Unfair Competition Law

What’s the difference between claiming that a food product is improperly certified as organic and claiming that the producer was properly certified but the product isn’t really organic? A unanimous California Supreme Court held in Quesada v. Herb Thyme Farms, Inc. (pdf) that state courts and juries should figure out the answer.  That ruling opens the door to state-law actions that challenge food producers’ compliance with the federal organic food product certification and labeling scheme, so long as the claims don’t take issue with the original certification decision.  The decision revived a consumer class action alleging that a food producer—though properly certified to use the “organic” label—intentionally misapplied that label to products containing conventionally produced herbs from one of its noncertified facilities.

Drawing an exquisitely fine line, the California Supreme Court held that preemption extends only to “matters related to certifying production as organic” and left “untouched enforcement against abuse of the label ‘organic.’”  The court concluded that state lawsuits alleging intentional misuse of an organic label were not preempted because (in the California court’s view) lawsuits of that kind would help rather than hinder Congress’s objective.

The federal Organic Foods Production Act of 1990 (OFPA) creates a uniform, federal definition of the term “organic” and gives the U.S. Department of Agriculture exclusive authority to elucidate the labeling standard and to certify producers as qualifying to label food as “organic.”  The USDA may approve a state agency to carry out the certification function and impose more stringent state substantive standards. The California Department of Food and Agriculture has been approved for both of these roles. The OFPA and its California counterpart both provide for administrative enforcement of the regulations, including processes for consumer complaints to the relevant agency.

In Quesada, the plaintiff sued Herb Thyme Farms under California’s Unfair Competition Law (UCL) and Consumers Legal Remedies Act (CLRA), alleging that Herb Thyme applied a “Fresh Organic” label to conventionally produced herbs and to a mixture of organic and conventional herbs.  Herb Thyme has an organic farm that has been certified to use the “organic” label, but also operates conventional, nonorganic farms.

The California Supreme Court held that the federal OFPA did not preempt Quesada’s state-law claims.  First, the court held that, because the pertinent provisions of OFPA do not reference enforcement, the statute expressly preempts state law only as to the definition of “organic” and the process for certifying that a grower’s methods of production entitle it to use the “organic” label.  The California court relied on the fact that the mislabeling claims did not address the certification or compliance of Herb Thyme’s organic facility, but only challenged the use of the “organic” label for Herb Thyme products that contained (or consisted solely of) herbs that were not produced at the certified farm.  The federal certification standards also address the procedures to be followed where a producer has both organic and conventional facilities, but the California Supreme Court found that regulation insufficient to bring the case within the OFPA’s preemptive scope.

Second, the California court concluded that Quesada’s claims were not impliedly preempted because they did not pose an obstacle to the uniform federal regulatory scheme, but rather furthered the purpose of that scheme. In the court’s view, once the regulators decide whether a producer or product meets the standards in the first instance, private plaintiffs may enlist state-law theories to enforce the producer’s later compliance with the labeling requirements. According to the court, allowing plaintiffs to use state statutory and common law to enforce the OFPA would “affirmatively further the purposes of the Act”—the more enforcement, the merrier.

By allowing a private plaintiff to pursue a state-law misrepresentation theory to police compliance with OFPA labeling standards, Quesada conflicts with the Eighth Circuit’s decision in  In re Aurora Dairy Corp. Organic Milk Marketing & Sales Practices Litigation.  The Eighth Circuit held in Aurora Dairy that claims alleging that “milk [was sold] as organic when in fact it was not organic are preempted because they conflict with the OFPA.” As the court of appeals put it, “compliance and certification cannot be separate requirements.” While the plaintiffs in Aurora Dairy could not sue over the use of the “organic” label, they could challenge related assertions and omissions about the way the cows were raised and fed, including affirmative claims that the cows were antibiotic- and hormone-free.

The California Supreme Court tried to avoid the conflict by asserting that the plaintiffs in Aurora Dairy were challenging the certification process itself.  But that is not what the Aurora court said; moreover, the claims it allowed were based on representations that did not use the word “organic.”

