Plaintiffs have made food labeling class actions a rapidly-growing field in recent years, particularly in the Northern District of California.  They typically rely on California’s regimen of consumer fraud statutes when bringing those claims. California also has Proposition 65, which requires labeling of substances that a state agency concludes may cause cancer or birth defects.  The threshold for labeling is quite low, meaning that even the most mundane items often include—or should include—warnings.  Indeed, plaintiffs recently have used the “lack” of a Proposition 65 label on food products as a basis for consumer fraud and other claims even though the Food and Drug Administration finds no health risk from the relevant ingredient and already dictates labeling requirements regarding the ingredient.  Such lawsuits are irreconcilable with the purpose of federal food labeling requirements.  

Proposition 65 and Its Relationship To 4-MeI in Beverages.      

In the past year, interest has grown in 4-methylimidazole (“4-MeI”) and its possible link to cancer.  4-MeI is formed as a byproduct in some foods and beverages as part of the cooking process. It also forms in trace amounts when manufacturing certain types of caramel coloring frequently used in some dark beverages, such as cola and dark beer.  

At this point, it is useful to address some of the science regarding 4-MeI.  A 2007 study by the National Toxicology Program (“NTP”) seems to be the genesis of this recent concern. That study did not find any increased cancer risk in rats exposed to high doses of 4-MeI but did see an increased rate of lung tumors in mice.  In broad strokes, a human would need to drink approximately 300 cans of soda every day for two years to consume the same amount of 4-MeI given to the mice and rats in the NTP study. The FDA has monitored available data and states on its website: “Based on the available information, FDA has no reason to believe that there is any immediate or short-term danger presented by 4-MeI at the level expected in food from the use of caramel coloring.”  The FDA is currently reviewing “all available data on the safety of 4-MeI,” but “is not recommending that consumers change their diets because of concern about 4-MeI.”

Much of the interest and litigation activity arose after Consumer Reports published an article in February 2014. Consumer Reports noted that its tests showed that customary servings of some popular soft drinks contain 4-MeI above the limits set by the California Office of Health Hazard Assessment (“COHHA”) under Proposition 65. That law requires labeling substances that COHHA concludes have a 1 in 100,000 chance of causing cancer or birth defects. That list of substances is quite long and includes things such as “Salted fish, Chinese-style,” “Oral contraceptives,” and “Alcoholic beverages, when associated with alcohol abuse.” Under the law, substances with more than 29 micrograms (a microgram is one-millionth of a gram) of 4-MeI must have a warning label; this means that COHHA believes that one excess cancer case will arise per 100,000 people exposed to more than 29 micrograms of 4-MeI daily for a lifetime.    

Putative Class Actions Regarding 4-MeI.

Class actions against PepsiCo and Goya Foods soon followed the Consumer Reports article. The article identified those companies’ products as having more than 29 micrograms of 4-MeI per serving. We now have inconsistent rulings in those cases. The most recent decision in the Goya Foods matter, moreover, shows how difficult it can be when a court may not understand the underlying science. 

Riva: There is not Sufficient Exposure to or Toxicity of 4-MeI in These Drinks.

In Riva v. PepsiCo, Inc., No. C-14-2020-EMC (N.D. Cal. Mar. 4, 2015), the court granted a motion to dismiss with prejudice. That decision addressed a putative medical monitoring class action in which the named plaintiffs alleged that consuming Pepsi products caused them to experience an increased risk of bronchioloalveolar cancer. Those plaintiffs cited the NTP report in their amended complaint, so the court analyzed that report closely.  First, even the NTP report concludes that the amounts of 4-MeI ingested from such beverages may not be significant.  Absent sufficient exposure for 4-MeI from consuming Pepsi products, those plaintiffs could not establish a credible risk of cancer from that consumption. The court was also reluctant to apply the NTP study to humans because it only found an increased risk of cancer in mice; that study implied that any effect may be species specific because rats did not experience a similar increase in that type of cancer. As the NTP study recognized, various species absorb, distribute, metabolize, and excrete the substance differently.  Of course, it was also difficult to conclude that humans would be exposed to 4-MeI at the same level as the mice in the NTP study (i.e., approximately 300 cans of soda per day). Moreover, because so many different products contain 4-MeI, those plaintiffs did not establish that consuming Pepsi products (as opposed to consuming other products) would have been the source of any alleged increased risk of that cancer.

Stated more simply, what does Riva mean? That court concluded that the study the plaintiffs relied on does not establish a significant risk of increased cancer from normal human consumption of beverages with 4-MeI. As we are about to see, however, a judge in the Southern District of California recently concluded that it was plausible that a different manufacturer misled consumers by not including a Proposition 65 warning on its beverages. So we have one judge finding that no increased health risk exists that would warrant medical monitoring but a second judge ruling that it may amount to consumer fraud to fail to warn consumers of this same “risk.”  

Cortina: Manufacturers may Need to Include Proposition 65 Warnings on Products With 4-MeI.

In Cortina v. Goya Foods, Inc., No. 14-CV-169-L(NLS) (S.D. Cal. Mar. 19, 2015), the named plaintiffs alleged several California consumer fraud claims because the defendant did not disclose “material facts about the levels of 4-MeI” in its beverages.  In essence, those plaintiffs argued that the beverages must contain a Proposition 65 notice because the caramel coloring adds more than 29 micrograms of 4-MeI to the products. That court rejected a federal preemption argument under the Nutrition Labeling and Education Act of 1990.  That federal statute expressly preempts state laws that would impose labeling obligations not imposed by the FDA.  Undeniably, federal law requires products with artificial flavoring, artificial coloring, or chemical preservatives to state that fact on the labels.  21 U.S.C. § 343(k).  The defendant argued that requiring additional labeling regarding 4-MeI (which arises from caramel coloring) would amount to an additional requirement beyond what federal law requires.  The court disagreed, reasoning that the allegations had nothing to do with caramel coloring. “Plaintiffs’ claims are based on a theory of omission—that defendant’s products failed to disclose the presence of substances known to the state to cause cancer.”  Apparently, under this reasoning, the state could compel a manufacturer to include a Proposition 65 warning about 4-MeI even though (1) federal law already dictates what a label must state regarding artificial coloring (the source of 4-MeI) and (2) the FDA states on its website that there is no reason to believe of any health risk from consuming foods with 4-MeI.  

