In postings in September 2013 and February 2014, I discussed tactics for opposing class certification in food labeling class actions. These tactics included relying on the Supreme Court’s opinion in Comcast Corp. v. Behrend, 133 S. Ct. 1426 (2013), to challenge the sufficiency of the plaintiffs’ damages model, which should be particularly difficult in these types of claims. In late March 2014, the Northern District of California decertified a food labeling class action largely based on those shortcomings.

In re POM Wonderful LLC Marketing & Sales Practices Litigation, 2014 U.S. Dist. LEXIS 40415 (N.D. Cal. Mar. 25, 2014), involves allegations that the defendant falsely advertised that certain of its juice products provide various health benefits and that substantial scientific research demonstrates those benefits.  The plaintiffs alleged familiar theories based largely on California consumer fraud statutes. The court had earlier certified the class, and the plaintiffs proposed two damages models from their expert as part of that process. The first would grant a full refund of the entire purchase price to the entire class--$450 million. That model assumed “that consumers would not have purchased Defendant’s juices if not for the alleged misrepresentations.” Id. at *11.  The court rejected that model, however, because it failed to acknowledge that consumers received some benefit even if they purchased the juice based on the “fraudulent” representations. It would be an improper windfall for the plaintiffs to receive a full refund when they could not “plausibly contend that they did not receive any value at all from Defendant’s products.” Id. at *14.

The second damages model was the “price premium” model. It assumed that consumer demand for the products would have been lower if not for the alleged misrepresentations. That damages calculation was approximately $290 million.  But the plaintiffs did not use any sort of consumer research data to show why consumers purchased these products or the effect of the alleged misrepresentations. Instead, they tried to rely on the fraud on the market theory that familiarly appears in securities fraud class actions. The fraud on the market theory, however, really only applies to establishing or overcoming the need to prove reliance on a class wide basis. It does not calculate damages. Plus, no case seems to have applied this theory to a consumer class-action.  Id. at *16.  Furthermore, the plaintiffs did not establish that an efficient market for the juices exists, which is a predicate to the securities fraud on the market theory.  It truly would be impossible to establish such an efficient market because consumers by such products for a host of different reasons, and the marketplace has not adjust the price to reflect all of those reasons.  “Absent such traceable market-wide influence, and where, as here, consumers buy a product for myriad reasons, damages resulting from the alleged misrepresentations will not possibly be uniform or amenable to class proof.”  Id. at *18.

Things going downhill for the plaintiffs. Even if a fraud on the market theory somehow were relevant, the plaintiffs could not show that the alleged misrepresentations caused the class to pay a price premium. The plaintiffs’ expert tried to compare the POM products to the average prices of refrigerated orange, grape, apple, and grapefruit juice. He never tried to explain why the POM juices were more expensive; he simply observed that they were and assumed that all of that price difference was attributable to the misrepresentations.  The expert “assumed, without any methodology at all to support the assumption, that not a single consumer would have chosen POM juice over some agglomeration of orange, grapefruit, Apple, and grape juice if not for POM’s allegedly deceptive advertising.”  Id. at *21.  But that ignores that consumers purchased products for several reasons-- because they are thirsty, they want to try something new, a friend likes the flavor, it was on sale, etc. That type of damages model did not meet the requirement that class-wide damages be tied to a legal theory, and the court could not conduct a rigorous analysis when “there is nothing of substance to analyze.”  Id. at *22.  Significantly, the court also noted that the expert’s opinions were not admissible under Daubert, implying that the court believes that standard governs the use of expert testimony at class certification.  Id. at *22 n.7.  Admittedly, that is an unresolved question across the Circuit Courts and the United States Supreme Court.

The final blow to class certification was ascertain ability.  It seems impossible to believe that many consumers would have retained receipts to prove that they purchase these products.  “Here, at the close of discovery and despite Plaintiffs’ best efforts, there is no way to reliably determine who purchased Defendant’s products were when they did so.”  Id. at *24.  See this earlier post for another analysis of using ascertain ability to defeat class certification in these cases.

In sum, this decision is an important victory for food labeling class action defendants that ties together several tactics. First, these plaintiffs tend to rely on that same price premium theory. It seems impossible, however, to create a coherent theory of establishing that damages model under Comcast.  People buy food products for too many different reasons to suggest that alleged fraud harmed everyone. This is where a defendant may want to use its own consumer survey research data to affirmatively demonstrate those different motivations for product purchases. And ascertain ability will continue to be a very difficult hurdle for these plaintiffs to overcome. Not yet addressed in an opinion I have seen is any effort to show which class members actually were “injured,” even under a price premium theory. That is, the actual price someone pays varies greatly from day to day and store to store. A product may be on sale because a particular store has too much in stock. The manufacturer may be running a promotion as well.  Supermarket customer loyalty programs also may result in discounts. It seems impossible to segregate “injured” class members from those who did not suffer any purported injury because they paid a price that is beneath the supposed “premium price.”

James Smith is a partner in the Phoenix office of Bryan Cave LLP.  He is a member of the Class and Derivative Actions Client Service Group and the Food & Beverage Team.

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The tide seems to be turning in favor of food labeling class action defendants with respect to the “unlawful” prong of California’s Unfair Competition Law.  The UCL provides consumers with a claim for “unlawful,” “unfair,” or “fraudulent” business practices.  Cal. Bus. & Prof. Code § 17200.  Since the California Supreme Court’s opinion in Kwikset Corp. v. Superior Court, 51 Cal. 4th 310, 246 P.2d 877 (2011), there has been no doubt that the UCL requires that a named plaintiff prove actual reliance on the challenged advertising when pursuing claims under the UCL’s unfair or fraudulent prongs.  A number of plaintiffs have argued, however, that they need not plead reliance when proceeding under the unlawful prong of the UCL.  Those plaintiffs contend that simply purchasing an “illegal” product that is misbranded in violation of California law is sufficient; thus, they need not prove that they relied on the alleged misbranding in those circumstances.  Admittedly, the decisions of some judges in the Northern District of California in food labeling class actions may support the argument that the plaintiff need not demonstrate reliance under the unlawful prong but need only allege facts showing that it is plausible that the defendant violated the law when selling a product.  E.g., Trazo v. Nestle USA, Inc., 2013 WL 4083218, *9 (N.D. Cal. Aug. 9, 2013).  