Although the Quesada decision is limited on its face to claims involving fraudulent or intentional substitution of uncertified products for certified ones, that restriction may provide only modest comfort to defendants. Plaintiffs’ counsel can manipulate the allegations in their complaints with relative ease, particularly under the elastic standards of the UCL and CLRA.  And the California Supreme Court opinion reflects hostility to federal preemption, suggesting that state lawsuits serve the purposes of an otherwise uniform federal regulatory scheme merely by increasing the volume of litigation, and that the so-called presumption against preemption may be dispositive even in an area like food safety, where the  federal government has been heavily involved for more than 100 years. .

The California Supreme Court has a reputation for hostility to arbitration, especially in the consumers and employment context. Much of the arbitration docket of the United States Supreme Court over the past 30 years has involved reversals of California Supreme Court decisions refusing to enforce arbitration agreements, most recently (and perhaps most notably) in AT&T Mobility v. Concepcion (in which the authors were counsel). Even when seemingly compelled to enforce an arbitration provision in the face of recent U.S. Supreme Court authority, the California court has often found a way to carve out some exception to arbitration in the particular case or to offer suggestions to plaintiffs seeking to avoid arbitration in a future case. A prime example is the 2014 decision in Iskanian v. CLS Transportation, which exempted from arbitration all wage-and-hour civil-penalty claims under the Private Attorney General Act.

The decision in Sanchez v. Valencia Holding Co. (pdf) represents a welcome break from this pattern, upholding an arbitration agreement against an array of unconscionability challenges without finding it necessary to sever even a single clause to render the agreement enforceable. Although every point decided in Sanchez is consistent with recent U.S. Supreme Court authority applying the Federal Arbitration Act, however, the opinion’s emphasis on the specific factual setting may seed further efforts to evade arbitration agreements . As so often is the case, the devil is often in the details.

Continue Reading Man Bites Dog: California Supreme Court unanimously rejects unconscionability challenge to consumer arbitration provision

Plaintiffs’ lawyers love to challenge products labeled as “natural,” with hundreds of false advertising class actions filed in just the last few years. Recently, in Astiana v. Hain Celestial (pdf), the Ninth Circuit reversed the dismissal of one such class action, and in doing so, addressed some key recurring arguments made at the pleading stage in litigation over “natural” labeling.

The Hain Celestial Group makes moisturizing lotion, deodorant, shampoo, conditioner, and other cosmetics products. Hain labels these products “All Natural,” “Pure Natural,” or “Pure, Natural & Organic.” A number of named plaintiffs, including Skye Astiana, filed a putative nationwide class action, alleging that they had been duped into purchasing Hain’s cosmetics. According to plaintiffs, those cosmetics were not natural at all, but allegedly contained “synthetic and artificial ingredients ranging from benzyl alcohol to airplane anti-freeze.” Astiana claimed that she likely would not have purchased Hain’s cosmetics at market prices had she been aware of their synthetic and artificial contents. As is typical in such cases, she sought damages and injunctive relief under a variety of theories: for alleged violations of the federal Magnuson-Moss Warranty Act, California’s unfair competition and false advertising laws, and common law theories of fraud and quasi-contract.

The district court dismissed the entire case in deference to the “primary jurisdiction” of the U.S. Food and Drug Administration over natural labeling of cosmetics. On appeal, the Ninth Circuit made two important rulings to which defendants in “natural” litigation should pay special attention:

Primary Jurisdiction

Federal regulators have (with a few limited exceptions not relevant here) declined either to adopt a formal definition of the term “natural” or to regulate that term’s use on cosmetics or food labels. But both plaintiffs and defendants have pointed to informal FDA statements and letters on the subject to advance particular litigation positions. For example, in this case, Hain invoked the prudential doctrine of primary jurisdiction to argue that a case challenging labeling statements cannot go forward because the FDA, not the courts, must determine in the first instance what the challenged labeling statement means and how it should be used. (Indeed, as we have previously discussed, the primary jurisdiction doctrine has led more than a dozen courts to stay false advertising cases in which plaintiffs allege that the ingredient name “evaporated cane juice” is misleading.)