The Cortina court also refused to defer to the FDA under the primary jurisdiction doctrine.  That is a prudential doctrine under which courts will await a regulatory agency’s actions regarding subject matter within the agency’s purview.  Such deference seems warranted here because the FDA is reviewing available data regarding the safety of 4-MeI to determine if it should take additional action.  Thus, this is not a situation of a defendant arguing hypothetically that a regulatory agency may look at the issue; quite the contrary, the FDA indicates it is actively doing so. Nonetheless, the court will not wait for the FDA’s ongoing review to conclude. Thus, the putative class action will plow forward even though the FDA may soon state that there remains no reason to believe a viable health risk exists.    

The Cortina court also concluded that the plaintiffs’ claims were plausible even though the FDA states that there is no reason to believe there is immediate or sort-term danger to consumers.  The court latched on to the FDA’s statement that it reached that conclusion “[b]ased on the available information . . . .”  The court inferred that meant some limit on the usefulness of the data.  Indeed, the court concluded that “it appears that the FDA is saying that it does not know whether, and in what amounts, 4-MeI presents a danger, but is looking into the situation.” That is an untenable interpretation of the FDA’s comments.  If that standard were sufficient, any plaintiff could always argue that one more test or one different analysis somehow may reach a conclusion different from what all existing analyses have reached. It will always be possible to suggest that some undefined additional testing should occur. It is not clear on what the FDA could base its statement other than “the available information.” It certainly could not base its conclusion on unavailable information.

These Cases Help Show That Proposition 65 Labeling Of Food Or Beverage Is Untenable.

At this point, we have one federal court in California holding that the science does not suggest any increased risk of cancer to humans from consuming beverages with 4-MeI in anticipated amounts.  Because of that lack of risk, there is no basis to order medical monitoring.  On the other hand, a different court in California concluded that it may amount to consumer fraud to fail to warn consumers about that same substance.

To be sure, Riva and Cortina present different legal theories—medical monitoring and consumer fraud, respectively. But the underlying premise is fundamentally the same.  In Riva, there is no need to test for cancer because 4-MeI does not lead to an increased risk of the disease.  In Cortina, however, it is deceptive to fail to warn consumers that beverages contain 4-MeI because that substance ostensibly is linked to an increase risk of cancer. And in both settings, the FDA knows that caramel coloring results in products containing 4-MeI; nonetheless, it permits using that coloring and only requires that the label note the use of “artificial coloring” in those situations.          

This morass points to the difficulties that Proposition 65 and questionable science create.  The standard for requiring Proposition 65 labeling is quite low—one more cancer in a population of 100,000 over a lifetime of exposure.  Put that into perspective. Using the most recent data available from the CDC (2011), the United States saw approximately 67 instances of lung cancer per 100,000 people.  Under Proposition 65, a manufacturer must label a substance that, with a lifetime of exposure, theoretically leads to 68 instances of lung cancer per 100,000 people—a 1.5 percent increase over the expected 67 instances.

Moreover, the science underlying these determinations is not always sound or certainly is questionable in terms of extrapolating to ordinary human exposure. Would anyone really consume 300 cans of soda a day for two years?  That is the approximate exposure required to replicate the 2007 NTP study. We know that “‘the dose makes the poison’; this implies that all chemical agents are intrinsically hazardous—whether they cause harm is only a question of dose.”  Bernard D. Goldstein and Mary Sue Henifin, Reference Guide on Toxicology, in Federal Judicial Center, REFERENCE MANUAL ON SCIENTIFIC EVIDENCE 636 (3d ed. 2011). Nonetheless, the reasonableness of the dose doesn’t seem to enter the calculus for these claims.  Even the NTP study only found increased incidence of cancer in mice; rats did not show such results. If such differences exist between those species, how can we reliably extrapolate to humans?

This is not an issue the FDA is ignoring. Rather than allow lawyer-driven litigation to proceed, we would be better served to leave these issues to that regulatory body and to real science.  

James D. Smith is a partner in the Phoenix office of Bryan Cave LLP.      

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The Ninth Circuit recently published an opinion in consolidated antitrust class actions regarding DVD rentals and sales.  In re Online DVD-Rental Antitrust Litig., No. 11-18034 (9th Cir. Feb. 27, 2015).  The first half of the opinion affirms summary judgment for the defendants, finding that the plaintiffs did not raise triable issues of fact as to whether they suffered antitrust injuries.  It is a well-reasoned opinion applying principles of antitrust injury in a straightforward manner.  This article, however, focuses on the second half of the opinion, which addresses taxable costs in federal court.  In that second part of the opinion, the Ninth Circuit spent approximately 20 pages addressing taxable costs, primarily in the context of e-discovery.  While the topic may seem mundane at first glance, the opinion provides very useful information to practitioners who want to seek certain e-discovery expenses as taxable costs in litigation.

Defense counsel and their clients don’t often have a way to recover substantial litigation expenses, particularly in class actions.  Plaintiffs often use e-discovery as leverage in large cases, knowing the expenses are substantial but that individual named class representatives don’t face a similar cost.  Thus, e-discovery often is a ratchet that only increases costs in one direction.  In DVD-Rental, Netflix sought and originally obtained an award of more than $700,000 in taxable costs.  While the Ninth Circuit reduced that total award and remanded for additional evaluation by the district court, it confirmed that successful defendants may recover certain e-discovery costs.     

Back To Basics: 28 U.S.C. § 1920 And Recovering Costs For Copies Necessarily Obtained For Use In A Case.           

Before diving too deeply into the opinion, I want to review taxable costs under federal law.  Those are creatures of statute, and the statute is fairly restrictive.  As e-discovery has become more prevalent and expensive, however, parties have looked to recover some of the expenses of e-discovery by relying on this category of allowable costs: “Fees for exemplification and the costs of making copies of any materials where the copies are necessarily obtained for use in a case.”  28 U.S.C. § 1920(4) (emphasis added).  That provision originally encompassed photocopies, so courts often consider whether e-discovery activities are analogous to photocopying hardcopy materials when evaluating fee requests.  And DVD-Rental showed the Ninth Circuit’s focus on the highlighted clause in the statute.     