Fortunately for class action defendants, however, the trend now seems to require reliance even under the UCL’s unlawful prong.  Judge Edward Davila issued the latest such decision in Thomas v. Costco Wholesale Corp., No. 5:12-CV-02908-EJD (N.D. Cal. Mar. 31, 2014).  There, two named plaintiffs alleged that Costco improperly labeled several products.  Judge Davila granted in part the motion to dismiss and emphasized the need for reliance for such claims under the unlawful prong.  Plaintiffs pursuing these claims allege they would not have purchased a product if he or she had known that it was mislabeled contrary to California law.  Because California law also makes it unlawful for a person to hold or offer for sale any misbranded food, such plaintiffs contend that they received products that are “worthless” and have no economic value, even if those plaintiffs consumed and enjoyed the products.  See Cal. Health & Safety Code § 110760 (unlawful for person to hold or offer for sale any food that is misbranded).

The plaintiffs in Thomas presented that same type of argument and contended that they need not show actual reliance on any of the several allegedly-improper labeling statements at issue. “Plaintiffs argue that their claims are not based on misrepresentation, [but] rather on the illegality of the products themselves as their misbranding violates the Sherman Law, and therefore there is no need for plaintiffs to prove reliance.”  Thomas Slip Op. at 12.  Judge Davila rejected Plaintiffs’ arguments:  “Plaintiffs cannot circumvent the reliance requirement by simply pointing to a regulation or code provision that was violated by the alleged label misrepresentation, summarily claiming that the product is illegal to sell and therefore negating the need to plead reliance.”  Id. As a backstop to the reliance issue, those plaintiffs also argued that they “relied on Defendant not to sell them illegal products (i.e., products misbranded under state law).”  Id. at 13.  The Court also rejected that proposition—Plaintiffs must plead and prove reliance “on the representation,” not on an implied assurance of “legality.”  Id.   

To be sure, Thomas is not a home run for class action defendants.  It denied the motion to dismiss as to several claims.  But it is an important addition to the growing line of cases holding that actual reliance is necessary under the UCL’s unlawful prong.  E.g., Gitson v. Trader Joe’s Co., 2014 U.S. Dist. LEXIS 33936, at *26 (N.D. Cal. Mar. 14, 2014) (holding that plaintiffs must demonstrate actual reliance); Kane v. Chobani, Inc., 2014 U.S. Dist. LEXIS 22258, at *22-23 (N.D. Cal. Feb. 20, 2014) (same).  

Some plaintiffs are successfully arguing that allegedly-illegal labels on certain products also support claims for breach of the implied warranty of merchantability.  They do not contend that they relied on any particular statements to support those claims.  Rather, they allege that they would not have purchased products that could not be legally sold or held, and that the defendant impliedly warranted that the product was “legal.”  These plaintiffs consumed and, apparently, enjoyed the products despite their “illegality,” and the products performed as expected (i.e., they could be safely consumed), so the notion of any sort of breach warranty shouldn’t apply.  With this continuing trend of requiring actual reliance under the UCL’s unlawful prong, I hope that these implied warranty claims also begin falling by the wayside.  It seems untenable to suggest that warranty claims can succeed where consumer fraud claims—which have broader remedial and ameliorative public policy purposes—fail.  
James Smith is a partner in the Phoenix office of Bryan Cave LLP.  He is a member of the Class & Derivative Actions Client Services Group and a member of the Food and Beverage Team.   

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Recently, the Eleventh Circuit issued an opinion that stands to be very useful to RICO defendants at the motion to dismiss stage. Undoubtedly, plaintiffs will argue that the decision is limited to RICO cases relying on a specific predicate act. That argument, however, ignores very important language in the opinion and the structure of RICO itself.

Simpson v. Sanderson Farms, Inc., No. 13-10624 (11th Cir. Mar. 7, 2014), involves poultry processing plant employees’ allegations that the plant depressed wages by falsely attesting that illegal employees presented genuine work-authorization and identification documents. Such false attesting violates 18 U.S.C. § 1546 and is a predicate offense under RICO.  This is not an entirely new theory. Indeed, the Eleventh Circuit held only a few years ago that a plaintiff stated a valid RICO claim by alleging that a deliberate scheme to hire illegal employees depressed wages in Williams v. Mohawk Industries, Inc., 465 F.3d 1277 (11th Cir. 2006).  At least two other circuits also have let such depressed wage claims survive motions to dismiss.   Trollinger v. Tyson Foods, Inc., 370 F.3d 602 (6th Cir. 2004); Mendoza v. Zirkle Fruit Co., 301 F.3d 1163 (9th Cir. 2002).  Importantly, however, all three of those opinions predate Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), and Ashcroft v. Iqbal, 556 U.S. 662 (2009), and the pleading standards that those United States Supreme Court opinions embraced. The Eleventh Circuit relied on that important fact when affirming the dismissal of these Plaintiffs’ complaint.

The two Plaintiffs in Simpson worked at the processing plant in Moultrie, Georgia. They alleged the plant used falsified documents in order to employ illegal immigrants.  Under the Plaintiffs’ theory, that allowed the plant to pay depressed wages to all employees, legal or illegal, because it artificially inflated the pool of potential workers.  And, of course, legal workers had to compete with illegal workers who are willing to work for lower wages. While these two Plaintiffs experienced wage increases of more than 30% in approximately two years, that alone did not doom their claims. After all, a logical conclusion of their theory could be that wages increased less rapidly than they otherwise would have. Similarly, wages could have started at a lower position due to the illegal employees with whom they competed.  Instead, the Eleventh Circuit affirmed the dismissal because the Plaintiffs failed to adequately plead basic economic facts showing that the alleged scheme directly caused their alleged injuries.

Despite designating its decision as an opinion for publication, the Eleventh Circuit at times downplayed (incorrectly in my view) the importance of its analysis. “Nevertheless, because this is not a close case, we need not engage in any creative legal analysis to conclude that the plaintiffs have not plausibly shown injury.”  [Slip Op. at 12]  The problem with the complaint was the failure to allege or include any wage data. The Plaintiffs did not offer any market data that would allow a court to infer that a gap existed between Plaintiffs’ actual wages and what they would have received but for the false employment documents. They did not offer or estimate wages paid by comparable processing plants in the relevant market, in the state, or even the region. And they certainly did not attempt to distinguish between the wages paid by employers who use illegal employees and those who do not. 

It was not enough to allege an abstract market impact theory. Rather, the court expected the Plaintiffs to quantify the labor market in some way. That is, show or at least estimate the number of unskilled workers in the market and what percentage of that workforce is work-authorized. The Plaintiffs had to establish that the percentage of illegal workers was sufficient to actually depressed or otherwise affect wages. They did not do this for the relevant market or even for this particular plant. And that failure to do so for the relevant market simply highlighted that the Plaintiffs never defined that market. Was it the entire county, a subset of the county or some other geographic region? The Plaintiffs never said, and the court would not guess.   