Critically for other defendants intending to invoke primary jurisdiction in the future, the Ninth Circuit concluded that the district court had not erred in concluding that the doctrine applied. Rather, the district court’s error was only in dismissing the case rather than staying it. As the Ninth Circuit explained, “[w]ithout doubt, defining what is ‘natural’ for cosmetics labeling is both an area within the FDA’s expertise and a question not yet addressed by the agency,” and “[o]btaining expert advice from that agency would help ensure uniformity in administration of the comprehensive regulatory regime established by the [Food Drug and Cosmetics Act.]” Significantly, as the Ninth Circuit noted, the FDA had shown “reticence to define ‘natural’” at the time Hain invoked the doctrine with respect to food labels, in light of competing demands on the agency, and there is no reason to believe the FDA is on the verge of rulemaking on ‘natural’ labeling. But that was not a reason to bar the doctrine’s application.

That said, when, as in Astiana, additional judicial proceedings are contemplated once the FDA completes its work, the Ninth Circuit held that the case should be stayed rather than dismissed. And on that basis, the Ninth Circuit reversed the district court’s dismissal. Whether the Astiana decision supports primary jurisdiction arguments outside the context of “natural” labeling on cosmetics—such as ‘natural’ statements on food labels—remains to be seen. But as we read it, the court’s core holding would seem to have broader application.

Express Preemption

Hain separately argued that the FDCA expressly preempted the plaintiffs’ claims challenging the use of the term “natural.” But because there are no regulations defining ‘natural’ or its use on cosmetics labels, the Ninth Circuit disagreed, concluding that neither plaintiffs’ claims nor their requested remedy would impose requirements different from the (non-existent) federal rules on “natural” labeling. The Court did not find persuasive Hain’s argument that the FDA’s conscious decision not to define or regulate the term “natural” supports express preemption. That said, in other settings, including in “natural” cases, defendants may still find it appropriate to point out that the FDA (or another agency) has made a conscious decision not to regulate, and that such a decision should be entitled to deference and respect, or should be taken into account in assessing whether plaintiff has stated a claim.

It is no secret that many private class actions are filed as follow-on lawsuits to news reports, government investigations, regulatory developments, and identical earlier-filed class actions. But a recent gambit by the plaintiffs’ bar is among the more creative efforts we have seen. Earlier this week, a well-known plaintiffs’ firm filed Dang v. Samsung Electronics Co., in the Northern District of California. The complaint alleges that Apple’s victory over Samsung (at least in part) in certain highly publicized patent infringement actions establishes that Samsung has violated California’s consumer protection law as well as warranty statutes in 49 states and the District of Columbia.

The background of the patent battle between Apple and Samsung is well known, so we mention only a few highlights. In fall 2013, the federal court for the Northern District of California found Samsung liable for infringing several patents relating to Apple’s iPhone. The International Trade Commission also found that certain devices were infringing and precluded Samsung from importing or selling those devices. The same court already has granted partial summary judgment to Apple in a second patent lawsuit targeting additional Samsung devices, with a jury trial set for the end of March. (The battles are not over, to be sure.)

The Dang lawsuit alleges that Samsung induced consumers to purchase its devices by concealing its infringing activities, and that once those activities became known, the resale prices of Samsung smartphones and tablets “dropped dramatically,” injuring consumers and unjustly enriching Samsung. Mr. Dang alleges that “[h]ad [he] known the Product he purchased infringed on the patents held by [Samsung’s] competitor, Apple, he would not have purchased the Product.” He seeks to represent everyone in the U.S. who has purchased one of the allegedly infringing devices since 2008—a proposed class that undoubtedly totals in the millions.

