California

Are You Shipping Me! Is Delivery Charging The Next Big Thing In Consumer Class Actions?

** Shipping and Handling Case Dismissed in California – Beginning of the End? **                                                                                                                                                                                                                                                                                                                                            

Lately, there’s been quite a bit of buzz over a couple of lawsuits filed in California alleging that internet retailers are charging too much for shipping and handling:  Reider v. Electrolux Home Care Products, Inc., No. 8:17-cv-00026-JLS-DFM (C.D. Cal) and McCoy v. Omaha Steaks International, Inc., No. BC 658076 (Cal. Sup. Ct, L.A. Cnt’y).  Much of the reporting on these cases focuses on the possibility that this claim may be the next big thing in consumer class actions.  How likely is that?

The answer, of course, is “Who knows?”  But a closer inspection of the lawsuits suggests that this litigation too shall pass — and perhaps quickly.  First, both lawsuits were filed by Scott J. Ferrell, the founder of Pacific Trial Attorneys, who is no stranger to consumer class actions against online retailers having brought several under California’s Automatic Renewal Statute. California Business and Professions Code §17600, et seq.  But there hasn’t yet been a break out of these shipping and handling cases.  And second, the Electrolux action is over via a joint stipulation to dismiss filed just yesterday after the District Court granted Electrolux’s motion to dismiss with the observation that any attempt to amend would likely be futile.  Dkt. No. 30, May 8, 2017.

The plaintiff in Electrolux pursued a novel theory of liability in a case where it was undisputed that he was apprised of the shipping charges prior to purchase.  Indeed, there was no way plaintiff could have missed the disclosure because he had to actually choose between shipping options with different charges at the time of purchase:  Ground Service at $7.99; Second Day Air at $15.00; and Next Day Air at $25.00.  (He judiciously chose ground service given his purchase was for a $1.99 vacuum bag.)  Faced with those facts, plaintiff honed in on the unfair prong of California Business & Profession Code § 17200, which prohibits and makes actionable “unlawful, unfair or fraudulent” business practices.

While California courts have not addressed the unfair prong in consumer lawsuits, the Ninth Circuit has – holding that for a business practice to be unfair to consumers it must either:  (1) violate a “legislatively declared” policy; or (2) fail a balancing test that weighs the benefit to the company against the harm to consumers.  Lozano v. AT&T Wireless Servs., Inc., 504 F.3d 718, 736 (9th Cir. 2007).  In Electrolux, the plaintiff argued that the guidelines of the Direct Marketing Association (“DMA”) that encourage retailers to make sure that their shipping and handling charges bear a reasonable relationship to the actual costs of shipping and handling and a 1980 FTC consent order prohibiting a car dealer from charging more than its actual costs in shipping cars to its showroom reflect a public policy against excessive shipping and handling charges and show that the balance tilts to consumers.

The District Court disagreed.  Dkt. No. 27, April 21, 2017. The “legislatively declared” policy was an easy call – neither the DMA nor the FTC are legislatures.  On the balancing test, the District Court found that there was simply no harm to the plaintiff and, therefore, nothing against which to balance Electrolux’s benefit.  Striking a blow for free markets everywhere, the court observed, “Online shoppers are aware that online merchants are in the business of making money and generating profit, and those looking for the best deals will find their way to the merchants who offer the best combination of quality, price, and service.”  In what should become known as the “Mini Bar Rule,” the court cited Searle v. Wyndham Int’l, Inc., 102 Cal. App. 4th 1327, 1330 (2002) – a case where plaintiffs unsuccessfully challenged a hotel chain’s mandatory 17% service charge:

“Perhaps the best analogy is the one made in Searle. The hotel room guest knows he could buy the $3 minibar candy for less at a neighborhood store. Perhaps he pays the high price so he can stay in his comfortable robe and enjoy the high-priced, in-room movie. In any event,“[t]he minibar patron, like the room service patron, is given both clear notice the service being offered comes at a hefty premium and the freedom to decline the service.” Searle, 102 Cal. App.4th at 1334.” (Dkt. No. 27 at 6).

The District Court in short order dispatched plaintiff’s Consumer Legal Remedies Act claim that the practice of charging inflated shipping and handling fees is deceptive because consumers believe that the charges are reasonably related to the company’s actual costs by noting that Electrolux makes no such representation.

But what of the second shipping and handling charge case —  McCoy v. Omaha Steaks International, Inc., CA Sup. Court, County of Los Angeles, Case No. BC 658076?  That case was filed in Los Angeles Superior Court on April 14, 2017 – a week before the District Court’s decision in Electrolux.  The claims are the same.  The support is the same.  We’ll have to wait and see if the superior court and the federal court agree.

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Healthy Conscious

** FDA Updating Requirements for “Healthy” Claims on Food Labeling **

One of the trending areas we have blogged about last year was “healthy” claims in food labelling becoming the new “all natural” target; see Hunter v. Nature’s Way Prod., LLC, No. 16CV532-WQH-BLM, 2016 WL 4262188, at *1 (S.D. Cal. Aug. 12, 2016) (Coconut Oil); Campbell v. Campbell Soup Co., No 3:16-cv-01005 (S.D. Cal. August 8, 2016) (Dkt 18) (Healthy Request® canned soups); Lanovaz v. Twinings N. Am., Inc., No. 5:12-CV-02646-RMW (N.D. Cal. September 6, 2016) (Twinings bagged tea).  It is a lucrative area for the plaintiff’s bar.  James Boswell et al. v. Costco Wholesale Corp., No. 8:16-cv-00278 (C.D. Cal) (recent $750,000 coconut oil settlement based on “healthy” labeling).

In many respects this trend was kicked off in 2015 by the Food & Drug Administration (FDA) who issued the KIND® company a not so kind letter asking the company, pursuant to 21 U.S.C. § 343(r)(1)(A) to remove any mention of the term “healthy” from its packaging and website.  See our prior blog post.  The basis for the FDA’s action is that the term “healthy” has specifically defined meanings under 21 CFR 101.65(d)(2) which includes objective measures such as saturated fat content (must be > 1 g) (see 21 CFR 101.62(c)(2)).  Later in 2016 the FDA seemingly had a change of heart – emailing Kind and stating that the company can return the “healthy” language – as long use “healthy” is used in relation to its “corporate philosophy,” not as a nutrient claim.

