, Professor Pritchard, said (subscription): “We are adding to the expense. We are not getting rid of any weak lawsuits.”

The plaintiffs’ bar has been unable to disguise its glee.  Salvatore Graziano (of the plaintiffs-side securities class action firm Bernstein Litowitz Berger & Grossmann) told one reporter: “I don’t see this decision having much impact at all.” “It’s a non-event.”  David Boies, who represents the plaintiffs in Halliburton, said: “Defendants have always been permitted to try to prove the absence of price impact, and permitting them to do so at the class-certification stage will not significantly limit securities lawsuits in the future.”

In sum, plaintiff and defense-side lawyers can breathe a sigh of relief—there will be little or no change in the status quo for them.

But for investors, there is a change for the worse: these lawsuits will be more expensive and impose an even greater burden on innocent shareholders, who ultimately pay all of the costs of the securities class action system. 

Supreme Court Refuses To Overturn Fraud-On-The-Market Presumption, But Adjusts Presumption To Allow Evidence of Absence Of “Price Impact” At Class Certification Stage

Posted in Class Certification, Predominance, Securities, U.S. Supreme Court

The securities class action industry was launched a quarter-century ago when the Supreme Court recognized the so-called “fraud-on-the-market” presumption of reliance in most putative securities class actions.  The result has been that—despite Congressional efforts at securities litigation reform—most securities class actions that survive the pleadings stage are likely to achieve class certification, forcing defendants to settle.  In the meantime, as explained in prior blog posts, the best economic thinking has shifted, calling the empirical assumptions underlying the fraud-on-the-market presumption into question.

In Halliburton Co. v. Erica P. John Fund, Inc. (pdf), decided today, the Supreme Court declined to abandon that presumption, instead largely maintaining the status quo.  The Court did clarify one key aspect of how class certification works in the securities context, holding that defendants are now entitled to attempt to rebut the presumption by introducing evidence at the class certification stage that there was no “price impact”—i.e., that misrepresentation alleged in a particular lawsuit did not affect the stock’s price.  This adjustment will make it possible for defendants to challenge class certification in a number of securities class actions, but is unlikely to alter the landscape of securities litigation significantly—a result that is troubling from a policy perspective because (for reasons we have previously stated) securities class actions generally benefit the lawyers who bring and defend them rather than the investors.

We provide more details about the decision below. Continue Reading

California Court Says No Need To Resolve Disputes Over Substantive Law In Evaluating Whether Class Can Be Certified

Posted in Class Certification, Commonality, Employment, Predominance

Suppose that you’re a trial court considering a motion for class certification.  And suppose that the parties present you with two competing statutory interpretations.  One legal standard permits the case to be adjudicated with common evidence.  And the other standard would require  individualized inquiries.  What should you do?  Should you decide what the law is and then see whether the putative class claims can be tried in a single trial?

The surprising answer of the California Court of Appeal is in Hall v. Rite Aid Corp. (pdf) is “No.”  Hall appears to conclude that commonality and predominance need not be established under the correct substantive legal standards.  Rather, if the plaintiffs propose a legal standard dispensing with individualized inquiries, the very question whether that standard applies is a common issue supporting class certification.

Hall is another decision in a growing series of “suitable seating” cases addressing a California Industrial Welfare Commission Wage Order that requires employers to provide employees with “suitable seats when the nature of the work reasonably permits the use of seats.” The plaintiffs in Hall—cashier-clerks who divided their time between check-out counters, stockrooms, and sales floors—construed the Order to require seats to be provided to every employee for every task where providing seats would be reasonable. In particular, the plaintiffs contended that Rite Aid had a duty to provide a seat to any employee who worked at a check-out counter for any period of time, even if for much of that time the employee would not be able to perform the job while sitting.  Rite Aid, in contrast, contended that the duty to provide a seat depended on the employee’s duties as a whole, so that the Order would not require providing a seat to an employee working at a check-out counter if the employee worked mostly at tasks where seating was inappropriate, or if check-out duties would not allow the employee to sit most of the time.  Thus, under plaintiffs’ legal theory, any failure to have a seat at a check-out counter was a violation requiring no further inquiry, while under Rite Aid’s theory such a failure would violate an employee’s rights only under certain, largely individualized circumstances.