Will Dang become a model for other plaintiffs’ lawyers to follow? The short answer: It depends on whether courts will accept the notion that the alleged infringement harms consumers (as opposed to competitors). Color us skeptical—to put it mildly, we have a number of questions:

  • How plausible is it that the interpretation of complex technology patents matters to consumers when they purchase a product?
  • How many Samsung purchasers even know that there is litigation involving Apple patents, much less the determination of the claims?
  • In light of the Ninth Circuit’s decision in Mazza v. American Honda Motor Co.—a case we have discussed before—what are the chances that a nationwide class could be certified given the variations among state warranty and consumer protection laws?
  • Is it realistic to believe that injury and damages can be proven on a classwide basis?

Nevertheless, it is easy to see why plaintiffs’ lawyers might find these kinds of cases attractive. If the result of a battle between competitors is that a product has been determined to be infringing by a court or agency, that may substantially reduce the work a plaintiffs’ lawyer needs to do to pursue the case. And that lawyer will likely argue that key aspects of liability have already been established before the class action even gets started.

The theory espoused in Dang parallels the strategies used by plaintiffs’ firms in the recent wave of false advertising class actions against food and beverage manufacturers. As we have discussed, many of these lawsuits rely on California’s wholesale incorporation of the federal Food Drug and Cosmetic Act (“FDCA”). Plaintiffs attempt to convert alleged technical violations of FDCA labeling requirements into consumer claims alleging that the mere sale of such products is illegal—without the need to show that class members actually were deceived by or relied on the alleged mislabeling. And most of those lawsuits have landed in the Northern District of California—now known as the nation’s “Food Court.”

It’s no coincidence that the Dang lawsuit was filed in the Northern District of California by two plaintiffs’ firms that are highly active in the Food Court wars. Will plaintiffs’ lawyers next flock to copycat class actions seeking to leverage findings of patent infringement? Stay tuned. We’ll be monitoring the situation.

 


Most people are familiar with Fig Newtons, an iconic cookie that has been around for over a century (at least according to its Wikipedia entry).  There are many other popular versions of Newtons—albeit of more recent vintage—such as raspberry and strawberry Newtons.  These fruit Newtons drew the ire of plaintiff Monique Manchouck, who filed a false advertising class action in the Northern District of California—which has become known as the nation’s “Food Court” —against the makers of the cookies.

What was her beef?  According to her complaint, the product packaging states that Newtons are “made with real fruit.”  Yet, the plaintiff argued, the cookie filling contained “merely mechanically processed fruit puree, which is not ‘real fruit.’” And without that alleged misrepresentation, she argued, she “would not have purchased” the Newtons—or at least, “would not have paid a ‘premium price’” for them. 

 

Thus, the court in Manchouck v. Mondelez International, Inc. d/b/a Nabisco was asked the vexing philosophical question: “When is a fruit not really a fruit?”

Alas, Judge Alsup found the lawsuit less appetizing than the plaintiff had hoped. After concluding that the plaintiff’s claimed injury satisfied Article III’s constitutional standing requirements, he tossed the claim on the merits, explaining: “Plaintiff has not plausibly alleged why” a “reasonable consumer” would think that “the statement ‘made with real fruit’ would not include mechanically separated fruit puree”

Judge Alsup gave four reasons why he believed that the plaintiff’s lawsuit “strains credulity”:

First, the complaint does not dispute that the cookies contain real fruits in purée form. … Second, even the most narrow definition of “real fruit” does not exclude fruit that has been strained or blended into puréed form. Purée Definition, American Heritage Dictionary (5th ed. 2011). Third, the packaging that said, “made with real fruit,” also prominently displays a depiction of the cookies’ puréed fruit filling …. Fourth, the amended complaint admits that the list of ingredients on the packaging serves notice to consumers that the products contain, “Raspberry Purée” and “Strawberry Purée” respectively . . .