Notably, this sparked a wider public health debate about the meaning of “healthy” and whether the focus, for example on the type of fat rather than the total amount of fat consumed, should be reconsidered in light of evolving science on the topic.  In September 2016 the FDA issued a guidance document (Guidance for Industry: Use of the Term “Healthy” in the Labeling of Human Food Products) stating that FDA does not intend to enforce the regulatory requirements for products that use the term healthy if the food is not low in total fat, but has a fat profile makeup of predominantly mono and polyunsaturated fats.

The FDA also requested public comment on the “Use of the Term “Healthy” in the Labeling of Human Food Products” – which comment period ended this week. Comments poured in from consumers and industry stakeholders, reaching 1,100 before the period closed on April 26, 2017. The FDA has not provided a timeline as to when revisions to the definition of “healthy” might occur following these public comments – and it is not clear if President Donald Trump’s January executive order, requiring that two regulations be nixed for every new rule that is passed, will hinder the FDA’s ability to issue a rulemaking on the term “healthy” in the near future.  It is also not clear whether the FDA will combine the rulemaking with its current musing of use of the term “natural” – as the terms are sometimes used synonymously.  Industry groups (and the defense bar) are hopeful though that some clarity will come sooner rather than later.

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Sugar in Missouri

** Do we have a new “sue-me” State for Food and Class Litigators? **                                                                                                                                                                                                                                      As we blogged about in the past the Food and Drug Administration (FDA) issued guidance in 2016 that it is false or misleading to describe sweeteners made from sugar cane as “evaporated cane juice” (ECJ). Guidance for Industry: Ingredients Declared as Evaporated Cane Juice.  As anticipated this has opened the way forward for cases against companies using the ECJ term, including of course those cases where the matter had been stayed under the primary jurisdiction doctrine.  Much of this ECJ litigation continues to be focused in state and federal courts in California.

That said, plaintiffs are also filing in other venues.  Missouri for one is becoming increasingly well-known as a plaintiff-friendly jurisdiction following full throated verdicts in product liability cases, such as the $70 million talcum powder case.  And food labeling suits are increasingly being filed as well in this new “sue me” State (in particular, St. Louis City – the 22nd Judicial Circuit, has been called one of “worst places in the nation for a corporation to be sued” and the new hot spot for litigation tourists.”)  In a recent win for the Plaintiff’s bar with respect to food litigation and labeling claims, a Missouri state court of appeals recently issued an opinion rejecting defenses successful in sister courts. In Murphy v. Stonewall Kitchen, LLC, 503 S.W.3d 308, 310 (Mo. Ct. App. 2016) brought under the Missouri Merchandising Practices Act (MMPA) the plaintiff (and putative class representative) alleged Stonewall Kitchen misrepresented that its cupcake mix was “all natural” when it contained leavening agent sodium acid pyrophosphate (SAPP).  The trial court, relying on the  decision in Kelly v. Cape Cod Potato Chip Co., 81 F.Supp.3d 754 (W.D. Mo. 2015), granted the motion reasoning that because the ingredient label clearly disclosed the presence of SAPP, it was not plausible that a consumer would believe the “all natural” representation on the product including the SAPP.  The Court of Appeals reversed, expressly rejecting the ingredient list defense.

Since Murphy, at least 16 cases have recently been filed in St. Louis on the topic of evaporated cane juice alone.  The targeted defendants include manufacturers of Pacqui Corn Chips (Dominique Morrison v. Amplify Snack Brands Inc., No. 4:17-cv-00816-RWS (E.D. Mo.), Jelly Belly jelly beans(Jason Allen v. Jelly Belly Candy Company, No. 4:17-cv-00588 (E.D. Mo.), and Bakery on Main granola (Callanan v. Garden of Light, Inc., No. 4:17-cv-01377 (E.D. Mo.).  The cases do appear connected, many having the same plaintiff’s counsel.  It is likely too early to call St. Louis the new “food court” – we’ll monitor it throughout the year though to see if it is a “flash in the pan” or not.

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Updating Proposition 65 Warnings for the Online Era

** California Law Makers Turn Their Attention to the Prop 65 Implications of Online Retailing **                                                                                                                                                                                                                                                                                                                      

California’s Proposition 65, requires any person who exposes a consumer to a listed chemical deemed to be either a carcinogen or a reproductive toxicant “in the course of doing business” to first provide a warning about that exposure (California Health & Saf. Code § 25249.5 et seq.).  As many of our readers are no doubt aware, particularly those who represent clients in California, Proposition 65 has generated a substantial amount of litigation since its enactment, largely due to “public interest” standing creating a private right of action to “any person” (§ 25249.7(d)).

California’s Office of Environmental Health Hazard Assessment (OEHHA) is tasked with updating the list of offending chemicals – there are almost a thousand currently on the list – and once a consumer product is shown to contain one of the listed chemicals a defendant has a heavy burden to show that the amount of exposure is within a safe harbor level or that the product is manufactured in such a way which precludes exposure.  The usual practice for consumer companies has been to rely on the warning provision – foreclosing on Prop. 65 litigation.  That said, the warning, in order to properly immunize the consumer company has to be “clear and reasonable” (§ 25249.11(f)).

What does this mean for manufacturers and retailers that deal with consumers online?  Bear in mind that the initial passage of Proposition 65 was in 1985 and unfortunately the implementing rules had not kept pace with changing trends in online retailing (not having been updated since 2008).  So internet sellers have been left somewhat to wonder.  OEHHA has released new regulations to take effect August 30, 2018, and for the first time they provide added specificity for internet sellers, and demonstrate when and how a Prop 65 warning should be provided.