So what lessons does this case have for defense practitioners?  It has long been the case that the alleged predicate acts must directly injure a RICO’s plaintiff’s business or property.  Hemi Group, LLC v. City of N.Y., 559 U.S. 1, 14-15 (2010); Holmes v. Secs. Investor Protection Corp., 503 U.S. 258, 265-68 (1992); Anza v. Ideal Steel Supply Corp., 547 U.S. 451, 458 (1991).  The plaintiff’s business or property must be injured “by reason of” the RICO violation.  18 U.S.C. § 1964(c).  Thus, if alternative causes exist or if the causal link is too attenuated, a RICO claim typically will fail. While often described in terms of proximate cause, this truly is a more stringent causation requirement than, for example, a common law tort claim.  For example, one of the more influential Court of Appeals opinions emphasized the need for a plaintiff to show how its losses were tied directly to the alleged predicate offenses (i.e., providing false information on commercial loan documents) rather than an overall downturn in the New York real estate market.  First Nationwide Bank v. Gelt Funding Corp., 27 F.3d 763, 770-71 (2d Cir. 1994) (affirming dismissal).  “[W]hen the plaintiff’s loss coincides with a marketwide phenomenon causing comparable losses to other investors, the prospect that the plaintiff’s loss was caused by the fraud decreases.”  Id. at 772.  

In that respect, the Eleventh Circuit’s recent opinion continues the proximate cause analysis that has been part of RICO for some time.  It is the level of detail and economic analysis that the complaint must include that makes the Eleventh Circuit’s opinion so interesting. It also would be a mistake to interpret it as limited to this type of illegal employment case. Any time a plaintiff—particularly a putative class representative—alleges that predicate acts caused widespread economic harm, it is almost inevitable that countervailing economic forces may be at work.  A defendant should point to this opinion and argue that the plaintiff must allege data points and facts supporting an inference of that economic effect in a particularly defined market.  The plaintiff should not be able to argue that discovery is necessary or that he may rely on “commonsense” inferences at the pleading stage.  A defendant should force the plaintiff to define the market and define the specific economic data showing the purported injury to business or property.  When possible alternative causes of the alleged injury exist, the plaintiff needs to address those at the pleading stage as well.

Defendant may see these types of allegations in “no injury” product defect cases.  That is, allegations that a product does not perform as promised, so the plaintiffs paid more than they otherwise would have or the product is now worth less than it otherwise would be. Similarly, allegations regarding real estate transactions, particularly following the housing bust, also often suggests some sort of effect across an entire market. Such claims should have difficulty withstanding this type of pleading requirement.  As defense counsel, you will want to identify all of the plausible alternative explanations for any economic harm alleged in the complaint.  Your plaintiff must do more than allege in conclusory fashion that those alternative causes are not to blame. Rather, he or she must provide a feasible theory that survives basic economic scrutiny.   

James Smith is a partner in the Phoenix office of Bryan Cave LLP and is a member of the firm’s Class & Derivative Actions Client Service Group.  

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Two recent district court decisions emphasize that food labeling class action defendants must carefully review complaints to identify what each named plaintiff contends it reviewed and whether the allegedly deceptive statements even affected the named plaintiff’s decision to purchase a product. These plaintiffs often string together unrelated allegations that have nothing to do with their purchases.  If a defendant connects the dots and shows just how unrelated those allegations are, you have a much better chance of succeeding early in the case.      

The first case involves five gallon bottled water that is municipal tap water that the seller put through a purification process.  In the Chicago Faucet Shoppe, Inc. v. Nestle Waters North America, Inc., No. 12 C 08119 (N.D. Ill. 2/11/14), the plaintiff alleged that the defendant failed to disclose that the water is municipal tap water and not natural spring water.  After buying the bottles for years, that plaintiff realized it was simply purchasing municipal tap water that underwent a purification process.  That defendant apparently referred to “spring water” on its website, invoices, and panels on its delivery trucks. Importantly, it did not include that statement on its labels.  That was crucial for purposes of the defendant’s preemption argument. Federal regulations exempt “purified water” from disclosing if the water comes from a community water system.  21 C.F.R. § 165.110(a)(3)(ii) & (a)(2)(iv).  In fact, the FDA considered but rejected requiring disclosure for purified water, concluding that consumers purchasing it were more concerned with purity and not the source.
This plaintiff knew it couldn’t force the defendant to add more to its label than federal law required. Instead, it argued that it only wanted the defendant to disclose the source in marketing materials and on invoices. But marketing really is no different than labeling. The federal Food Drug & Cosmetic Act prohibits states from imposing any food labeling that is not identical to a federal standard.  Because the federal regulations do not require “purified water” to disclose if it came from a municipal water source, federal law preempted this plaintiff’s claims even though it framed the targeted materials as marketing materials rather than labeling.  
You may wonder why the plaintiff did not allege affirmative fraud based on statements on the website and invoices referring to Ice Mountain “spring water.”  Indeed, the court wondered the same thing, so it analyzed (and rejected) an affirmative misrepresentation claim even though the plaintiff did not plead it.  Of course, the most likely reason that the plaintiff did not pursue an affirmative misrepresentation claim is the near impossibility of getting such a class certified.  The court did not touch on that issue, but anyone familiar with consumer fraud class actions certainly recognizes it.  If the plaintiff built its case on specific statements on the website or on invoices, it would have to explain how the court could certify a class without getting mired in individual issues of who saw the website, who relied on it, and what other sources of information they possessed.  That is why these types of food labeling claims tend to rely entirely on the product labeling as opposed to occasional statements on websites or other places.  
The next case is Kane v. Chobani, Inc., No. 12-CV-02425-LHK (N.D. Cal. 2/20/14).  This case is familiar to people following food labeling class actions and began in May 2012.  Since then, the court has granted various motions to dismiss but allowed that plaintiff more opportunities to plead cognizable claims. At this point, the plaintiff was on her fourth attempt and, thankfully, it is the last one.  This case is a little more typical because it is in the Northern District of California and relies on California consumer protection laws.  This plaintiff has been pursuing claims falling into two categories.  The first relates to Evaporated Cane Juice (“ECJ”); she alleges that ECJ is nothing more than sugar or dried can syrup, so referring to ECJ on the label is misleading and violates federal regulations requiring manufacturers to refer to ingredients by their common and usual names.  The second class of claims are “all natural” claims.  She alleges that using fruit and vegetable juice and turmeric for color was false and misleading because those are not “all natural.”
One of the most useful portions of this order is its discussion of California UCL claims under that statute’s “unlawful” prong.  Some plaintiffs have successfully argued that they need not rely on a labeling statement that is “unlawful”; rather, they only need to plead that it is plausible that a defendant broke a law (typically, a federal food labeling requirement).  In fact, a handful of other courts in the Northern District of California have accepted that rationale.  But Judge Lucy Koh was having none of it.  She reasoned that any UCL named plaintiff must allege that they relied on the offending statement or conduct, even under the “unlawful” prong.  This will be a developing area under California consumer fraud law.  At some point, the California Supreme Court or the Ninth Circuit will resolve this growing split among lower courts interpreting allegations of “unlawful” conduct and UCL claims.  For now, unfortunately, the outcome in such cases may turn on which judge handles a particular case.  
The court then analyzed whether this plaintiff actually relied on the alleged misstatements. This really is an interesting portion of the opinion, particularly considering how Judge Koh evaluated the plaintiff’s changing allegations over the course of the case.  As to ECJ, the plaintiff initially contended she did not realize that ECJ was just another sweetener.  But in other portions of the amended pleading, the plaintiff repeatedly referred to sugar and dried cane syrup interchangeably.  Judge Koh did not believe it was plausible that the plaintiff could realize that “dried cane syrup” was a form of sugar, but that “evaporated cane juice” was not.  Similarly, the plaintiff earlier sought a preliminary injunction (perhaps an unwise move) and submitted a declaration indicating she would not have purchased the product if she knew it contained “dried cane syrup”; again, this showed she knew that dried cane syrup was the same as sugar.  And despite the court’s earlier rulings, this latest pleading failed to explain how the plaintiff could understand that dried cane syrup was a form of sugar but was oblivious to that fact regarding ECJ, particularly considering that she purported to read and rely on the label.  
Perhaps showing some desperation, the plaintiff and her counsel suggested that the “cane” in ECJ could have referred to some other type of cane, such as bamboo cane or sorghum cane.  But during the hearing on the plaintiff’s preliminary injunction motion (again, probably not a good idea), the plaintiff’s counsel admitted that he does not know what people might think when they see ECJ on a label or whether they may believe it is something other than sugar cane.  It was too much for Judge Koh, who found the “which cane is it” argument to be nonsensical.    