Judge Alsup’s bottom line: “It is ridiculous to say that consumers would expect snack food ‘made with real fruit’ to contain only ‘actual strawberries or raspberries,’ rather than these fruits in a form amenable to being squeezed inside a Newton.” Accordingly, he dismissed the case without leave to amend.

The plaintiff has filed a notice of appeal. Will common sense win out in the Ninth Circuit? We’ll be watching!

The federal Food Drug and Cosmetic Act (“FDCA”)—along with the implementing regulations promulgated by the FDA—sets out a detailed national standard for much of what appears on food and beverage labeling. See 21 U.S.C. §§ 301, et seq.; 21 C.F.R. §§ 101, et seq.; Pom Wonderful LLC v. Coca-Cola Co., 679 F.3d 1170, 1175 (9th Cir. 2012). This national labeling law expressly preempts states from enacting different requirements for labels, including requirements imposed by courts under the guise of redressing a “misleading” or “fraudulent” label. 21 U.S.C. § 343-1; Turek v. Gen. Mills, Inc., 662 F.3d 423, 426 (7th Cir. 2011).

Preemption under the FDCA served as a bulwark against the first wave of false advertising consumer class actions against the food and beverage industry. Most of those complaints essentially attempted to impose state-law labeling requirements that differed from the federal requirements, and courts therefore dismissed the claims as expressly preempted. See, e.g., Turek, supra; Carrea v. Dreyer’s Grand Ice Cream, Inc. (pdf), 475 Fed. App’x 113 (9th Cir. 2012).

In response, the plaintiffs’ bar adapted by refocusing class action litigation on labeling statements that they asserted were not covered by a federal requirement. The hundreds of cases challenging “natural” labeling statements are an example. In most respects, FDA has declined to regulate the use of the term “natural” on food and beverage labels, claiming that, “[f]rom a food science perspective, it is difficult to define a food product that is ‘natural’ because the food has probably been processed and is no longer a product of the earth.”  No federal requirement, no preemption of the state-law consumer claims, plaintiffs say.

Moreover, in the last 16 months, the plaintiffs’ bar has debuted a new theory that it hopes will allow them to evade preemption. They rely on California’s wholesale incorporation of the FDCA’s labeling law into the law of California. Cal. Health & Safety Code § 110100. Alleged violations of the FDCA are thus transformed into violations of California’s Sherman Food Drug and Cosmetic Law. And violations of the Sherman law, in turn, may be alleged as predicate acts in support of claims for violation of California’s consumer protection laws, including the Unfair Competition Law (a/k/a Section 17200). Plaintiffs argue that because state law imposes identical requirements to the federal requirements (indeed, the same FDCA requirements), liability under state law is not preempted.

But is indirect enforcement of the FDCA via a “state-law delivery device” compatible with Congress’s refusal to create a private right of action for violation of the FDCA? (California’s Sherman Law also does not allow for private enforcement.) Plaintiffs tried and failed to use a similar strategy in the context of medical devices, which are also governed by the FDCA. Specifically, the Supreme Court has held that Section 337 of the FDCA (the exclusive-enforcement provision) impliedly bars suits by private litigants “for noncompliance with” federal law, and that the express-preemption provision of the Medical Device Amendments preempts any state-law claim if the result of the litigation might be to require (or forbid) any conduct not already required (or forbidden) by federal law. Buckman Co. v. Plaintiffs’ Legal Comm., 531 U.S. 341, 349 n.4 (2001); Riegel v. Medtronic, Inc., 552 U.S. 312, 330 (2008). Taken together, the exclusive-enforcement and express-preemption provisions

create a narrow gap through which a plaintiff’s state-law claim must fit if it is to escape express or implied preemption. The plaintiff must be suing for conduct that violates the FDCA (or else his claim is expressly preempted . . .), but the plaintiff must not be suing because the conduct violates the FDCA (such a claim would be impliedly preempted . . .).

Bryant v. Medtronic, Inc. (pdf), 623 F.3d 1200, 1204 (8th Cir. 2010) (emphasis in original).