DVD-Rental emphasizes many times that parties seeking e-discovery expenses as costs must provide specific information about the services the e-discovery vendor provided to establish those services fit within the statute.  The descriptions of tasks and services must have “sufficient specificity, particularity, and clarity” to establish that data collected or processed were “necessarily obtained for use in the case.”  [Slip Op. at 27]  In broad strokes, this means that invoices or declarations from an e-discovery vendor with generic descriptions like “data collection,” “data processing,” or “electronic discovery services” will not suffice.  Just as lawyers decades ago had to abandon invoices with generic statements such as “legal services rendered” and a dollar total, e-discovery vendors will need to provide sufficient detail if parties want to recover those expenses as taxable costs. 

Certain Costs Associated Exclusively With Modern Discovery—Like Optical Character Recognition—May Be Recoverable.             

The court’s first tip of the hat to modern discovery’s complexities is acknowledging that “copying” data isn’t the same as photocopying paper.  Current practice may involve optical character recognition (“OCR”) (making material text-searchable), providing metadata, and converting materials to non-editable formats (so a reviewer can’t alter a produced email, for example).  The parties may agree to such production, a trial court may order it, or one party may demand it.  “When copies are made in a fashion necessary to comply with obligations such as these, costs are taxable so long as the copies are also ‘necessarily obtained for use in the case.’”  [Slip Op. at 27]  While it is encouraging to see the court recognize that OCR, sequentially numbering data, or providing metadata are recoverable costs in the modern era, don’t leave it to chance.  Memorialize an agreement with your opponent about producing data in such formats to enhance your ability to recover the costs.   

Specific Expenses The Court Addressed. 

            The Vendor’s Expertise Typically is not Recoverable.

Often, an e-discovery vendor does much more than mechanically gather and process data.  The vendor may provide guidance and expertise about the best ways to harvest data, de-duplicate data, recreate archived data, etc.  A party won’t be able to recover that type of “intellectual effort involved in [data] production” under § 1920(4), though.  [See Slip Op. at 36 (quotations omitted)]  Work with your vendor to ensure that its invoices segregate this type of intellectual effort from the more mechanical (and recoverable) aspects of data production.  Absent that type of specificity, the court likely will deny the request.     

Creating a Database to Review Data may not be Recoverable.

Netflix and its vendor indicated that uploading documents was necessary to create a new database so Netflix’s counsel could select documents for production.  That included reviewing for privilege.  The Ninth Circuit believes that reflected the process that Netflix and its vendor wanted to use; it did not indicate that reviewing an uploaded copy in a new database was necessary for use in the case.

Admittedly, this seems like a very narrow view.  Even in the days of hardcopy-only review, no one would want the legal team handling the original documents—the risk of tearing pages, spilling coffee, or misplacing papers was too great.  You made a Bates-numbered set for the team to work with.  Nonetheless, uploading data for review likely isn’t recoverable in the Ninth Circuit.   

            Filtering or “Keywording” may not be Recoverable.

The next challenged expense related to “keywording” activities.  That is the process of filtering data (e.g., emails, Word documents) to identify those containing key words; those without the key words typically are deemed non-responsive.  The court concluded that was akin to a lawyer reviewing documents to identify which were responsive to discovery requests.  Accordingly, using automated software filtering processes to identify the documents to produce was not a taxable cost. 

            Enhanced Processing for Production Sets is Recoverable.         

The next cost was a flat $10,000 charge for copying nearly 80 gigabytes of data—the equivalent of tens of millions of pages of documents—for production (not merely review).  Some of those tasks would be recoverable, such as OCR, conversion to TIFF, and other activities essential to making copies that were necessary to the case.  Anything beyond those activities in the $10,000 charge, however, could not be recovered.

The Key Takeaways For Practitioners.       

The Ninth Circuit gave clear guidance that costs attributable to OCR, converting documents to TIFF, and “endorsing” activities—all of which the plaintiffs had requested—were recoverable.  “Endorsing” activities include tasks such as sequentially numbering every image produced (also known as “Bates numbering”).  This especially is the case when the parties agree to such production formats, the trial court orders them, or a party’s requests for production demand it.  Other points include:

Your vendor must provide specific task descriptions on its invoices.  What exactly did the vendor do and how do we know that expense related to copies “necessarily obtained for use in the case”?  Task-based work descriptions may be necessary. 

Your vendor should track what proportion of data collected you actually produced.  For example, if you produced 27 gigabytes of 100 gigabytes collected, you have a stronger case for recovering 27% of bulk costs.  You should still be able to recover all of your OCR, etc., costs associated with the 27 gigabytes you produced in all events.      


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

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Recent food labeling class actions suggest that plaintiffs’ counsel are broadening the scope of these types of claims.  Of course, we are familiar with the more typical food labeling class actions, such as those challenging “all natural” labels or disputing whether a food product complies with federal law when noting it has “no added sugar.” Those traditional claims focus on the ingredients.  The recent complaints mentioned in this article, however, suggest that class counsel may now focus on subjective statements regarding the processes used to make foods or beverages.

Social Responsibility Statements.

Jablonowski v. Chiquita Brands, Inc., No. 3:15-cv-00262 (S.D. Cal.), is a complaint filed by the well-known class action firm of Hagens Berman Sobol Shapiro LLP.  It alleges that Chiquita falsely advertises on its website that it requires ecologically friendly farming practices.  In “truth,” a Guatemalan company from which Chiquita buys hundreds of millions of pounds of bananas each year allegedly has horrible environmental practices.  That complaint largely relies on research by an environmental organization called Water & Sanitation Health Inc., which apparently traveled to Guatemala to observe and document practices there.  Notably, that complaint does not base its allegations on labeling statements actually found on the bananas.  Rather, it contends that the familiar Chiquita blue label indicates that the bananas meet Chiquita’s “strict standards,” which implicitly includes environmental responsibility.  According to the complaint, Chiquita knows that the Guatemalan company it buys bananas from does not adhere to sound environmental practices.  The complaint also points to statements on Chiquita’s website about environmental responsibility and contends that the named plaintiff relied on those statements.