Agreeing with Rite Aid’s view of the substantive law, the trial court decertified a class.  The San Diego-based Court of Appeal reversed.  In its view, the disputed legal elements of the plaintiffs’ claim were themselves common legal issues supporting class certification.  According to that court, deciding exactly what the law required the plaintiff had to prove in common was an impermissible predetermination of the action’s merits, and thus fell afoul of the California Supreme Court’s decision in Brinker Restaurant Corp. v. Superior Court.

True, Brinker had disapproved a “free-floating inquiry into the validity of the complaint’s allegations” at the class certification stage.  Yet the California Supreme Court also recognized that when “legal issues germane to the certification inquiry bear as well on aspects of the merits, a court may properly evaluate them”; indeed, [t]o the extent the propriety of certification depends on disputed threshold factual or legal questions, a court may, and indeed must, resolve them.”

It seems to me that, when one interpretation of a Wage Order would require resolution of myriad individualized issues, and the other interpretation would permit the same issues to be resolved in common, the “propriety of certification” under Brinker would depend on the correct legal standard.  Not so, according to the Hall court, which viewed the very dispute over the legal standard as a common issue supporting class certification.

The Hall opinion would seem to allow a plaintiff to obtain class certification simply by advancing a theory of liability that omits inherently individualized elements such as causation and injury, on the ground that the validity of the plainly erroneous legal theory could be determined on a class-wide basis.  And the Hall approach raises significant unanswered questions.  The opinion suggests that defendants—especially employers whose policies are challenged—should want threshold legal questions to be decided after class certification so that the entire class is bound by the result.  But if class counsel is wrong about the legal theory, and in fact the legality of the employer’s policy depends on individual circumstances, does the entire class lose because the class plaintiff’s overbroad theory fails, even though some or even many class members would have valid claims under the proper, more individualized standard?  That might create adequacy and due process problems, elevating the interests of the class-action lawyers over those of their clients.  But if determination of the legal issue on a class basis instead simply results in decertification of the class, allowing new actions under the correct theory, then it makes no sense to defer the decision as to what, exactly, plaintiffs must prove through common evidence.

The issue surfaced indirectly in the California Supreme Court’s recent unanimous decision in Duran v. US Bank NA (pdf), which we recently discussed.  Duran rejected the use of questionable statistical sampling that swept away individualized issues and defenses in a wage-and-hour class action.  The Court’s evaluation of the class-certification and trial-management issues hinged on a view of the governing law under which an employee’s exempt status under the overtime laws hinged on whether the employee actually spent more than half-time carrying out duties that were exempt (there, sales outside the employer’s facility).  Justice Liu’s concurring opinion suggested a possible legal test—different from the Court’s view—that would turn on the employer’s reasonable expectations about the balance of exempt or nonexempt activity within a particular job classification, not on the employees’ actual work practices. If that test correctly stated the obligation, Justice Liu suggested, the application of the exemption could be determined as a common issue without the need for statistical sampling. Hall raises the troubling possibility that a litigant could seek to avoid individualized issues by restating the governing legal test along the lines of Justice Liu’s concurrence in Duran, and then claim that the choice between Justice Liu’s formulation and the formulation adopted in the Court’s opinion itself was a common issue of law.   In my view, such an approach would be inconsistent with Duran and Brinker.