On our view, Buckman and its progeny bar any state-law claim for which the existence of the federal regulatory scheme is a “critical element.” This implied preemption issue, as applied to food labeling false advertising claims, is currently joined in several pending motions in the Northern District of California. See, e.g., Kane v. Chobani, No. 12-cv-2425 (N.D. Cal), Dkt. No. 97; Trazo v. Nestlé USA, Inc., No. 12-cv-2272 (N.D. Cal.), Dkt. No. 64; Samet v. Procter & Gamble Co., No. 12-cv-1891 (N.D. Cal.), Dkt. Nos. 85, 87; Bruton v. Gerber Prods. Co., No. 12-cv-2412 (N.D. Cal.), Dkt. No. 47.

We expect decisions on these motions in the near future and will blog on the results when decisions are issued.

 

The California Supreme Court held in Arias v. Superior Court that a plaintiff may bring a representative action on behalf of himself and other employees to recover civil penalties under California’s Private Attorney General Act (“PAGA”) without meeting California’s class-certification requirements. The court reasoned that, unlike a class action, where the plaintiff is suing on behalf of individual employees, a PAGA plaintiff steps into the shoes of state labor-law enforcement agencies. While that holding governs California state courts, the federal district courts have been split as to whether plaintiffs bringing PAGA claims in federal court must seek class certification under Federal Rule of Civil Procedure 23.

On January 14, 2013, Judge Gutierrez of the Central District of California held that PAGA plaintiffs need not bother with class certification in federal court. See Alcantar v. Hobart Serv. (No. 5:11-cv-1600-PSG-SP). In that case, the plaintiff had filed a class action and a PAGA action alleging overtime, meal-period, and other wage-and-hour violations. The court denied class certification and granted in part defendants’ motion for summary judgment. The defendants later filed a motion in limine, asserting that the plaintiff could no longer proceed with his PAGA claim because plaintiffs who cannot meet Rule 23’s class-certification requirements lack standing to represent the rights and interests of third parties. The district court denied the motion, holding that although a class action allows individuals to seek financial remuneration to redress personal injuries, a PAGA action is an enforcement action brought on behalf of the state labor agencies to penalize noncompliant employers, making class certification unnecessary.

The Alcantar court also rejected defendants’ argument that the PAGA claims could not be tried on a representative basis without violating defendants’ due process rights. Among other things, the defendants argued that they should have the right to call each employee to the stand as they would in defending a claim under California’s Unfair Competition Law (UCL). The Alcantar court disagreed, holding that, “unlike claims under the UCL, which require an individualized determination of the particular restitution due to each plaintiff, PAGA claims require only a showing that a Labor Code violation has occurred.”

Finally, the Alcantar court rejected the defendants’ remaining argument that Wal-Mart Stores, Inc. v. Dukes forbids the plaintiff from calculating the amount of PAGA penalties owed solely by using estimates derived from representative testimony and statistics. The district court disagreed, noting that the Dukes Court had analyzed the permissibility of “Trial by Formula” in the specific context of Title VII of the Civil Rights Act, while both the Ninth Circuit and California courts have permitted awards for California Labor Code violations based on a representative sampling of class members. (Note: The issue of use of representative testimony and statistical evidence at trial in wage and hour class action lawsuits is pending before the California Supreme Court in Duran v. U.S. Bank Nat’l Ass’n., No. S200823.)

Alcantar may give new encouragement to the plaintiffs’ bar in their pursuit of PAGA claims. Under its approach, defendants in PAGA cases are deprived not only of the protections of Rule 23, but also the due process right to present individualized defenses to each employee’s claim. Whether other district courts will follow Alcantar’s lead, or instead follow the decisions of other courts that (in our view) are more consistent with Rule 23 and due process—and how the federal appellate courts will eventually settle this issue—remains to be seen. In the meantime, defendants may be able to distinguish the Alcantar court’s reasoning by showing that their cases involve fact patterns where proof of a statutory violation will require highly individualized, fact-sensitive mini trials.