Some observations come to mind after reviewing this complaint.  First, although Hagens Berman certainly is a legitimate player in the class action field, it must recognize this case has little chance of being certified as a class action.  The Chiquita blue label does not say anything about environmental practices.  Moreover, even the complaint admits that the named plaintiff had to visit Chiquita’s website to read about its environmental commitment.  Thus, it is impossible to suggest that every purchaser was exposed to the “misleading” statements merely by reviewing the product label.  Instead, it would require the added step—wholly removed from buying the product—of visiting the website and reading information about environmental commitment.  

Other difficulties should include the near impossibility of establishing injury/damages.  This plaintiff should have to prove that the Chiquita label misled a substantial percentage of consumers about environmental practices and that the misrepresentation somehow led to a price premium for Chiquita bananas.  This is in contrast to any price premium attributable to advertising or brand recognition. Last, the notion that the blue label signifies that the produce complies with Chiquita’s “strict standards” really amounts to little more than puffery, which typically is not actionable.

Having said this, clients should be aware that the plaintiffs’ class action bar is looking at these types of environmental responsibility or social responsibility statements as targets for consumer class actions.  While this particular suit seems more akin to a publicity stunt than litigation that plaintiffs’ counsel hopes will produce monetary returns, it almost invariably will not be the last claim based on social responsibility statements.  If your clients’ product labels contain such statements, you may want to examine the bases for those statements with your clients.  

Craftsmanship Statements.

Another recent development is litigation regarding the “handmade” nature of various spirits. The most recent case seems to be Welk v. Beam Suntory Import Co., No. 15-cv-0328 (S.D. Cal.).  That plaintiff filed his putative class action on February 17, but similar cases challenging the “handmade” nature of Maker’s Mark bourbon and Tito’s vodka emerged toward the end of 2014.  These lawsuits allege that the manufacturers deceived the public because their products are made using machines, as opposed to entirely by hand.  These claims are more traditional than the Chiquita banana lawsuit because they rely on statements on each label of the product. They also point to undefined phrases (e.g., “handmade” or “hand crafted”), just like the “all natural” litigation. Like the banana litigation, however, these liquor claims point to the process to make the product rather than the ingredients. In the Chiquita case, the issue was whether the process was environmentally friendly. Here, it is whether the process is “handmade.”    

As in more traditional food labeling class actions, these “handmade” plaintiffs should face some serious obstacles. First, establishing damages or any way to measure them seems quite difficult. They should need to establish that Jim Beam is a more expensive bourbon than a comparable brand because of the “handmade” statement. As anyone who has purchased liquor can attest, however, product pricing varies greatly based on advertising, ingredients, brand reputation, and a host of other factors.  It should be very difficult to identify a sound methodology to isolate any supposed price premium attributable to the “handmade” statement (which is not prominent on the label) from other factors. We have also seen the implicit ascertainability requirement play a more prominent role in food/beverage labeling class actions in California courts lately; it should likewise be a valid defense to these latest processing claims.    

A second difficulty is establishing that the “handmade” statement misleads a substantial portion of the consuming public. Even more so than with “all natural” label allegations, trying to establish that a named plaintiff’s understanding of “handmade” accurately represents the general public’s understanding seems nearly impossible. Do consumers purchasing a mass-market beverage truly believe that only human hands were involved in the process?  Facing these difficulties, I suspect these plaintiffs will try to settle early for nuisance values and, perhaps, labeling changes.  

Despite the difficulties that these latest claims face, they also provide a reason for clients and their counsel to reexamine labels for statements regarding the processes used in making products. While many of the defenses in more traditional food labeling class actions will apply to these latest claims, the defendants should have more arrows in their quivers to attack these allegations.

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

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More Obstacles for Food Labeling Class Actions

Posted on December 17, 2014 04:14 by James D. Smith

The Ninth Circuit is poised to address the implicit “ascertainability” requirement for class actions in Jones v. ConAgra Foods, Inc., No 14-16327 (9th Cir.). Briefing is underway in that matter in which the district court denied class certification when it concluded that the class wasn’t ascertainable and that the plaintiffs’ proposed damages model wasn’t methodologically sound. I wrote about that district court ruling in a post on June 26, 2014.  

The Jones appeal may provide some benefit to other defendants as a basis to stay other food labeling class actions.  In Gustavson v. Mars, Inc., No. 13-cv-04537-LHK (N.D. Cal. Dec. 10, 2014), Judge Lucy Koh stayed proceedings pending a decision in Jones: “The appellant in Jones has briefed issues concerning ascertainability and damages that could be material to the Court’s disposition of any class certification motion in the instant action.”  Judge Koh concluded that any decision in Jones likely will lead to additional briefing and possibly to more discovery regarding class certification in Gustavson. 

By itself, the stay is good news for food labeling defendants hoping for clarity regarding the ascertainability standard in the Ninth Circuit and the types of damages models that will or won’t suffice in food labeling class actions.  Judge Koh’s stay order is also noteworthy because she issued class certification decisions arguably at odds with the Jones district court decision at nearly the same time.  In Werdebaugh v. Blue Diamond Growers, No. 12-cv-2724-LHK (N.D. Cal. May 23, 2014), and Brazil v. Dole Packaged Foods, LLC, No. 12-CV-01831-LHK (N.D. Cal. May 30, 2014),  Judge Koh adopted fairly lenient standards for ascertainability and accepted the regression analysis methodology of the plaintiffs’ economist, Dr. Oral Capps—who is also the plaintiff’s expert in Gustavson.  In Jones, the district court immediately rejected the same Dr. Capps’ methodology.  Even Judge Koh later rejected Dr. Capps’ methodology when she granted summary judgment for the Brazil defendant on December 8, 2014.  And she decertified the class relying on Dr. Capps’ opinions in Werdebaugh on December 15.