New Reg. § 25600.1 provides a definition of “Retail seller” which means “a person or business that sells or otherwise provides consumer products directly to consumers by any means, including via the internet” (emphasis added).  The new rules do not upend the presumption that “[t]o the extent practicable, warning materials such as signs, notices, menu stickers, or labels shall be provided by the manufacturer, producer, or packager of the consumer product, rather than by the retail seller” (old § 25603) – they recognize that the new implementing rules are intended to minimize the burden on retail sellers of consumer products (see § 25249.11(f) of the Act).  As such it is primarily the burden of the “manufacturer, producer, packager, importer, supplier, or distributor” to provide the written notice of exposure to the retailer seller (Reg. § 25600.2 (b), (c)).

However, a retailer sellers is responsible for providing a Prop 65 warning in the following instances (§ 25600.2(e)):

  • The retail seller is selling the product under a brand or trademark that is owned or licensed by the retail seller or an affiliated entity;
  • The retail seller has knowingly introduced a listed chemical into the product, or knowingly caused a listed chemical to be created in the product;
  • The retail seller has covered, obscured or altered a warning label that has been affixed to the product by a manufacturer; or
  • Where the seller has “actual knowledge” from a “reliable source” of the potential of consumer product exposure to a listed chemical AND where the manufacturer, producer, packager, importer, supplier, or distributor of the product is: EITHER not “doing business” (because for example, they have less than 10 employees ” ( 25249.11(b))) OR has no registered agent or place of business in California. See Reg. § 25600.2 (e)(5).  In essence this broadens the reach of Prop 65 to retailers as a proxy for manufacturers who were not otherwise caught by Prop 65, either because they were too small or not connected to California.  “Actual knowledge” means specific knowledge of the consumer product exposure received by the retail seller from any reliable source.”  If the source of this knowledge is a notice served pursuant to Section 25249.7 (d)(1) of the Act (i.e. the 60 day notice required under Prop 65 before litigation can commence), the retail seller shall not be deemed to have actual knowledge of any consumer product exposure that is alleged in the notice until five business days after the notice.  This 5 day rule provides an important safe harbor for retailers – and begs the question as to whether there is any incentive for retailers to investigate products – or just wait until notice is provided. The fact that the provision also only applies to retailers when they are dealing with small (or out of state companies) also begs the question whether they’ll be a perhaps unintended consequence – retailers refusing to deal with these small businesses out of fear of the pass-along risk.

A retail seller can also be liable to provide Prop 65 warning where the manufacturer , importer, etc. provides notice and materials for the retailer to affix them, to shelves, products, or the text to provide on internet listings.  (Reg. § 25600.2 (b), (c)). The retailer’s correlative obligation is the “placement and maintenance of warning materials, including warnings for products sold over the Internet, that the retail seller receives” from the manufacture, producer etc.  (Reg. § 25600.2 (d)).  However, a retailer who agrees in writing with the manufacturer, importer, etc., that allocates legal responsibility to the latter will be binding and effective against Prop 65 liability (provided the consumer receives the relevant warning) (Reg. § 25600.2 (d)).  This provision provides another important safe harbor for retailers.  It will be interesting to see in which retail-manufacturer relationships the retailer has the bargaining power to demand this agreement.

The new regulations also provide guidance on how a Prop 65 warning should be given (Reg. § 25602 (b)): “For internet purchases, a . . .  must be provided by including either the warning or a clearly marked hyperlink using the word “WARNING” on the product display page, or by otherwise prominently displaying the warning to the purchaser prior to completing the purchase.  If an on-product warning is provided pursuant to Section 25602(a)(4), the warning provided on the website may use the same content as the on-product warning. For purposes of this subarticle, a warning is not prominently displayed if the purchaser must search for it in the general content of the website.”  As many of you are aware, the new 2018 Regulations also provide new warning requirements, including a symbol, hyperlink and warning language more specific to the carcinogen, reproductive toxicant, etc. (Reg. § 25603).  There are also slightly different rules for specific products such as Food (Reg. § 25607.2), Raw Wood Products (Reg. § 25607.10), Furniture (Reg. § 25607.12), Products With Diesel Engines (Reg. § 25607.14), etc.

These new rules provide clarity . . . but also raise new questions.  For example, is an online platform which is merely connecting the ultimate seller and buyer, such as eBay (and to some extent Amazon) the actual “retail seller” or is the vendor who uses the site the “retail seller.”  See Tiffany (NJ) Inc. v. eBay Inc., 600 F.3d 93, 96–97 (2d Cir.2010) (eBay does not “does not itself sell the items listed for sale on the site nor does it ever take physical possession of them.”); Butler v. eBay, Inc., No. 5:06–cv–02704–JW (N.D.Cal. 12, 2006) (“[T]he seller is in control of the sale, not eBay…. Thus, the sale transaction is between the seller and the bidder.”); see also Cal. Att’y Gen. Op. No. 02–111 (2003) (“We have little doubt that eBay does not sell or offer to sell or buy or offer to buy, on behalf of another or others, any of the items.”). Should retailers, as discussed above, be required to be affirmative or have constructive knowledge of Prop 65 chemicals?  And if online retailers, as a practical matter, have to make the warning nationwide – does this trigger dormant commerce clause challenges?  These developments and more to follow as the rules begin implementation next year.

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Alert: Ninth Circuit Opens A Door For All Natural Class Claims

** Appeal Court Panel Holds That Genuine Dispute Remained As To Whether All Natural Claims Would Survive Reasonable Consumer Test **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      hires-2Judge Lucy H. Koh gave all natural class defendants cause for celebration back in 2014 when she closed the door on a putative class representative’s claim that Dole’s fruit juices and fruit cups were wrongfully labelled as “All Natural.”  Brazil v. Dole Packaged Foods, LLC, No. 12-CV-01831-LHK, 2014 WL 6901867 (N.D. Cal. Dec. 8, 2014).  Last week, however, the Ninth Circuit re-opened that door slightly – at least enough for the plaintiffs’ bar to try to squeeze their feet in.