The plaintiff also tripped over her own allegations because she acknowledged that “fruit juice concentrate” is a well-known added sugar.  In light of that admission, it was implausible that the plaintiff thought “evaporated cane juice” was something healthful when she admittedly knew that “fruit juice concentrate” was little more than sugar.  Juice was juice from the court’s perspective.
The court then turned to the “all natural” claims that relied on Chobani using fruit or vegetable juice concentrate as coloring.  The defendant’s labeling explicitly disclosed that it adds fruit or vegetable juice for color, and the plaintiff purported to read the label.  Hoping to salvage this claim, the plaintiff now alleged that the juices added were actually processed, unnatural substances. The court was not impressed.  In three prior complaints and several hearings, the plaintiff never before disclosed a theory that the juice concentrate used for coloring somehow was not “natural” due to some unidentified aspect of its processing.  It was not enough that the plaintiff alleged the juices were “highly processed unnatural substances far removed from the fruits or vegetables they were supposedly derived from”; that was nothing more than a conclusory statement without any factual support.  Judge Koh wanted to know how or why the juices were not natural, and this plaintiff never answered that question despite several opportunities.
Some take away points from Chicago Faucet Shoppe and Kane to consider:
  • In terms of substantive law, reliance and the “unlawful” prong of California’s UCL needs clarifying.  The Northern District of California likely is the federal court with the greatest volume of such claims, and some of its judges are split on whether a named plaintiff must have relied on the allegedly-unlawful statement.  
  • Dissect the plaintiff’s allegations and take the court step-by-step to identify: (1) what the plaintiffs actually saw or relied on; (2) what they included in the complaint as “fluff” (e.g., perceived bad facts that didn’t play a role in their purchase); (3) how their allegations may disprove their claims (e.g., they admit elsewhere that a listed ingredient is known to be “unnatural”); (4) conclusory assertions about ingredients that lack factual bases (e.g., something is “unnatural,” but the plaintiff doesn’t describe how or why); and (5) implausible assertions—courts are slowly showing more willingness to recognize that a label didn’t deceive a plaintiff merely because he or she alleged as much.      
Food labeling cases continue to be a favorite among the plaintiffs’ class action bar.  No doubt, the initial success in surviving motions to dismiss—often followed by quick class-wide settlements—encouraged them. Many courts, however, seem to be taking a closer and more skeptical view of these claims.
James Smith is a member of the Bryan Cave Food and Beverage Team and of the Class and Derivative Action Client Service Group.  He is a partner in the firm’s Phoenix office.     

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A recent decision from the Northern District of California provides defendants with reason for cautious optimism regarding food labeling class actions.  In Sethavanish v. ZonePerfect Nutrition Co., No. 12-20907-SC (N.D. Cal. Feb. 13, 2014), the court denied the plaintiff’s motion for class certification. That plaintiff alleged that the “all natural” representations on ZonePerfect bars were false and misleading because the bars contain at least one of ten specified non-natural ingredients.  The plaintiff alleged that she regularly purchased those bars for her then-fiancé, who was an active-duty Marine who eventually deployed overseas.  The plaintiff alleged that she and her fiancé relied on those representations and paid more for the ZonePerfect bars than she would have paid for other bars that were not all natural.  She alternatively alleged that she would have purchased another brand of nutrition bar that truly was all natural.

In ruling on class certification, the court first addressed whether the plaintiff had standing to bring her claims.  While the court’s ruling in this regard is not helpful to defendants, it is also not surprising.  The defendant argued that the plaintiff did not suffer any injury because its bars are less expensive than the Pure Protein bars that the plaintiff now purchases.  The defendant also noted that the plaintiff admitted that she and her fiancé were willing to purchase non-natural nutrition bars so long as they were less expensive than “all natural” alternatives.  Plaintiff also admitted that she has always been willing to eat foods with artificial and synthetic ingredients.  While the court saw some tension among the plaintiff’s declaration, her pleadings, and her deposition testimony, that tension was not enough to eliminate standing.  From the court’s perspective, “[i]t is enough that she has asserted that she would not have purchased the product but for Defendant’s alleged misrepresentation.  She bargained for a nutrition bar that was all natural, and she allegedly received one that was not.”  Again, the standing threshold is not a terribly difficult one to overcome, so this ruling is not too surprising.  
More helpful for defendants, however, is the court’s ruling on ascertainability.  The court agreed with the defendant that the plaintiff could not define an objectively ascertainable class.  The defendant overwhelmingly sells to retailers, and not directly to consumers.  Records could only identify a very small fraction of consumers who purchased ZonePerfect bars in the last several years.  Thus, no method existed to identify the members of the class.  
The district court noted that courts in the Ninth Circuit are split on the issue.  It cited Xavier v. Philip Morris USA, Inc., 787 F. Supp. 2d 1075 (N.D. Cal. 2011), as an example of a case concluding a class could not be certified when there is no way to ascertain class membership.  That court declined to rely on affidavits from potential class members, reasoning that such a procedure could invite fraudulent or inaccurate claims.  In that respect, the Third Circuit’s opinion in Carrera v. Bayer Corp., 727 F.3d 300 (3d Cir. 2013), also was instructive.  There, the Third Circuit found that retailer records were not sufficiently thorough or accurate to identify class members.  In addition, the Carrera court “held that fraudulent or inaccurate claims could dilute the recovery of absent class members, and, as a result, absent class members could argue that they were not bound by a judgment because the named plaintiff did not adequately represent them.”  The court also pointed to Ries v. AriZona Beverages USA LLC, 287 F.R.D. 523 (N.D. Cal. 2012), as an example of a court rejecting a defendant’s ascertainability argument when dealing with “all natural” claims.  Nonetheless, this court found the reasoning in Xavier and Carrera more persuasive.  While those cases may restrict types of consumer class actions that may be certified, they do not bar such classes altogether.  Because this plaintiff did not identify any method to determine class membership, let alone an administratively feasible method, the court denied class certification without prejudice.  
One effect of such decisions may be to encourage class counsel to try to certify narrower classes.  For example, if a manufacturer sells directly to consumers through its website, a class action plaintiff may contend that a court could certify a class of those consumers.  Of course, that assumes that the manufacturer maintains adequate records of such customers.  Similarly, class representatives may argue that the court may certify a class of consumers who purchased the products at retail locations with robust consumer loyalty programs.  Those types of programs often track individual customer’s purchases, though the extent of data maintained varies considerably. This is not to say that such narrowed classes would be appropriate.  They would bring a host of other difficult issues.  Nonetheless, it would not be surprising to see plaintiffs resort to that tactic in hopes convincing a court to certify a class.  Such class certification would, of course, provide the type of leverage that class counsel seek to negotiate a broader settlement.  