It is too soon to conclude that regression analysis is finished as a damages model in food labeling class actions in the Northern District of California, but that methodology is far from proving itself as viable.  While some judges seemed willing to gloss over myriad problems with regression analyses in general—and Dr. Capps’ opinions in particular—in the early stages of food labeling class actions, the problems proved insurmountable as the cases continued to summary judgment or as more discovery of Dr. Capps’ methodology occurred.  We now have a nice body of case law from the Northern District raising questions about the viability of these classes and the plaintiffs’ favored expert witness.  Every defendant will want to move to stay proceedings while Ninth Circuit addresses Jones.  Based on the number of district court judges finding flaws in these classes, it seems like those jurists may welcome the opportunity to put the brakes on expanding the district’s reputation as the “food court.”  

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


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Defendants often raise ascertainability when opposing class certification in food, beverage, and personal care products labeling litigation.  District courts in the Ninth Circuit, however, sometimes reach different conclusions regarding a putative class representative’s burden when it comes to establishing ascertainability.  Indeed, the subject has led to divergent decisions in the Northern District of California (often called “the food court”), with judges in that district commenting on the intra-district split.  Two recent decisions, however, bolster defendants’ arguments that ascertainability in contested class certification proceedings (as opposed to settlement classes) is a significant hurdle for such plaintiffs to overcome.  

Martin v. Pacific Parking Systems Inc., 2014 U.S. App. LEXIS 14200 (9th Cir. July 25, 2014), didn’t address consumer product labeling, but it addressed ascertainability.  The Ninth Circuit affirmed the denial of class certification of claims under the Fair and Accurate Credit Reporting Act.  While this is an unpublished decision and short on analysis, it may offer some insight regarding the Ninth Circuit’s leanings regarding ascertainability.  That district court concluded that the putative class was not ascertainable because there was no reasonably efficient way to determine which of the possible class members used a personal credit or debit card, rather than a business card.  That status was important because the claims purported to exclude anyone who used a business card for a transaction.  Id. at *2-3.  The Ninth Circuit agreed with the district court that the plaintiff “has not demonstrated that it would be administratively feasible to determine which individuals used personal, and not business, credit cards to purchase parking . . . .”  Id. at *3.  

Notably, the Ninth Circuit also included a footnote addressing “self-identification” and ascertainability.  We often see plaintiffs in product labeling class actions argue that self-identification is a viable way to identify class members—just have consumers provide affidavits attesting that they bought some quantity of the product during the class period.  But in Martin, the panel suggested that such efforts would not work in a contested class action:

Self-identification may suffice for some settlement-only classes.  But those classes need not satisfy Rule 23(b)(3)(D)’s “manageability” requirement.  “Confronted with a request for settlement-only class certification, a district court need not inquire whether the case, if tried, would present intractable management problems, see Fed. Rule Civ. Proc. 23(b)(3)(D), for the proposal is that there be no trial.”  Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 620 (1997).  

Id. at *4 n.3.  This footnote could be the beginning of the end for plaintiffs’ self-identification arguments in consumer class actions.    

The other recent decision is In re Clorox Consumer Litigation, No. 12-00280-SC (N.D. Cal. July 28, 2014).  Those plaintiffs challenged whether labeling on Fresh Step cat litter misleadingly suggested that product more effectively eliminated odors than products that do not contain carbon.  Several problems existed with the proposed class, but the district court began with its ascertainability analysis.  Judge Samuel Conti noted a split among courts in the Northern District of California regarding ascertainability, but he explained that he has followed Carrera v. Bayer Corp., 727 F.3d 300, 306 (3d Cir. 2013), in other consumer class actions.  In this instance, the plaintiffs did not propose any method for determining who purchased Fresh Step during the class period.  For example, none of the named plaintiffs kept their receipts.  Moreover, even the named plaintiffs had difficulty remembering whether they bought Fresh Step, what sizes, types, or quantities.  That type of uncertainty made it impossible to rely on affidavits from consumers (i.e., self-identification).  

The plaintiffs argued that various retailers’ records could identify class members.  Even those data, however, were incomplete and often depended on a customer participating in the retailer’s loyalty program.  In sum, those types of retailer programs would capture, at best, a tiny fraction of all transactions involving a specific product.  

While the thrust of the Clorox decision is ascertainability, Judge Conti also explained that predominance was lacking.  Fresh Step labeling varied considerably during the proposed class period—not all included statements about the product’s superiority to other cat litter without carbon—making it impossible to conclude that all or even most class members saw the representations.  While the plaintiffs pointed to “deceptive” television commercials, those commercials only ran for a limited part of the class period, so it was impossible to presume that most class members saw or relied on the advertising.  In addition, Clorox pointed to survey evidence indicating that only 11 percent of customers who read packaging at all even looked at the back panel where the allegedly misleading statements appeared.  The putative class also did not satisfy the superiority requirement, largely for the same reasons that ascertainability and predominance were lacking.

Whenever possible, defendants will want to cite Martin in the Ninth Circuit to explain why self-identification does not solve the ascertainability issues that permeate food labeling class actions. In addition, Clorox is another instance of a judge in the Northern District of California embracing a meaningful ascertainability requirement.  Clorox also provides a solid analysis of the lack of predominance in consumer product labeling class actions based on variations in packaging, the short duration of certain advertising programs, and survey data regarding consumer behavior.  

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

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Three recent decisions from two judges in the Northern District of California provide us with a lot of information regarding where food labeling cases are headed in terms of class certification strategy. Notably, two of the decisions are from Judge Lucy Koh and granted class certification.  Of course, these losses from the defense perspective are disappointing, but it is important to understand them in order to develop effective defense strategies. The third decision is from Judge Charles Breyer and denied class certification. That opinion shows us strategies that work from the defense perspective. In addition, however, the opinion is also interesting because Judge Breyer recognizes the Northern District of California’s status as the epicenter of these cases and because he often expressly acknowledges that his reasoning differs from Judge Koh’s.  So bear with me as we go through three important class certification decisions before identifying some best practices for defendants in these types of claims.

Two Losses for the Defense, but Important Lessons to Learn.

In Werdebaugh v. Blue Diamond Growers, No. 12-CV-2724-LHK (N.D. Cal. May 23, 2014), Judge Koh granted class certification when the plaintiff alleged that he purchased the defendant’s almond milk that allegedly had misleading labels.  That plaintiff contended that using “evaporated cane juice” rather than “sugar” on the label was deceptive and that the phrase “all natural” was deceptive because the products contain potassium citrate.  I won’t address every aspect of this decision but will focus on the ones of most interest to defendants.