 

POM v. Coke Does Not Alter The Landscape for Food False Advertising Class Actions

Posted in Class Action Trends, U.S. Supreme Court

After the oral argument in POM Wonderful LLC v. Coca-Cola Co. (pdf), No. 12-761, the Supreme Court appeared all but certain to allow competitors to sue for false advertising under the Lanham Act over labels of FDA-regulated food products.  Food manufactures have been waiting to see just how broad the ruling would be and whether it would affect the onslaught of consumer class actions challenging food and beverage labels.  The wait is over, and the POM v. Coke decision, while effecting a dramatic change in competitor actions, should have little impact on consumer class actions.

As described by the Supreme Court, here are the facts of the case:  POM markets a juice product labeled “Pomegranate Blueberry 100% Juice,” which consists entirely of pomegranate and blueberry juices.  Coke (under its Minute Maid brand) markets “Pomegranate Blueberry Flavored Blend of 5 Juices,” a competing product that contains 99.4% apple and grape juices, with pomegranate, blueberry, and raspberry juices accounting for the remaining 0.6%.  The label on the Minute Maid product features a picture of all five fruits and the words “Pomegranate Blueberry” in a larger font than the words “Flavored Blend of 5 Juices.”  Significantly, the Minute Maid label complies with the technical labeling rules set out in the federal Food, Drug, and Cosmetic Act (FDCA) and FDA’s related regulations for naming a flavored juice blend.

POM alleged that Coke’s product name and label violate the Lanham Act’s false-advertising provision because (according to POM) consumers will be fooled into thinking there is more pomegranate and blueberry juice in the product than there really is.  The district court and Ninth Circuit rejected the Lanham Act claims, accepting Coke’s argument  that because juice labeling is pervasively regulated by FDA, applying generalized principles of false advertising under the Lanham Act would destroy the uniform, national labeling standard announced by the agency under the FDCA.  As the Ninth Circuit put it, “the FDCA and its regulations bar pursuit of both the name and labeling aspect” of the Lanham Act claim because allowing the claim would “undermine the FDA’s regulations and expert judgments” about how juices may and should be included in the product name.

The Supreme Court unanimously reversed the Ninth Circuit’s decision in an opinion by Justice Kennedy.  In analyzing whether one federal statute (the FDCA) precludes a remedy available under another (the Lanham Act), the Court ruled that the FDCA and Lanham Act can be harmonized because they are “complementary and have separate scopes and purposes” and—unlike FDCA’s express preemption of state-law claims—neither statute “discloses a purpose” by Congress to bar competitor suits like POM’s.  (A more detailed discussion of the Court’s opinion is available here.)  Notably—although the Court repeatedly tells us that the FDCA and Lanham Act can get along—the opinion never actually does the hard work of harmonizing Coke’s compliance with the FDCA’s detailed rules for naming flavored juice blends with POM’s theory of liability challenging the FDCA-compliant name under a generalized theory of false advertising.

By contrast with competitor lawsuits, the Court’s decision should have virtually no impact on food labeling consumer class actions.  While the Court expressed the view that consumers will be indirect beneficiaries of competitor Lanham Act claims over allegedly misleading labels, it made clear that its decision does not address or alter the interplay between state consumer protection laws or consumer suits and the FDCA.  In other words, the decision does not in any way undermine preemption principles that would apply to state-law claims challenging labels regulated by FDA.  That’s important not just for food companies facing consumer class actions, but also to avoid a problem the Court specifically recognized in its decision: the “disuniformity that would arise from the multitude of state laws, state regulations, state administrative agency rulings, and state-court decisions that are partially forbidden by the FDCA’s pre-emption provision.”  Though the Court correctly recognizes the resulting chaos if each state could impose non-identical labeling requirements, it characterizes the potential disuniformity from the potential tension between the FDCA and the Lanham Act a result that Congress envisioned.

Whether the Court was right or wrong about that, one thing is clear:  In creating food labels, food companies should consider not only what the FDCA and federal regulations say, but also analyze the potential risks of competitor lawsuits under the Lanham Act.  We will have more to say about these issues on a webinar tomorrow; interested clients or friends of the firm may register for the webinar here.