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A recent federal court decision rejected a preemption argument under the Food, Drug, and Cosmetic Act and the Nutrition Labeling and Education Act regarding Smart Balance “fat-free” milks.  Admittedly, those defendants advocated a novel preemption theory.  It also did not help that a competing product used labeling that the plaintiffs acknowledged complied with all federal laws and would not provide a basis for state law claims.

In Koenig v. Boulder Brands, Inc., No. 13-CV-1186 (ER) (S.D.N.Y. Jan. 31, 2014), the plaintiffs alleged that the defendants deceptively labeled milk products as “fat free” when they truly contained one gram of fat per serving.  The defendants added an Omega-3 oil blend to fat-free milk, so the product contained less than 0.5 gram of milk fat per serving, but contained one gram of fat per serving due to adding the oil blend.  As is common in these types of claims, the plaintiffs alleged that the “fat-free” labeling deceived them and that they paid a premium for the products because of that deceptive labeling.
While the product labeling touted the “fat-free” nature of the milk, the front label also disclosed that it contained “(1 g fat from Omega-3 oil blend),” albeit in smaller font.  Of course, the nutrition facts panel also disclosed that the milk contained one gram of fat per serving, and the oil blend was the third ingredient listed.  Unfortunately for the defendants, however, the nutrition facts panel did not contain an asterisk or disclaimer modifying that description.  As we will see below, that was an important omission from the court’s perspective.
It is well-recognized now that states cannot impose labeling requirements different from those imposed by the Food, Drug, and Cosmetics Act (“FDCA”) and the Nutrition Labeling and Education Act (“NLEA”).  Federal law, however, does not preempt state laws that only impose identical labeling requirements.  A state consumer law may provide a claim even though the relevant federal laws do not provide any private remedies for consumers.  Thus, these plaintiffs had to establish that their state law claims only imposed the same obligations as federal law, while the defendants argued the opposite.
Not surprisingly, a specific regulation regarding labeling of “fat free” products exists.  Under that regulation, products labeled as “fat free” and that have an added ingredient consisting of fat must have an asterisk next to the ingredient and a statement along the lines of, “adds a trivial amount of fat,” “adds a negligible amount of fat,” or “adds a dietarily insignificant amount of fat.”  21 C.F.R. § 101.62(b)(ii).  That is why the lack of an asterisk came back to haunt these defendants.
The defendants argued, however, that FDA compliance policy guides allowed them to treat this milk product essentially as two combined products—one that is “fat-free milk” and the other that is not fat-free Omega-3 oil.  The defendants pointed to such policy guides regarding water with added minerals and peas and carrots.  No such guidance existed for a “fat-free” product with added fat, though.  The court rejected the argument that the policy guides for other products somehow pointed to preemption here.  After all, no policy guide exists for this type of milk product, and a competing milk product appropriately uses the asterisk to note added oil.  In fact, the court could not find any FDA policy guide involving combining an ingredient that is fat with a “fat-free” food.  Considering that a regulation specifically addresses such situations of adding fat to “fat-free” foods, there was no reason to try to analogize to other policy guides for different types of food.  Thus, the court concluded that the plaintiffs’ claims only sought to impose requirements that were identical to federal law.
The court then turned to the sufficiency of the state law claims.  First, the plaintiffs alleged consumer fraud under New York’s General Business Law (“GBL”) § 349.  That law relies on an objective test to assess whether practices are likely to mislead reasonable consumers acting reasonably under the circumstances.  The court noted that a reasonable consumer may conclude that the product contains a gram of fat per serving, but also noted that a reasonable consumer might focus on the more prominent wording on the label touting the product as “fat-free milk and Omega-3s.”  That was enough to defeat the motion to dismiss.  The court also concluded that the plaintiffs adequately alleged injury because they contended that they paid price premiums based on the defendants’ misrepresentations.
The court dismissed the plaintiffs’ breach of express warranty claims, however, due to the lack of privity.  It did so without prejudice, so the plaintiffs may attempt to replead that claim.  It seems difficult, however, to conceive of retail plaintiffs buying products directly from the manufacturers, rather than from a grocery store.  The court also dismissed the plaintiffs’ unjust enrichment claims as duplicative of other claims.
At this point in food and beverage labeling class actions, several courts have ruled on preemption issues and provide fairly consistent guidance on that doctrine.  That guidance, of course, cuts both ways for manufacturers—plaintiffs have fairly clear road maps for how to plead claims to avoid preemption.  More interesting questions, and perhaps more successful defenses, will arise in later proceedings such as summary judgment and class certification.  For example, nearly every state’s consumer fraud laws purport to rely on an objective standard.  That is, what would the reasonable consumer believe or would the labeling deceive the reasonable consumer?  It is not clear how class action plaintiffs intended to satisfy this burden in many respects.  Labels typically disclose the relevant information even when a plaintiff seizes on only one portion of the label (e.g., “fat free” or “all natural”).  It should not be sufficient for class action plaintiffs to rely only on the named plaintiff’s subjective interpretations.  There should be some requirement that they establish that a “reasonable” consumer would not have read other portions of the label, would not have understood them correctly, or would have disregarded them.  This seems particularly difficult to do and, at a minimum, should require statistically significant and valid survey data regarding consumer perceptions of the labels.  If a plaintiff does not offer that type of survey, a defendant should have grounds for summary judgment or to defeat class certification.
Another issue that these types of plaintiffs do not thoroughly address is injury due to alleged “premium” payments.  In sum, plaintiffs argue that they paid more for a mislabeled product than they otherwise would have.  That tends to be the entire measure of damages proffered by these types of class actions.  But this should be a difficult proposition to prove.  Grocery prices vary significantly depending on several factors.  Was the product on sale?  Did a customer belonging to a store’s “membership” program buy the product at a price lower than that for a non-offending product because of that membership?  Did a customer buy the product because her preferred alternative product was sold out?  Any number of differences may explain (1) whether a consumer actually paid a “premium” price and (2), if so, whether she paid that price because of the labeling or for unrelated reasons.  The United States Supreme Court’s recent decision in Comcast Corp. v. Behrend, 133 S. Ct. 1426 (2013), gives class action defendants considerable ammunition to attack plaintiffs’ proposed methodologies for establishing injuries and damages.  That ruling should play a significant role in defending any of these labeling class actions.
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Food labeling class actions continue to plague food manufacturers and retailers, with the Northern District of California being the favored forum for these claims.  Indeed, in The New Lawsuit Ecosystem: Trends, Targets and Players (Oct. 2013), the U.S. Chamber Institute for Legal Reform identified food labeling class actions brought by plaintiffs, public interest groups, and attorneys general as one of the primary emerging liability threats facing American businesses.  One of the favorite allegations of such claims centers on the use of “all natural” or similar words on food labels.  Very often, a plaintiff alleges that a product contains ingredients from genetically modified soybean or corn, so the product allegedly cannot be considered “natural.”  With California’s liberal consumer protection laws, these claims often survive motions to dismiss, with courts reasoning that plaintiffs adequately pled that reasonable consumers will read “all natural” labels and conclude that the product does not contain genetically modified or other allegedly unnatural ingredients.  E.g., Parker v. J.M. Smucker Co., No. C 13-0690 SC (N.D. Cal. Aug. 23, 2013) (denying motion to dismiss claims that vegetable oils were not “all natural”).