That plaintiff had standing to challenge those aspects of the labels because he contended he would not have purchased the almond milk had he known about the misbranding. He contended that the “all natural” label was a substantial reason why he bought the product as well. As to “evaporated cane juice,” Judge Koh distinguished to earlier decisions from the Northern District of California and found that it was plausible for this plaintiff to contend that he did not understand what “evaporated cane juice” meant when he purchased the products. At that point, the court turned to the requirements of Rule 23.

In a minor victory for the defendants, the court refused to certify and injunctive relief class under Rule 23(b)(2). That plaintiff did not allege or even attempt to establish that he intends or wants to purchase these almond milk products in the future. That meant there was no likelihood of future injury to him that could be redressed through injunctive relief.

Turning to the requirements of Rule 23(a), Judge Koh rejected the defendant’s argument that the class was not ascertainable. She concluded that a class is ascertainable so long as it is defined with “objective criteria” and if it is administratively feasible to determine whether a particular member is in the class. Class membership hinged on objective criteria, i.e., purchasing the almond milk products during the class period.  While other courts have held that a class is not ascertainable when there are no corporate records to identify product purchasers or when the purchases are so small that consumers are not likely to have records of them, Judge Koh rejected that approach. She relied on the facts that all purchasers of the almond milk products are within the class definition and all cartons of the products or the alleged mislabeling.  Moreover, “[t]he class period here is also far shorter than in [an earlier case], and inviting plaintiffs to submit affidavits attesting to their belief that they have purchased a carton of Blue Diamond almond milk in the past several years is much likelier to elicit reliable affidavits then asking potential class members to recall whether they had smoked 146,000 of a certain cigarette over the course of several decades.”  [Slip Op. at 20]  

As to Rule 23(b)(3), the court refused to certify a nationwide class because it concluded that the law of each consumer’s state of residence would apply to his or her claims. Thus, it limited the class to California consumers. 

A substantial issue was whether the plaintiff presented a damages model under California consumer protection statutes that is consistent with his liability case. The plaintiff relied on the testimony of an economist, Dr. Oral Capps, to present three damages models. The court rejected two of them. First, a full refund model was not appropriate because consumers received benefits from the almond milk even if it was mislabeled. Second, the court rejected a price premium model in which Dr. Capps tried to compare the price of the Blue Diamond products to allegedly comparable products that did not have the challenged label statements. He planned to attribute the entire price difference between the Blue Diamond products and the “comparable” products to the labeling. That theory also ignored, however, that the “comparable” product also contained potassium citrate, so it was not an appropriate comparator.  Last, this price premium theory also could not account for any other differences between the Blue Diamond products and the “comparable” products that may lead consumers to pay different prices (e.g., brand loyalty, generic vs. brand name).

The court, however, accepted Dr. Capps’ third theory, a regression model. He contended that he could isolate the relationship between a dependent variable (i.e., the price of Blue Diamond almond milk) and other variables (e.g., the alleged mislabeling). Plaintiff’s expert contended he could control for regional price differences, and Blue Diamond did not introduce any evidence about how regional price differences would affect regional price changes.  And it is that price change that the regression analysis purports to measure. That is, what price movement (if any) occurred after Blue Diamond stopped using the challenged labels? Under this theory, by ostensibly controlling for all other factors that could account for the change, all of the resulting change would be attributable to the labeling.

The court did not require the plaintiff to present a regression analysis that actually works at the class certification stage rather, it only required whether he established a workable model. Indeed, Dr. Capps had yet to run his regression analysis at the time of class certification. While two other courts had excluded Dr. Capps’ testimony in prior cases, Judge Koh found it important that Blue Diamond did not question the tool of regression analysis itself.

The second decision from Judge Koh is Brazil v. Dole Packaged Foods, LLC, No. 12-CV-01831-LHK (N.D. Cal. May 30, 2014).  That plaintiff challenged the “all natural” labeling on 10 packaged fruit products.  Each product contains both ascorbic acid (a naturally occurring form of Vitamin C) and citric acid (a natural preservative derived from citrus).  Coming only a week after the Werdebaugh class certification decision, it is not surprising that the analysis in Brazil is similar.  Once again, Judge Koh rejected the defendant’s ascertainability argument. Because the alleged misrepresentations appeared on the product packaging, there was no concern that the class includes individuals not exposed to the alleged misrepresentations. She also rejected the argument that the lack of company records identifying product purchasers affected ascertainability.  Judge Koh seemed satisfied that every purchaser received the same alleged misrepresentations and the class was limited to only 10 products in a specified timeframe.

The court certified a nationwide injunctive relief class under Rule 23(b)(2), rejecting the notion that the plaintiff’s damages were not incidental to the injunctive or declaratory relief requested. And although this plaintiff said he stopped buying Dole products months ago, he said he would remain willing to buy them now. That sufficed under Judge Koh’s analysis.

As to the Rule 23(b)(3) class, the court again refused to certify a nationwide class based on choice of law issues. These plaintiffs also used Dr. Capps as their damages expert, so the court once again rejected a full refund model and price premium model. The court accepted the regression analysis, however, just as it had in the earlier case. Dole’s position had another wrinkle because it had refused to produce certain economic data, contending that was not needed for class certification. Judge Koh viewed that as a bit of gamesmanship. She would not allow Dole to challenge Dr. Capps’ failure to actually create a working regression model when Dole had refused to provide the economic data he contended he needed for that process.

A Defense Victory Quickly Follows.

Soon after Judge Koh’s class certification decisions, Judge Breyer denied class certification in Jones v. ConAgra Foods, Inc., No. C 12-01633 CRB (N.D. Cal. June 13, 2014).  As he noted, “[t]his district has seen a flood of such cases, in which plaintiffs have challenged, with varying degrees of success, marketing claims on everything from iced tea to nutrition bars. This Order does not—and, given their multiformity, could not—speak to the merits of all such cases.”  [Slip Op. at 1 (footnote omitted)]  So it seems Judge Breyer may not be impressed with Northern District of California’s “food court” moniker.

