Consumer Protection Update | August.29.2011
Manufacturers and suppliers are finding it increasingly difficult to secure early dismissal of consumer claims for product or service misrepresentations brought under California's Unfair Competition Law, Cal. Bus. and Prof. Code §§ 17200, et seq. Under current law, plaintiffs often need to allege relatively little to avoid a motion to dismiss, other than that they would not have purchased a product had they known the alleged "truth" about it.
Since mid-2009, plaintiffs have filed a number of consumer advertising misrepresentation cases in California relating to many areas of commerce, including:
Commodities: advertising claims about motor fuel octane ratings
Consumer electronics: claims about "1080p" resolution televisions; advertising about "other" operating system functionality for gaming consoles; claims that a tablet computer provides an experience just like reading a book; and claims about the shockproof and waterproof qualities of cameras
Consumer foods: claims about "all natural" tea drinks or guacamole; "human quality" pet food ingredients; "pure" juices; the health benefits of crackers, cookies, and snack bars that contain trans fats; the nutritious content of butter substitutes; the fruit content of cereals; the ability of cereals to improve children's attention spans; the healthfulness of peanut-containing products allegedly contaminated with Salmonella; the place of origin of beverages; "green drops" on bottled water allegedly implying environmental friendliness; and heart-healthy claims about walnuts
Other consumer products: claims about safe and environmentally sound cleaning products containing synthetic compounds; claims about the health benefits of sneakers
Over-the-counter pharmaceuticals and medical products: claims about "effortless" weight loss diet pills; claims about the effectiveness of anti-cavity mouthwash; claims about multivitamin benefits; claims about the benefits of condoms made with nonoxynol-9; and claims about digestive care products' ability to maintain a healthy and natural digestive system
Prescription pharmaceuticals: marketing claims about off-label drug uses
Retail sales: claims about the use of retail shopping cards
Foodstuffs, pharmaceuticals, cosmetics, electronics and medical devices seem particularly likely to be targeted by these lawsuits.
The recent case of Astiana v. Ben & Jerry's Homemade, Inc. ecided May 26, 2011 by the U.S. District Court for the Northern District of California, based on claims that ice cream was mislabeled as "all natural," illustrates the trend. The case is discussed briefly below, as well as other recent key 17200 decisions and strategies for responding to 17200 litigation.
Section 17200 (the "UCL") prohibits unlawful, unfair, or fraudulent business acts or practices. Historically, any person, even someone who did not purchase a defendant's product or service, could sue the defendant under the UCL. This extremely broad standing rule was narrowed by California voters in Proposition 64, passed in 2004, which requires that a plaintiff establish that he "has suffered injury in fact and has lost money or property as a result of . . . unfair competition." UCL claims have also been limited by judicial decisions regarding the available remedies in UCL cases. For example, in Korea Supply Co. v. Lockheed Martin Corp., 29 Cal. 4th 1134 (2003), the court held that restitution (the only monetary remedy under the UCL) is limited to either money or property that defendants took from plaintiff or money or property in which plaintiff has a vested interest. Korea Supply gave companies hope that UCL claims would be strictly limited to cases where a defendant actually took something of value from a plaintiff as a direct result of a clear misrepresentation or other action.
Two recent California Supreme Court cases, however, have weakened the hurdles facing potential UCL plaintiffs. First, in In re Tobacco II Cases, 46 Cal. 4th 298 (2009), the court ruled that only the named plaintiff(s) in a putative class action must establish Proposition 64 standing. Unnamed class members need not do so. Although the court also ruled that plaintiffs must establish actual reliance to establish a claim under the UCL's fraud prong, the court relaxed the pleading requirements or applicable presumptions in the case of certain alleged advertising frauds. Second, in Kwikset Corp. v. Superior Court, 51 Cal. 4th 310 (2010), the court addressed UCL claims that locks labeled "Made in USA" were falsely marketed and sold. The court held that consumers who allege that they would not have bought a product but for a misrepresentation can establish economic injury and UCL standing.
In Astiana, plaintiffs alleged that Ben & Jerry's and Breyers misrepresented ice cream containing "Dutch" or "alkalized" cocoa as "all natural," despite the fact that potassium chloride, used in product processing, is a synthetic ingredient. They alleged that over the past several years, the named plaintiffs had purchased ice cream, and that had they known that it contained cocoa that was not "natural," they would not have purchased it. Following Kwikset, the court declined to dismiss the allegations, although it did note that ultimately plaintiffs may fail to prove their claims. The court rejected defendants' arguments that an unconditional money-back guarantee precluded plaintiffs' standing or a finding of economic injury.
Defendants maintained that the words "all natural" are a term of art under federal Food and Drug Administration policy and USDA regulations about what constitutes a "synthetic," and that consumers would have to possess a fairly sophisticated understanding of the policy, regulations and the facts before being misled by the "all natural" product statements. The court, however, rejected the defense argument that plaintiffs did not allege their fraud claims with adequate specificity, or establish a plausible claim that reasonable consumers would be deceived. The complaints adequately "assert that the effect of mislabeling the ice cream cartons would be to mislead consumers into believing that they were getting something that they were not."
Finally, the court rejected defendants' preemption arguments under the federal Nutrition Labeling and Education Act. Although the NLEA prohibits nonidentical state law labeling "requirements," the court held that the NLEA regulations do not address "the use of an adjective such as 'natural' on a food label." Such adjectives are therefore subject to state law regulation.
Cases such as Astiana are making it increasingly difficult for defendants to dismiss consumer advertising claims (even where the consumer concededly received a valuable and useful product), where the consumer alleges that she would not have purchased the product if she had known the truth about one of its features. The relative ease of pleading that a plaintiff would not have bought the product if he had "known better" is likely to increase the frequency of such claims. Companies doing business in California should therefore be prepared for a rising tide of misrepresentation litigation.
Given the lower pleading hurdle, manufacturers and suppliers should consider other options in addition to standard motions to dismiss filed complaints or to limit remedies. For example, companies should consider proactive advertising "audits" to identify potential claims, weigh their risks, and evaluate appropriate modifications.
Companies should also consider novel and creative arguments to avoid Kwikset―for example, in some cases, defendants might be able to successfully argue that reliance on alleged misrepresentations is truly implausible and therefore not actionable under the Twombly pleading standard (at least in federal court). The Astiana court itself found "somewhat persuasive" defendants' argument that it was implausible that plaintiffs were deceived―although the court declined to dismiss the complaint, because at least as to the named plaintiffs there was a question of fact. In other cases, the argument may remain open.
Companies should also be prepared in appropriate situations (where the product claim is clearly justified, and is essential to the product's value or market differentiation) to litigate the issues of alleged misrepresentations and consumer reliance on the merits, which likely will entail extended fact and expert discovery, especially in the class action context. In such cases, discovery concerning named plaintiffs' alleged reliance and adequacy will be particularly important. Defense counsel's familiarity and experience with these issues can make a difference between a successful summary judgment and a trial. In all cases, a flexible response, informed by the facts and the law, is key.