Though not from the Northern District of California, another recent federal court decision from that state offers some hope to defendants in these actions.  In Pelayo v. Nestle USA, Inc., No. CV 13-5213-JFW (AJWx) (C.D. Cal. Oct. 25, 2013), the court dismissed an “all natural” labeling action.  That plaintiff alleged that a number of pasta products should not bear the “all natural” label because they contain synthetic xanthan gum and soy lecithin.  Thus, according to that plaintiff, the labels would be reasonably likely to deceive the public under California consumer protection laws.

In dismissing the claims that court seized on an issue that truly affects all of these “all natural” claims. That is, the plaintiff “fail[ed] to offer an objective or plausible definition of the phrase ‘All Natural,’ and the use of the term ‘All Natural’ is not deceptive in context.”  [Slip Op. at 4]  Notions that “natural” means only something existing in nature surely could not apply as any consumer would realize that pasta is a manufactured product; the reasonable consumer does not believe that pasta grows in fields or is ranched from livestock.

The court also rejected that plaintiff’s effort to rely on the definition of “organic” to bolster her claims. Unlike “natural,” the word “organic” has a specific definition in the Code of Federal Regulations. Moreover, the court concluded that “it is implausible that a reasonable consumer would believe ingredients allowed in a product labeled ‘organic,’ such as the Challenged Ingredients, would not be allowed in a product labeled ‘all natural’.” [Slip Op. at 5]

Finally, the court noted that the products bear the “all natural” label on the front and back of the packages, and that the label on the back appears immediately above the list of ingredients. Thus, the ingredient list clarifies any supposed ambiguity regarding the definition of “all natural” by identifying the challenged ingredients.  In such a circumstance, a reasonable consumer would not be misled by “all natural” appearing on the label.

Pelayo highlights a weakness of these “all natural” claims.  That is, there is no widely-recognized definition of that phrase.  It should be impossible to allege or prove that the mythical reasonable consumer will be misled by a phrase that does not have a uniform or even generally-recognized definition.  This is particularly true when ingredient labels identify the product’s contents.  Unfortunately, many defendants in the Northern District of California, in particular, could not obtain dismissal of such “all natural” claims against them.  Thus, those cases must progress to discovery and possibly summary judgment in order to make the points that the Pelayo court raised.  That is, there is no common understanding of the phrase “all natural,” so it is impossible to establish that the phrase misleads reasonable consumers.  Indeed, it is possible that consumers may interpret “all natural” in a manner that favors defendants.  It should be a plaintiff’s burden to prove what “all natural” means to reasonable consumers, likely though statistically significant and reliable consumer survey research.  Going through the discovery process to reach that stage and summary judgment is expensive and a distraction to defendants, of course.  In the interim, however, defendants may use the Pelayo court’s reasoning to attack such “all natural” claims at the motion to dismiss stage.

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Two recent district court decisions denying motions to dismiss in food labeling putative class actions demonstrate how plaintiffs’ counsel will use the presence of genetically modified crops as a basis for consumer fraud claims.  

In Parker v. J.M. Smucker Co., No. C 13-0690 SC (N.D. Cal. Aug. 23, 2013), the plaintiff alleged that four types of Crisco cooking oil were deceptively labeled as “all natural” because they are made with genetically modified crops and are chemically processed.  Parker is pending in the Northern District of California, which has become the favorite forum for food labeling class actions. That plaintiff alleged that the four types of cooking oil could not truthfully be called “all natural” because more than 70% of U.S. corn, more than 90% of U.S. soy, and more than 80% of U.S. canola crops are genetically modified.  That court rejected a number of arguments that the defendant raised in its motion to dismiss.  Most notably here, the defendant’s preemption argument failed because the FDA’s only action with respect to bioengineered foods to date is to refuse to require disclosing that a product includes such genetically modified ingredients.  The court rejected the notion that the plaintiff wants to force companies to label products as containing genetically modified ingredients.  Rather, the plaintiff only contended that products with genetically modified ingredients could not be labeled “all natural” without being misleading.  That theory was not preempted. Furthermore, the plaintiff’s California state law claims under that state’s consumer protection statutes could proceed. The court could not conclude as a matter of law at this stage that reasonable consumers would all understand that packaged, non-organic foods may contain bioengineered ingredients and that the only way to avoid such ingredients is to buy certified organic products.  The court found it plausible that a reasonable consumer would read the “all natural” statement and conclude that such a product does not contain bioengineered or chemically-altered ingredients.  