These plaintiffs challenged a variety of Hunt’s tomato products labeled as “100% Natural” and “free of artificial ingredients & preservatives” because they contained citric acid and/or calcium chloride. They also challenged PAM cooking spray labeled as “100% natural” because that spray contains a propellant that is not natural. Last, they challenged a variety of Swiss Miss cocoa products labeled as being a source of antioxidants.

The opinion nicely analyzes standing and typicality, exploring different plaintiffs’ deposition testimony regarding why they bought certain products, what they read on the labels, what was important to them, and what they admitted was not deceptive. I want to focus on different portions of the decision in this article, however, so I will not discuss standing and typicality in detail.

Judge Breyer uses a more stringent ascertainability standard than Judge Koh. The plaintiffs proposed having class members identify products they purchased with photographs or affidavits/declarations. The court found it infeasible to believe that consumers would recall such purchases accurately, particularly considering that literally dozens of varieties of different can sizes with different ingredients existed during the class period.  While this is a useful conclusion for defendants, plaintiffs will try to distinguish this case by noting that the products’ ingredients and labels varied during the class period. 

Judge Breyer continued rejecting class certification arguments with his Rule 23(b)(2) analysis. Each of the named plaintiffs disavowed any intent to buy the challenged products in the future. That was fatal to any requested injunctive relief.

Moving to Rule 23(b)(3) predominance was lacking because of different labeling statements and, more importantly, the plaintiffs’ failure to show uniform understandings regarding the challenged labels. In this instance, the plaintiffs used an expert who opined that the labeling statements were material. That expert, however, did not survey consumers and relied on circular reasoning. That is, she opined that the statements were material because defendants would not have included them on the labels if they were not. That did not suffice for the court. The lack of any established meaning of the word “natural” when used on food labeling truly undermined these claims. Plaintiffs’ expert did them no favors by failing to survey consumers and by admitting that some consumers do not read labels, do not care about labeling statements, and would purchase products regardless of their labels.

In the next collision with Judge Koh’s decisions, Judge Breyer rejected the same Dr. Capps’ regression analysis as Judge Koh had accepted. He believed there simply was no way to control all of the variables to conclude that the price difference was attributable to the labeling. Moreover, Dr. Capps could not identify an adequate compared for product. And, absent an accurate way to identify what each class member paid, no damages analysis could succeed. In essence, Judge Breyer would not accept the notion that Dr. Capps theoretically could create a feasible damages model using regression analysis. Rather, he wanted adequate proof that Dr. Capps had done so at this stage.

How These Decisions Guide Defendants’ Strategy. 

Using Experts.

Neither the Werdebaugh nor Brazil decisions granting class certification mentions if the defendants presented survey evidence about consumers’ understandings of “all natural,” either generally or relating to the challenged ingredients specifically (which all are naturally occurring).  These food labeling claims typically rely on California consumer protection laws.  In broad strokes, those laws require that the label be likely to mislead the reasonable consumer.  The difficulty for judges and the parties is that phrases such as “all natural” do not have a set definition.   Class action plaintiffs will use this vagueness to argue that the potential for misleading consumers is a question of fact for the jury to resolve.  Defendants in these cases will benefit from hiring experts to survey consumers to determine their understandings of the phrases at issue.  If substantial percentages of consumers do not share the plaintiff’s understanding of a phrase or disagree with it, it should be untenable to contend that the a cohesive, class-wide understanding of the phrase exists.  The label will not deceive the hypothetical “reasonable consumer.”  Such surveys may also help establish that consumers bought the products for different reasons (e.g., brand loyalty, had a coupon, wanted to try something new).  

While parties to these cases are using economists and other damages experts, retail grocery pricing experts/consultants may be useful, too.  Such experts could be outside consultants who advise retailers on pricing strategy or former pricing analysts for retailers.  Such experts may help establish that too many independent variables affect retail pricing for a regression analysis to work.  In addition to factors mentioned in the cases discussed above, several other variables exist.  For example, an individual store may need to reduce the price of a certain product due to inventory control issues during a particular time frame.  Similarly, certain consumers may pay different prices for the same product based on membership in a retailer’s “club card” program.  In fact, those types of discounts may result in the challenged product having a lower price than the comparator product at a specified time.  Those types of discounts may be the motivating factor for consumers as well.  That is, if they can purchase the challenged product at a lower price due to a “club card” membership, they may have done so.  Those types of consumers would not be misled by any labeling.

Another expert to consider is a food scientist.  This type of expert would explain that ingredients such as ascorbic acid and citric acid truly are natural ingredients, whether created in a laboratory or in nature.  There is no chemical difference.  Similarly, she can explain that research confirms the safety of genetically-modified organisms (another frequent target of such “all natural” litigation).  In theory, this type of evidence arguably relates to the merits and not class certification.  But you always want to give your judge the comfort of knowing that she is not allowing truly bad conduct to go without a remedy if she refuses to certify the class.  

Disproving Your Plaintiffs’ Allegations.

It also is important to evaluate your plaintiff’s purchasing habits and history.  As we saw in Jones, those defendants effectively used testimony from the plaintiffs to defeat class certification. Explore whether they buy other products with similar ingredients and whether they have continued to buy the challenged product even after filing suit.  See if your plaintiff will admit that the labeling statement was not important to her.    

Many grocery retailers offer membership programs to customers.  Typically, these programs track purchasing history at an individual level so the retailer may direct specific advertising and offers to that customer.  Online retailers such as Amazon likewise track customers’ order history.  Try to obtain those data to determine if your named plaintiff buys other products with ascorbic acid or citric acid despite now avowing that he tries to avoid those ingredients.  Does your plaintiff who now avows a passion for healthful food habitually purchase sugary beverages, processed snacks, or other junk food?  Such purchasing history also may have data regarding the prices that plaintiff paid for the challenged product.  Those data may show the dramatically varying prices from week to week as well as discounts that a consumer enjoyed because of membership in that type of program.

Food labeling class actions continue to be a thriving business for plaintiffs’ counsel.  Mounting strong defenses not only helps your client end the current case but also sends a message to the plaintiffs’ bar that bringing suit against your client will not be a good investment for them.   