Mr. Brazil alleged in his 2012 Complaint that Dole’s fruit cups and fruit juices were falsely labelled as “All Natural” because they contained citric acid (i.e. vitamin C) and ascorbic acid (used to prevent discoloring).  Dole successfully argued on summary judgment that Plaintiff had failed to show that a significant portion of the consuming public or of targeted consumers, acting reasonably under the circumstances, would be misled by its labeling.  Id. at *4, citing Lavie v. Procter & Gamble Co., 105 Cal.App. 4th 496, 507 (2003).  Plaintiff’s own opinion about the added Vitamin C and absorbic acid was not enough.  Id.  Neither was his rationale that a reasonable consumer could be misled by virtue of a label that violated FDA guidance on the topic (the FDA is not a reasonable consumer and vice versa, Judge Koh reasoned).  Further, in a prior ruling, Judge Koh decertified Plaintiff’s main damages class because Plaintiff’s damages model (or lack thereof) failed the threshold test of Comcast Corp. v. Behrend, 569 U.S. ___ (2013), i.e., that damages could be adequately calculated with proof common to the class.  Brazil appealed both the summary judgment and decertification decisions.

The Ninth Circuit affirmed in part and reversed in part.  Brazil v. Dole Packaged Foods, LLC, No. 14-17480, 2016 WL 5539863, at *1 (9th Cir. Sept. 30, 2016).

The good news is that the Ninth Circuit agreed with Judge Koh’s decertification of the damages class – and by so doing signaling that the Circuit will continue adhering to the Comcast principle that Plaintiffs have the burden of demonstrating a viable class-wide basis of calculating damages.  It held that the lower court correctly limited damages to the difference between the prices customers paid and the value of the fruit they bought—in other words, the “price premium.”  2016 WL 5539863, at *2 – 3, citing In re Vioxx Class Cases, 103 Cal. Rptr. 3d 83, 96 (Cal. Ct. App. 2009).  The Ninth Circuit reiterated that under the price premium theory, a plaintiff cannot be awarded a full refund unless the product she purchased was worthless – which in this case – the fruit was not.  Id. citing In re Tobacco Cases II, 192 Cal. Rptr. 3d 881, 895 (Cal. Ct. App. 2015).  Because Mr. Brazil did not (and presumably could not) explain how this premium could be calculated across a common class, the motion to decertify was rightly decided.  Id. at *3.

The bad news is that the Appeals Court rejected the lower court’s reasoning that bare allegations of an individual’s claims of deception were insufficient to show the reasonable consumer would be equally deceived.  Troublingly, the court used the FDA’s informal policy statement (see Janney v. Mills, 944 F. Supp. 2d 806, 812 (N.D. Cal. 2013) (citing 58 Fed. Reg. 2302–01)) on the issue as determinative of the reasonable consumer standard.  As one commentator has noted, this converts informal guidance into binding authority.

With the damages class gone, the Ninth Circuit remanded the case for a determination of Plaintiff’s injunctive relief class.  That may be a pyrrhic victory in the end.  As we have blogged in the past, a plaintiff who is aware of the supposed deception is not in a position, as Pete Townshend penned, to be fooled again.

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Proving a Negative

** Plaintiffs in a Putative Class Action Successfully Rely on Internet Articles on Homeopathy to Support Their Falsity Claims **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            .

Close up of the word HOMEOPATHIE in an old French dictionary. Selective focus and Canon EOS 5D Mark II with MP-E 65mm macro lens.

One of the few dependable defenses on which nutritional supplement/homeopathic drug makers facing consumer class actions can rely is that false advertising claims cannot rest on an allegation that the advertising lacks substantiation .  In the ground-breaking case of Nat’l Council Against Health Fraud, Inc. v. King Bio. Pharm., Inc., 107 Cal. App. 4th 1336 (2003), the California Court of Appeals held that it is not enough for a plaintiff to allege that the defendant’s products were ineffective because there is “no scientific basis for [their] efficacy.”  Id. at 1340-41.  In King Bio. Pharm, the plaintiff advocated that the defendant should bear the burden of proving its homeopathic remedies worked.  The California Court of Appeal disagreed, finding that — while regulatory agencies are legally authorized to demand substantiation — private parties are not, id. at 1345.  This is an eminently reasonable decision — otherwise, the plaintiffs’ bar would bring “ready, shoot, aim” lawsuits.

The question arises, of course, as to what level of “proof” is necessary for a putative class representative to sustain a claim of false advertising/labeling.  Must plaintiff’s counsel hire experts to perform double blind studies?  Or is a literature review all that is necessary?  This issue is front and center and may have reached its logical extreme in an important case in the U.S. District Court for the Southern District of California, Hammock et al. v. Nutramarks Inc. et al., case number 3:15-cv-02056 (2015) – a case that implicitly threatens the entire homeopathic medicine industry.

Homeopathy is the brain child of the German alternative physician, Samuel Hahnemann (1755-1843), who has a fabulous monument dedicated to him on Scott Circle in D.C.  Hahnemann developed the concept similia similibus curantur – or “like cures like.”  The idea is that a disease causes symptoms, and by treating patients with a substance that causes the same symptoms as the disease, the disease can be cured – like cures like.  By way of example, homeopathic medicines intended to remedy colds may include onions because onions cause watery eyes and runny noses – the precise symptoms of the common cold.

Dr. Hahnemann, however, did not want his medicines to produce the same symptoms the patient was already suffering from so he created a preparation protocol known as “extreme dilution.”  The active ingredient would be diluted with water or alcohol and the container would then be banged against an elastic surface (usually, a leather book) to the point that few of the molecules of the active ingredient remained.  In the world of homeopathic medicine, the more diluted the remedy, the  higher its potency and more effective it is.

Homeopathic medicine was heralded upon its entry into the United States in 1835, primarily because –unlike traditional medicine of the time – it didn’t kill patients (like mercury tinctures) and wasn’t gross (like leaching).  As modern medicine evolved, however, homeopathy came to be branded by the “traditional” medical industry as quackery.  Nevertheless, to this day, homeopathic drugs are treated (as opposed to nutritional supplements) by the FDA under Section 201(g)(1) of the Food, Drug and Cosmetic Act.