Interestingly, the Parker court also refused to dismiss the plaintiff’s express warranty claims.  Courts had been dismissing such express warranty claims relating to food products regularly, concluding that the Magnuson-Moss Act (or state law analogs) only applied to defects, and labeling on a package cannot support such claims.  In this instance, however, the court concluded that “all natural” is an affirmative claim about the product’s qualities sufficient to support common law express warranty claims.  

Another recent case is In re Frito-Lay North America, Inc. All Natural Litigation, No. 12-MD-2413 (RRM) (RLM) (E.D.N.Y. Aug. 29, 2013).  One item of note, of course, is that the case is not in the Northern District of California despite that court’s popularity with plaintiffs.  In this case, the plaintiffs alleged that a number of Frito-Lay products were deceptively labeled as “all natural” despite containing genetically modified ingredients.  While the court granted the motion to dismiss Frito-Lay’s parent company (PepsiCo, Inc.), it largely allowed the consumer fraud claims to proceed. The primary jurisdiction doctrine did not apply because the FDA has not formally addressed when food may be labeled as “natural.”  Moreover, there is no indication of when the FDA may define that term or whether its definition would shed any light on whether a reasonable consumer is deceived labeling a product “all natural” when it contains bioengineered ingredients.

Preemption did not apply because any guidance from the FDA was non-binding, and several other courts had recently rejected similar preemption arguments regarding the meaning of “natural.” The court also refused to conclude as a matter of law that a reasonable consumer would not conclude that “all natural” means that the product does not contain any genetically modified ingredients. Interestingly, this court dismissed the warranty claims because the plaintiffs did not allege that they provided pre-suit notice as required by the Uniform Commercial Code.  The court, however, refused to rule as a matter of law that “all natural” labeling could not constitute an express, factual description regarding the products’ qualities.

Because the substantial majority of certain American crops use bioengineering, these types of “all natural” claims likely will gain traction with the plaintiffs’ bar. Thus far, courts have not shown any tendency to dismiss these claims early in the litigation.  Unfortunately, food producers likewise may expect similar claims based on statements of products being “pure,” “nothing artificial,” and the like.  California consumer protection laws will continue to be the basis for a number of such claims because of the minimal standing requirements under those laws.  Absent regulatory action by the FDA or legislation from Congressional (which seems unlikely), these cases seem likely to multiply. Thus, the real battles may move from the motion to dismiss stage to class certification and summary judgment. At some point, these plaintiffs must come forward with admissible evidence that these labels are likely to mislead reasonable consumers.  Similarly, they must provide some methodology for measuring the alleged economic impact of the supposed misrepresentations; on that score, the Supreme Court’s 2013 opinion in Comcast Corp. v. Behrend may prove to be a considerable stumbling block for these plaintiffs seeking class certification in federal court.

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A current trend in consumer class action litigation across the country focuses on food and beverage labeling.  Plaintiffs will allege that products labeled as “all natural,” being a good source of a certain nutrient, or having “no artificial ingredients” are deceptive and violate various unfair competition laws.  The United States District Court for the Northern District of California has become a particularly active forum for these claims, earning the nickname, “the food court.”  That court often denies motions to dismiss and grants class certification, largely relying on California’s consumer-friendly False Advertising Law, Unfair Competition Law, and Consumers Legal Remedies Act.  A recent decision on one of the earliest “all natural” class actions, however, emphasizes that defendants can succeed against these claims even after losing the motion to dismiss and motion for class certification.  This decision reminds us that, as with any class action, it is important to prepare the case as if you will take it to trial (and be prepared to try it) and to put the plaintiffs to the test of meeting the essential elements of their claims.

Reis v. AriZona Beverages USA LLC, No. 10-01139 RS (N.D. Cal. Mar. 28, 2013), began in March 2010 and is one of the earlier “all natural” food labeling cases.  Those two plaintiffs alleged that the defendants falsely labeled AriZona Iced Tea as “all natural,” “100 percent natural,” and “natural” even though the products contain high fructose corn syrup and citric acid.  The plaintiffs contended that those ingredients are not natural and that the marketing, advertising, and labeling was deceptive.  The Northern District of California denied a motion to dismiss, denied a motion for summary judgment, and certified a class under Federal Rule of Civil Procedure 23(b)(2) to pursue claims under California law.

Things changed, however, after discovery had closed.  The plaintiffs never disclosed any expert opinion as to whether high fructose corn syrup and citric acid are not “natural,” and they did not provide any evidence as to how to measure restitution or disgorgement under California law.  Thus, the defendants renewed their motion for summary judgment.

The court took a particularly harsh view of plaintiffs’ failure to conduct basic discovery or provide evidence supporting essential elements of the claims.  Central to the claims, of course, is the assertion that high fructose corn syrup and citric acid are not “natural.”  The defendants provided an expert report from a food scientist who described the processes of making those ingredients, and who opined that they are natural.  The defendants also provided declarations from their suppliers reflecting that the high fructose corn syrup supplied to defendants satisfies FDA natural policy, and a certificate of the natural status of their citric acid.

The plaintiffs did not offer any evidence that high fructose corn syrup is artificial.  Instead, they asked the court to take judicial notice of patents issuing for the process of producing that product.  They argued that high fructose corn syrup is not natural as a matter of law because a patented process is necessary to create it.  The court quickly dismissed that argument as it lacked any legal support and was nothing more than an extension of plaintiffs’ contention that a product is artificial if it cannot be grown in soil, plucked from a tree, or found in the ocean.  As the court noted (Slip Op. at 7), “[i]n the face of a motion for summary judgment, rhetoric is no substitute for evidence.”

The plaintiffs truly seemed to discard their “not natural” argument.  Instead, they contended that the labels were misleading under California law because ordinary consumers would not know that “all natural” includes such ingredients derived through complex processes.  The court rejected that argument as well because California law requires that the statements be likely to mislead the public, not merely that they could mislead the public.  To succeed on this type of claim, the plaintiffs should have demonstrated by extrinsic evidence (such as consumer survey evidence) that the challenged statements tend to mislead the public.  Ambiguous deposition testimony from one of the defendant’s executives about the decision to include the “all natural” labeling on the products did not meet the plaintiffs’ burden.  

Equally important, the plaintiffs failed to meet their burden of establishing some way to measure damages.  Under California law, plaintiffs and the class would only be entitled to restitution or disgorgement.  The proper measure of such damages is the difference between what plaintiffs paid for and what they received.  Even under the plaintiffs’ theory, the drinks they purchased had some value—presumably the same value as “correctly” labeled beverages that did not tout being “all natural.”  But the plaintiffs did not even address this essential element of their claims.  “They offer not a scintilla of evidence from which the finder of fact could determine the amount of restitution or disgorgement to which plaintiffs might be entitled if this case were to proceed to trial.”  [Slip Op. at 11]  That failure alone was sufficient to grant summary judgment.    