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

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A recent decision denying class certification in a cosmetics labeling action provides a useful roadmap for defendants in consumer products labeling class actions.  These particular defendants used several of the strategies discussed in earlier blog posts, and the decision sends a shot across the bow of plaintiffs’ class counsel who bring such consumer fraud claims on the cheap in the hopes of a quick payout.

Representations About “24 Hour” Cosmetics

Algarin v. Maybelline, LLC, No. 12-CV-3000 AJB (S.D. Cal. 5/12/14), involves allegations under California’s consumer protection laws.  Those plaintiffs contend that lipstick and makeup labeled as “24HR” does not provide the promised 24-hour coverage, and they allege that they paid a premium for the products based on those representations.  The proposed class would have included all California consumers who purchased the lipstick or makeup for personal use until the date of class notice.  [Slip Op. at 6]  Of course, California consumer protection laws depend on whether the advertising would mislead the hypothetical reasonable consumer.  I have mentioned in earlier blog entries about the importance of using expert testimony to discuss actual consumer understandings.  Maybelline took the same strategy here, and it carried the day: “Of great importance to the matters in this class certification is the fact Maybelline has introduced unrefuted evidence of who the reasonable consumer in the target audience is, and what drives her in making purchasing decisions.”  [Id. at 8]

Maybelline provided two expert reports, one from a marketing expert and one from an economist.  The marketing expert explained that repeat purchasers of the products could not be considered injured.  After all, they bought the product, used it, and then bought it again (apparently satisfied with its original performance).  Based on his survey research, the expert concluded that only 9 to 14 percent of the sampled consumers were one-time purchasers who expected the products to last 24 hours and were disappointed that it did not.  [Id. at 9]  These data turned out to be very important to the court. 

Rule 23(a) Problems

An initial problem for class certification was whether the class was ascertainable.  As with many of these types of consumer class actions, the plaintiffs did not provide a reliable method of determining who actually purchased the products.  The court was not willing to rely on having class members self-identify themselves with no actual proof of purchase.  “Cases where self-identification alone has been deemed sufficient generally involve situations where consumers are likely to retain receipts, where the relevant purchase was a memorable ‘big ticket’ item; or where defendant would have access to a master list of customers or retailers.”  [Id. at 13]  Without an administratively feasible way of identifying class members, plaintiffs could not satisfy their burden under Rule 23(a).

Commonality also was lacking because of the objective evidence that the 24-hour statements did not mislead a substantial percentage of class members.  “Indeed, most purchasers expected the product to last less than 24 hours or had no specific duration expectations.”  [Id. at 15-16]  The defendants used an economist’s report to explain that the existence of economic injury was not a common question because many purchasers were satisfied with the products.  [Id. at 16]  

The same shortcomings regarding what consumes believed was important was also doomed typicality.  In sum, the court did not believe that the named plaintiffs’ reliance on the alleged misrepresentations was typical of other class members.  Again, the consumer survey data were crucial to this point.  [Id. at 17]  

No Rule 23(b)(2) Injunction Class

Things did not get any better for the plaintiffs with respect to their Rule 23(b)(2) class.  That class sought injunctive relief, and the plaintiffs argued that any damages were merely incidental to the injunctive relief.  But there is little point in any injunctive relief here.  Any consumer would immediately know if the product met her expectations.  If she nonetheless bought the product again, there would be no basis to allege that she was deceived.  She would have known the “truth” at the time of the repeat purchase.  [Id. at 18]  Moreover, the restitution and disgorgement sought were not incidental to the injunctive relief.  Indeed, the named plaintiffs knew about the products’ alleged shortcomings and would not purchase them again; their only legitimate concern would be with monetary relief, not an injunction.

Rule 23(b)(3) Problems

These plaintiffs used the familiar “price premium” theory of damages.  That is, they contended they paid a premium price for the products that they would not have paid if they knew the “truth” about the 24-hour representations.  Plaintiffs, however, did not have any valid methodology to establish that the difference in price for these products was attributable solely to the alleged misrepresentation.  For example, the price difference could not attributable to different ingredients, the selection of colors, or Maybelline’s internal costs.  “To establish that any difference in price is attributed solely to the alleged misrepresentation, the Court must use a product, exactly the same but without the 24-hour claim.”  [Id. at 21]  The substantial variations in retail prices among the products and competing products made this type of damages analysis impossible.  

Of course, Maybelline does not sell retail and does not set the retail prices—it sells wholesale to retailers or distributors.  That alone made class treatment nearly impossible.  While the plaintiffs argued through an expert that the court could rely on the wholesale prices charged by Maybelline, the same pricing variability existed as to wholesale prices.  That is, the court could not assume that all retailers paid the same wholesale price or that any differences in wholesale price were attributable to the misrepresentations.  [Id. at 22]  Though not mentioned by the court, it also seems impossible to believe that wholesale pricing would directly affect retail pricing in every instance or that plaintiffs could control for those differences.

Finally, the court concluded that class treatment was not superior.  Although Maybelline argued that its own refund program provided a superior alternative, the court was not comfortable comparing judicial remedies to that type of out-of-court resolution program.  Setting that aside, all of the difficulties in identifying class members, determining their injuries, and evaluating whether any misrepresentations were material made class treatment inferior.  Such actions “are not likely to benefit anyone but the lawyers who bring them.”  [Id. at 23 (internal quotations omitted)]

Key Points For Defendants

While Algarin deals with cosmetics, similar class actions target a number of other types of consumer products, particularly food and beverages.  Many of these cases survive motions to dismiss, especially when California law is at issue, but the real battles are at class certification and summary judgment.  That is why it is crucial to work with appropriate experts—typically a marketing/consumer research expert and a damages/economic expert—to build your defense early in the case.  Don’t let the plaintiff’s arguments about what “typical” consumers believe go unchallenged.  Drill into statistically-significant survey data to show the court why consumer buy your product, what they understand certain phrases to mean (or not to mean), and whether they are satisfied with the product.  You also have a host of individual economic issues to address based on the “premium pricing” damages theory in these cases.  Building this evidentiary record takes some time and money, of course, but it is well worth the expense.  Class actions are like any other litigation matter—you need to prepare them as if you are going to take them to trial. You may find that your opponents do not take that approach, and that inevitably works to your benefit.

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

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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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