Which brings us back to the Nutramarks case.  In Nutramarks, the plaintiffs allegedly purchased NatraBio® Smoking Withdrawal, Leg Cramps, Restless Legs, Cold and Sinus Nasal Spray, Allergy and Sinus, Children’s Cold and Flu Relief, and Flu Relief homeopathic products.  Did the plaintiffs’ lawyers conduct any independent research to determine whether these products were effective prior to filing the lawsuit?  Of course not.  Did the plaintiffs’ lawyers cite any previously published studies about the challenged products?  Nope.  Did the plaintiffs’ lawyers cite any research on the efficacy of the ingredients in the products?  Nyet.  So what did the plaintiffs use to satisfy their plausibility burden under Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)?  Answer:  Internet articles challenging homeopathy as a whole.

Nutramarks pushed back on the complaint asserting in a motion to dismiss that relying on internet articles that did not involve its products or the constituents of its products was not enough, citing Murray v. Elations Co., No. 13-CV-02357-BAS WVG, 2014 WL 3849911, at *7 (S.D. Cal. Aug. 4, 2014) (studies “must have a bearing on the truthfulness of the actual representations made by Defendants”).  Nutramarks also argued that, because some experts believe that homeopathic remedies are effective, the action must be dismissed under In re GNC Corp., 789 F.3d 505, 516 (4th Cir. 2015), in which the court held that “[i]n order to state a false advertising claim on a theory that representations have been proven to be false, plaintiffs must allege that all reasonable experts in the field agree that the representations are false.”

In Nutramarks, Chief Judge Moskowitz rejected these arguments and denied the motion to dismiss as it pertained to the products’ effectiveness.  (The Court dismissed plaintiffs’ claims for injunctive relief and breach of implied warranty.)  Judge Moskowitz saw nothing deficient in the plaintiffs’ failure to cite studies relating to defendants’ products or the ingredients in its products: “Although the Complaint only concerns the effectiveness of Defendants’ Products, Plaintiffs are alleging that homeopathy in general is ineffective.  Should Plaintiffs prove this allegation later on, Defendants’ Products would likewise be proven to be ineffective.”  As to Nutramarks’ “all reasonable experts” argument, the Court distinguished the Fourth Circuit’s opinion in In re GNC Corp. on the basis that In re GNC Corp dealt with false advertising and Nutramarks concerns alleged false labeling.  This latter holding is a stretch.  Indeed, the plaintiffs didn’t make the argument for it in their opposition — although they cited the same language from In re GNC Corp that Judge Moskowitz relied on.

The language from In re GNC Corp reads, “Our holding today should not be interpreted as insulating manufacturers of nutritional supplements from liability for consumer fraud.  A manufacturer may not hold out the opinion of a minority of scientists as if it reflected broad scientific consensus.  Nevertheless, we need not decide today whether any of the representations made on the Companies’ products are misleading, because Plaintiffs chose not to include such allegations in the [complaint].”  The most important sentence in this dicta is the second because it highlights the precise representation – be it on a print advertisement or on the bottle, itself — that the Fourth Circuit didn’t want its opinion to absolve — a manufacturer falsely claiming that  there is broad consensus supporting its health claim when it is really only the opinion of a minority of scientists.  This claim appears nowhere on any of Nutramarks’ packaging challenged by the plaintiffs.

In the end, it is clear from the Fourth Circuit’s opinion in In re GNC Corp that the panel was convinced that there really would be an impermissible “battle of the experts” as to the efficacy of glucosamine and chondroitin for joint health if the case were to proceed past the motion to dismiss.  The label of one of the challenged products referenced a private study showing the effectiveness of the ingredients.  In a footnote, the Court stated (with just a bit of sarcasm), “Although Plaintiffs were free to allege that the study cannot have been conducted in a reasonable or reliable way (because all reasonable experts support the opposite conclusion), they failed to do so.  We decline to speculate as to why, if the evidence is as clear and unequivocal as they claim, Plaintiffs exhibited such hesitation.”

Of course, all is not lost for Nutramark or the homeopathic medicine industry in general.  Just last year, a California jury returned a verdict in favor of a manufacturer of homeopathic products for, among other things, allergies, leg cramps, migraine headaches and sleeplessness finding that the plaintiffs could not sustain their burden of showing lack of efficacy.  Allen et al. v. Hyland’s Inc. et al., 2:12-cv-01150 (Central District).

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The New Naturals

** Where are Class Action Claims Against Consumer Food and Personal Product Companies Trending in 2016?**                                                                                                                                                                                                                                                        PrintWe have blogged in the past about some of the “usual suspects” in the consumer class action line-up – particularly for food, beverage, cosmetics and related industries – for example, the “all-natural” case – the “evaporated cane juice” case – and the “handmade” or “craft beer” case.   Trends come and go – as Plaintiffs run out of companies to sue and as companies change their labeling and advertising in response to the litigation risks.

Which begs the question:  Where are the current litigation trends leading?  We have surveyed recent filings to identify some of the tropes and traps that plaintiffs lawyers are currently focusing on:

As we have discussed in the past, the attractiveness of the all-natural class claim lies in the gaps between FDA guidance and labeling law and the vagaries of the reasonable consumer standardThat gap may be closing with the FDA taking comments and perhaps looking to expand its policy on “natural” foods.  As the term “Natural” loses some of its vagueness, the term “healthy” appears to be taking its place – particularly in so far as the term has the required “eye of the beholder” quality necessary to support class action claims (although in some respects the term “healthy” is regulated see e.g.,  21 CFR 101.65(d)(2)) .  For example in  Kaufman v. CVS Caremark Corp., No. 16-1199, 2016 WL 4608131, at *1 (1st Cir. Sept. 6, 2016) (reversing district court dismissal on Rule 12), CVS Pharmacy, Inc. was sued for its Vitamin E dietary supplement because its label touts the product as supporting “heart health.”  Plaintiff argues that this is misleading because the medical literature does not support a link between consuming vitamin E and cardiovascular health.  Kaufman v. CVS Caremark Corp., No. CV 14-216-ML, 2016 WL 347324, at *1 (D.R.I. Dkt. No. 1 at 7) (and in some studies cited by Plaintiff – Vitamin E dosage increases the rate of heart failure).  In Hunter v. Nature’s Way Prod., LLC, No. 16CV532-WQH-BLM, 2016 WL 4262188, at *1 (S.D. Cal. Aug. 12, 2016) (denying motion to dismiss), Plaintiff alleges that Nature’s Way’s coconut oil is advertised with various health claims (such as its “Variety of Healthy Uses”, “ideal for exercise & weight loss programs”, “fuel a[] healthy lifestyle”), but according to Plaintiff, coconut oil products are not “healthy” . . . “but rather their consumption causes increased risk of CHD, stroke, and other morbidity.” (Dkt. No. 1-5 Compl. at ¶ 118).  In Campbell v. Campbell Soup Co., No 3:16-cv-01005 (S.D. Cal. August 8, 2016) (Dkt 18) (Def. Mot. to Dismiss), Campbell’s Soup Co is defending against Plaintiff’s claims that its Healthy Request® soups are not “healthy” because they contains partially hydrogenated oil (PHO).  Notably, Campbell’s soups are somewhat unique from other food labelling cases because they contain more than 2% meat or poultry and therefore are USDA regulated (see 21 U.S.C. § 451, et seq.) and their labelling is pre-approved (see 21 U.S.C. § 457; accord 21 U.S.C. § 607).  Campbell’s has doubled-down on that argument – moving for Rule 11 sanctions.  No 3:16-cv-01005 (S.D. Cal. August 29, 2016) (Dkt 18).  In Lanovaz v. Twinings N. Am., Inc., No. 5:12-CV-02646-RMW (N.D. Cal. September 6, 2016) (dismissing remaining claims), Twinings successfully defended against claims that the labeling of its tea as a “healthy tea drinking experience” and having “antioxidant” benefits were misleading.  In particular Plaintiff claimed that Twinings’ health benefits could not be substantiated and  were contrary to FDA regulations.  No. 5:12-CV-02646-RMW (N.D. Cal. Dkt. Nos. 1, 24).  It appears that “Healthy” is the new “Natural.”

Plaintiff’s lawyers are also taking a close look at ingredients – to determine if touted anchor ingredients are prominent enough.  For example in Coe v. Gen. Mills, Inc., No. 15-CV-05112-TEH, 2016 WL 4208287, at *1 (N.D. Cal. Aug. 10, 2016) (Order denying Mot. to Dismiss), Plaintiffs argued (successfully at the pleading stage) that General MillsCheerios Protein product labeling is misleading because it implies that the product is essentially the same as normal Cheerios but with added protein.  While Plaintiffs acknowledge that Cheerios Protein does have more protein than regular Cheerios (Plaintiffs calculate that 200 calories of Cheerios contains 6 grams of protein, whereas 200 grams of Cheerios Protein contains 6.4 or 6.7 grams of protein), they argue that this smidgen of an increase is so immaterial as to be misleading.  In another example, in Nazari v. Gen. Mills, Inc., No. 2:16-cv-02015 (E.D. Cal. Aug. 23, 2016), the Plaintiff sued Target with a proposed class action alleging the retailer’s up & up™ Green Aloe Vera Gel lacks traces of Aloe Vera.  Plaintiff alleges that while the product is labelled as an “aloe vera gel” with “pure aloe vera,” its laboratory testing (which it contends would have revealed acemannan, the key compound in aloe vera) could detect no active aloe ingredient.  In another example, in Torrent v. Thierry Oliver., No. 2:15-cv-02511 (C.D. Cal. Sept. 2, 2016) (denying motion to dismiss), Plaintiff survived dismissal on claims that Natierra brand Himalania Goji berries are misleadingly labeled because they are not berries from the Himalayan mountain region in China – which was inferred by the “Himalania” brand name.  In labelling, as in everything else, attention to detail counts.

We will update you on these trends as they progress.

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No Pay, No Play

** District Court Rejects Settlement Deal That Extracts a Broad Release of Claims But Provides No Money to Class Members **

Pay writing on Keyboard

It is not common for judges to reject class settlements, usually because lawyers for the opposing sides — putting aside their adversary roles — are savvy enough not to give the judge cause.  That was not the case recently, however, in a long running homeopathic product false advertising case in the Southern District of California.  Allen v. Similasan Corp., No. 12-CV-376-BAS-JLB, 2016 WL 4249914, at *1 (S.D. Cal. Aug. 9, 2016).

The allegations in this case, which are similar to those of other recent homeopathy cases (see e.g., Nat’l Council Against Health Fraud v. King Bio Pharms., 107 Cal. App. 4th 1336, 1348 (2003); Herazo v. Whole Foods Mkt., Inc., No. 14-61909-CIV, 2015 WL 4514510, at *1 (S.D. Fla. July 24, 2015); Conrad v. Boiron, Inc., No. 13 C 7903, 2015 WL 7008136, at *1 (N.D. Ill. Nov. 12, 2015)) complain that Similasan engaged in false advertising by omission by not including on its products’ labels statements to the effect that (i) the product was not FDA approved as medically effective and (ii) the active ingredients were diluted.  Notably, neither of those disclaimers is required on homeopathic products – but even so, many companies voluntarily include them.

In Similasan, after four years of hard fought litigation  the Defendant had successfully narrowed the claims by summary judgment [Dkt. No. 142] and Plaintiffs had certified  a class [Dkt. No. 143].  Similasan, however, filed a motion to decertify, arguing that Plaintiffs would not be able to prove materiality or falsity with their expert witnesses’ survey evidence [Dkt. No. 164].  With the motion to decertify pending, the parties settled and sought judicial approval of their agreement [Dkt. No. 196].  But the settlement was not a cure the district court could swallow.  Judge Bashant noted her role in the fairness hearing was to look for “subtle signs that class counsel have allowed pursuit of their own self-interests and that of certain class members to infect the negotiations.” (2016 WL 4249914, at *3 citing In re Bluetooth Headset Prods. Liab. Litig., 654 F.3d 935, 947 (9th Cir.2011)).  In this case, the signs were not subtle, and it was not a close call for the Court to deny approval.