Last, the court also decertified the Rule 23(b) (2) class that it had certified.  The court concluded that the plaintiffs and their counsel were not adequate representatives for the absent class.  The failure to even attempt the necessary discovery and to fail to address at all in their summary judgment opposition the proper measure of damages indicated they could not protect the class’ interests.

Although Ries is a district court decision, it is significant for a few reasons.  First, it is an important victory for class defendants facing such food labeling claims in the Northern District of California. That court has become a magnet for these types of claims.  Second, the decision emphasizes that class action defendants cannot view class certification as the end of their case.  Class action plaintiffs’ reliance on the vague meaning of “all natural” can work against them on the merits of the claim.  At some point, plaintiffs must prove that the ingredients they challenge truly are not “natural” or not a good source of a nutrient.  While plaintiffs in this district often defeat motions to dismiss through rhetoric (i.e., it is not natural if it can’t be grown or raised), meeting the burden of proof at summary judgment is a different matter altogether.  Defendants should be able to compel plaintiffs to provide, at a minimum, expert testimony to meet this burden.  Of course, expert testimony must satisfy Daubert at the summary judgment stage, so that provides another avenue of attacking the plaintiffs’ case.  As with every case, prepare it from the outset as if you are going to trial.  

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The Eleventh Circuit recently allowed a defendant to enforce the arbitration provision in its consumer agreement despite some missteps that could have led to the opposite result, particularly if this case had been in another circuit.  In re Checking Account Overdraft Litigation, No. 11-14318 (11th Cir. July 6, 2012), involves allegations that a bank charged overdraft fees when accounts had sufficient funds, provided inaccurate information about balances, and failed to inform consumers of changes to policies (leading to more overdraft fees). That named plaintiff brought claims under the North Carolina Unfair Trade Practices Act, breach of contract, and breach of the covenant of good faith and fair dealing.

The bank moved to compel arbitration under it services agreement, which the district court denied.  Following AT&T Mobility, LLC v. Concepcion, 131 S. Ct. 1740 (2011), the Eleventh Circuit remanded for reconsideration.  The district court again refused to compel arbitration.  It held that the bank waived the right to submit the question of arbitrability to the arbitrator after having litigated the matter for more than a year.  It also found the arbitration clause to be unconscionable because the bank could recover its fees from the arbitration, even if it did not prevail, and by withdrawing those fees from the customer’s account without notice.  [Slip op. at 4]  

The Eleventh Circuit affirmed the conclusion that the bank waived its argument that the agreement gave the arbitrator the authority to decide enforceability and arbitrability.  While Rent-A-Center West, Inc. v. Jackson, 130 S. Ct. 2772 (2010), confirms the validity of such delegation provisions, it did not address whether a party may waive them by inconsistent conduct.  By litigating the case for a year without raising this threshold issue of arbitrability, the bank gave ample grounds to the district court to find waiver.  [Id. at 6]

 The fee shifting provision, indeed, allowed the bank to recover its fees and costs incurred from “any dispute involving [the customer’s] account.”  [Id. at 7]  Thus, the bank was entitled to those fees and costs even if a customer prevailed in a dispute.  The bank argued that the provision did not apply to arbitration—it was not in the arbitration section of the agreement, and the arbitration clause specified that AAA rules applied (which have their own costs provisions).  The appellate court also backed the district court’s conclusion that the provision applied to this arbitration and, therefore, could be considered in evaluating unconscionability.  [Id. at 8-9]   

If the fee/cost provision applied, it was not difficult to conclude that it is unconscionable under general principles of contract law.  While the arbitration provision was conspicuous and on the agreement’s first page, the unusual fee shifting provision was not highlighted and was on page 14.  Its plain language allowed the bank to recover fees even if it lost.  [Id. at 18, 20-22]

The last issue was the remedy in light of this unconscionable language.  The agreement contained a clause to sever any unenforceable portion of the arbitration provision.  Likewise, applicable state law allows for severing unconscionable provisions from broader contracts.  While the consumer argued that the bank waived its right to rely on the severance clause, the state law principle still applied.  The Eleventh Circuit held hat severing the fee shifting provision was appropriate because the arbitration clause could function effectively without it.  [Id. at 25-26]  The parties most likely intended the fee shifting provision and arbitration clause to operate separately considering they appeared in separate potions of the agreement and did not reference one another, too. [Id. at 26]  Accordingly, the appellate court reversed and instructed the district court to compel arbitration, though without the fee shifting provision.

Lessons Learned

Had this matter been in the Second or Ninth Circuits, it is quite possible the court would have invalidated the arbitration clause as unconscionable.  Of course, we cannot always choose the forum, so we need to consider how to avoid the risks this case presented.  

First, lawyers for businesses cannot focus only on the arbitration clauses when advising our clients.  We must evaluate how the clause interacts with other provisions or even other documents if they are incorporated by reference, etc.  It seems impossible to believe the bank truly intended to recover fees if it lost at arbitration; the provision more likely covered fees incurred if the bank had to litigate garnishment, child support, or spousal maintenance issues as a third party.  But the uncertainty regarding the fee shifting provision’s scope nearly invalidated the unrelated arbitration clause, which would have opened up the bank to a class action in federal court.  Read and understand every document your client will present to the customer as part of the transaction.  Ensure they do not contain surprises like this fee shifting provision or inconsistent arbitration clauses.  If your client is interested in including a fee shifting provision, include it in the arbitration clause and try to get the client to agree that it only applies if the consumer’s claim is frivolous.  We do not want a court to think the arbitration provision disadvantages the consumer if terms of such risks of fee shifting when compared to litigation.  

Second, do not forgo arguments to enforce portions of the arbitration clause unless you and the client are prepared to waive them forever.  The bank may have had sound reasons to initially forgo arguing that the arbitrator had the power to determine arbitrability, but it tried to change tactics and to embrace that provision too late.  Always look down the road to how your decisions will affect the case in 6 or 12 months.  

Third, evaluate including clauses to sever an unconscionable portion of the overall agreement or the arbitration provision.  Admittedly, this calls for careful consideration.  I do not tolerate the risk of class arbitration well; the lack of appellate review is just too much for a “bet the company” matter if you can avoid it.  I am inclined to include a provision invalidating the entire arbitration agreement if a class action waiver is found to be unenforceable or unconscionable to avoid that risk.  Your client’s agreement, however, may have provisions that can fall by the wayside but still have the overall agreement provide fair and reasonable dispute resolution processes.  Again, think carefully about how to address this issue.  

The bank here may have dodged a bullet.  Its close call gives defense practitioners another reason to suggest that our clients carefully review their consumer agreements so they avoid the risks seen here.                              

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