In particular, Judge Bashant took exception to the following features of the proposed agreement:

  • The remedy for the unnamed class was injunctive relief only. While the company agreed to add the disclaimers that Plaintiffs’ counsel had complained were omitted, Similasan was not required to compensate class members;
  • The only money went to the class representatives who would pocket $2,500.00 each and Plaintiff’s counsel who secured a clear-sailing agreement which would permit an award of fees in excess of $550,000.00;
  • In exchange for injunctive relief, class members released Similasan from all claims identified in the complaint;
  • The release covered a nationwide class even though the Court had certified a California class only.

These settlement terms were not good enough for the Court.  The class was being asked to give up the right to sue but receiving nothing in return.  Indeed, to the extent the remedy was an injunction, a class member who opted out would receive the same benefit without forfeiting any rights.  Tellingly, eight State Attorneys General (Arizona, Arkansas, Louisiana, Michigan, Nebraska, Nevada, Texas and Wyoming) filed an amicus curiae brief urging the Court to reject the proposed settlement. [Dkt. No. 219].

The Court also discussed the role that notice (or lack thereof) played in its decision making.  The Court observed that the proposed class would have been in the tens of thousands [Dkt. No. 216], but the settlement notice prompted only 136 views of the settlement information website and 21 phone calls to the settlement hotline.  The Court attributed this lackluster response to the weakness of the notice, which consisted of a single ad in USA Today and some incidental online placements.  But the reality is the paucity of the economic return (i.e. zero) likely resulted in mass indifference.

 

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A Lodestar Off Our Mind!

** The California Supreme Court endorses the Percentage of Common Fund Approach for Class Action Settlements **                                                                                                                                                                                        

4427950_HiResIn a decision that consumer class action lawyers have been on pins and needles awaiting, the California Supreme Court just issued its opinion in Lafitte v. Robert Half Int’l Inc, Cal., No. S222996 (Aug. 11, 2016) regarding the proper way to determine attorney fee awards in common fund cases.  The Court concluded that the percentage of the fund method favored by plaintiffs’ class action lawyers (and, frankly, defense attorneys who settle consumer class actions by agreeing to a common fund) is alive and well.

For the past several years, objectors to class action settlements in California have become increasingly vocal with their criticism of this prevalent class action settlement device that creates a fund to compensate class members and pay class counsel (and sometimes claims administration costs as well).  In consumer fraud actions, after compensation to the class has been negotiated, additional money is placed in the common fund to compensate class counsel for their work on the case – typically 25% of the entire fund amount. Critics of the percentage of the common fund approach argue that it incentivizes plaintiffs’ counsel to put their interests ahead of class members (see e.g., Smith, Adam, The Wealth of Nations (1776)) and settle cases quickly in an amount that may not fully compensate class members in order to avoid otherwise needless effort in obtaining their fee.

Lafitte was a wage and hour case against Robert Half, the well-known staffing company.  The parties preliminarily settled the lawsuit by establishing a $19 million settlement fund that included a “clear sailing” provision for attorney fees of $6,333,333 – 33% of the common fund.  (Because courts must rule on the reasonableness of fees, a plaintiff and defendant settling a class action cannot agree on the plaintiff’s attorney’s fee award.  Instead, the defendant will sometimes agree that it will not oppose a specific fee award – giving plaintiff’s counsel “clear sailing” toward their requested fee.)

One of the class members in Lafitte thought the $6+ million award was a bit rich and believed it was not sufficiently justified or substantiated by class counsel, who relied primarily on the fact that 33% was within the range of typical class action settlement awards (20%-50%).  The class member filed an objection to that effect citing Serrano v. Priest (1977) 20 Cal.3d 25 (“Serrano III”) for the proposition that fee awards must be calculated on the basis of time spent by the attorneys on the case plus a multiplier.  The Los Angeles Superior Court denied the class member’s objection determining that a percentage of the common fund was the correct approach but double-checking it against the reasonable fee class counsel would have charged if it was a billable hour case – the “lodestar.”  The court analyzed plaintiff’s counsel’s billing records and concluded that the lodestar was between $2,968,620 and $3,118,620.  The gap between the lodestar amount and the $6,333,333 percentage fee was closed by applying a multiplier of between 2.03 and 2.13.  Why apply a multiplier?   To compensate class counsel “for the novelty and difficulty of the questions involved, (2) the skill displayed in presenting them, (3) the extent to which the nature of the litigation precluded other employment by the attorneys, (4) the contingent nature of the fee award.”  Ketchum v. Moses, 24 Cal.4th 1122, 1132 (2001) (citing Serrano III).

Viewing the “double check” methodology with Pope’s “jaundiced eye,” one might conclude that – because the multiplier is completely subjective – a court can always engineer a proposed percentage fee award in a class action settlement with the lodestar analysis.  This is precisely what the objector argued.  Any student of algebra can solve this simple equation where the contingent fee award and lodestar fee are known:

contingent fee award = lodestar fee x multiplier

In Lafitte, the California Supreme Court charted the birth, death and resurrection of the common fund percentage approach for attorney fee awards throughout legal history — at least from 1966 when Federal Rule of Civil Procedure 23 was amended so as to usher in the modern class action.  The Court also carefully analyzed the pros and cons of each approach.  For those keeping score:  Lodestar MethodPros:  (1) better accountability from class counsel for case handling, (2) encourages class counsel to pursue marginal increases in class recovery; Cons:  (1)  discourages early settlement, (2) consumes judicial resources in reviewing class counsel’s timesheets; Percentage MethodPros:  (1) easy to calculate, (2) creates reasonable expectations for class counsel in terms of recovery, (3) encourages early settlement; Cons:  (1) encourages class counsel to settle too early for a reduced amount, (2) may create a windfall when the common fund is very large.  After this detailed analysis, the Court concluded, “[W]e clarify today that use of the percentage method to calculate a fee in a common fund case, where the award serves to spread the attorney fee among all the beneficiaries of the fund, does not in itself constitute an abuse of discretion.”  Moreover, “[T]rial courts have discretion to conduct a lodestar cross-check on a percentage fee . . . [but]; they also retain the discretion to forgo a lodestar cross-check and use other means to evaluate the reasonableness of a requested percentage fee.”  The Lafitte Court acknowledged that Serrano III may have caused confusion on the issue, but limited Serrano III’s lodestar requirement to cases involving enforcement of statutes with fee-shifting provisions – for example, where prosecution of the case “has resulted in the enforcement of an important right affecting the public interest.”  Cal. Code Civ. Proc. §1021.5.

Before California consumer class action lawyers fire up their calculators, however, a few words of warning are in order.  First and foremost, the Lafitte Court did not dispense with the fundamental requirement that the fee award be reasonable.  While the Court’s opinion does not require a lodestar double check, it does mandate that the trial court use some means to evaluate the reasonableness of the fee.  Interestingly, the Court shied away from endorsing the “sliding scale” approach sometimes employed in class action settlements to promote reasonableness where the fee percentage decreases as the settlement increases in amount:  “[W]e do not mean to endorse the use of a sliding percentage scale. That issue is not before us and is not without controversy.” In addition, the California Supreme Court made clear that its ruling does not inform whether and how a contingent fee can be applied where there is no common fund – i.e., where class counsel argues for a “’constructive common fund’ created by the defendant‘s agreement to pay claims made by class members and, separately, to  pay class counsel a reasonable fee as determined by the court.”

Most importantly for counsel who settle consumer class actions, the Court stated that its decision does not apply to a case where “a settlement agreement establishes a fund but provides that portions not distributed in claims revert to the defendant or be distributed to a third party or the state, making the fund‘s value to the class depend on how many claims are made and allowed.”   Because it is often the case that the common fund settlement amount in a consumer class action includes more money (even minus class counsel fees and administration costs) than is needed to compensate class members’ claims, such settlements often include cy pres provisions requiring that left-over money not claimed by class members (or eaten up by fees and costs) be donated to a specific charity.  Cy pres provisions are employed to:  (1) convince the court deciding whether to approve the settlement that the amount is “real” in that the defendant isn’t getting any of it back; and (2) establish a concrete settlement number on which to apply the attorney fee percentage.  The Lafitte Court grounded its decision to approve the percentage of fund method on the basis that “the percentage of the fund method more accurately reflects the results achieved.”  But if cash in the settlement fund ends up going to a charity – no matter how worthy the cause – does this amount “reflect the results achieved” for the class?  No doubt, given the ever-increasing use of cy pres provisions in consumer class actions, we will almost certainly learn the answer to this question in the very near future.

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Fair in Love and War?

** Popular Match Making App Tinder Loses on Second Bite To Defeat Gender-Bias Class Action **                                                                                                                                                                               

Antalya, Turkey - February 02, 2016 : A close up of an Apple iPhone 6s Plus screen showing various dating apps, including happn, Tinder, The Grade, POF, Badoo, Glint, LOVOO, eHarmony, OkCupid

The popular geo-location dating application Tinder was rebuffed in its latest attempt to have a putative California class action complaint against it dismissed.  Manapol. v. Tinder, No. BC589036, (Sup. Ct. L.A. County) (filed April 28, 2015).  The complaint alleges that Tinder illegally discriminated against Plaintiff by charging him more than a similarly situated woman (for the Tinder Plus service) and therefore violated California’s Unruh Civil Rights Act.  Id.   Earlier this year, Plaintiff’s initial complaint was dismissed without prejudice for his failure to “connect the dots” on the facts.  Id. (Order and Opinion, Feb. 17, 2016).  The court held that Plaintiff’s complaint was built on his naked (pun intended) allegation that a female friend’s Tinder Plus bill was lower than his, which, (even if were true) was merely an isolated event and, therefore, insufficient to show a pattern of price discrimination based on gender.  Plaintiff returned with an amended complaint alleging that the disparate pricing he experienced was not a one-off occurrence – but embedded in the algorithms at the heart of the functionality of Tinder Plus.

Superior Court Judge William F. Highberger rejected Tinder’s demurrer to this amended complaint, holding that Plaintiff’s allegations were adequately pled.  Id. (Order and Opinion, July 21, 2016).  In an oral argument (which we would have paid money to attend), the parties went back and forth with Judge Highberger over whether Tinder engages in gender discrimination with Tinder offering the declaration of a company employee that Tinder does not discriminate in its pricing for Tinder Plus or the number of free swipes a user gets on Tinder – and Plaintiff asserting he has his own contrary facts and will be able to obtain more evidence from Tinder.  Clearly, a fight is brewing over the discoverability of Tinder’s trade secret algorithms.

The most surprising thing about this lawsuit for those who are unversed in California’s Unruh Civil Rights Act is that, even accepting the allegations as true, the complaint states a claim.  Long before Ronald Bell of Kool & the Gang penned his immortal 1979 ballad (best performed by Jon Lovitz in the Wedding Singer), of the same name, “Ladies Night” was a ubiquitous part of American nightlife.  But ironically, at about the same time the song reached its zenith at #8 on the Billboard Hot 100, a gentleman by the name of Dennis Koire was visiting Orange County car washes asking for the advertised “Ladies’ Day” discount and the Jezebel Nightclub in Anaheim demanding the “Ladies’ Night” reduced admission, all to no avail.  The lawsuit he filed made it to the California Supreme Court in 1985, where the Court put the kibosh on Ladies Night in Koire v. Metro Car Wash, 40 Cal.3d 24 (1985), holding that such discounts violate the Unruh Act’s requirement that “[a]ll persons within the jurisdiction of this state are free and equal, and no matter what their sex . . .  are entitled to the full and equal accommodations, advantages, facilities, privileges, or services in all business establishments of every kind whatsoever . . . .”  Cal. Civil Code §51.  Jezebel’s owner argued that the “social policy” exception applied in other Unruh Act cases was warranted in his case because “’Ladies Night’ encourages more women to attend the bar, thereby promoting more interaction between the sexes.”  Koire, 40 Cal.3d at 33.  The Court found this argument “not sufficiently compelling.”  Id.   Although such an argument is not likely to assist Tinder — if in fact it does gender discriminate as Plaintiff alleges — the California Supreme Court might want to reconsider its rejection of Jezebel’s social policy argument.  In a world of millennials (and seniors!) looking for love on their laptop screens, there may be social utility in encouraging live interaction between Californians.

 

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