Wednesday, September 21, 2011

No class action for salons; court finds survey of 1200 too small

Salon FAD v. L’Oreal USA, Inc., 2011 WL 4089902 (S.D.N.Y.)

In an earlier opinion, the court found that salons had properly alleged standing to claim false advertising from defendant hair care products manufacturers' labeling of their products as available exclusively in salons. In this opinion, the court denied class certification.

“Sales of hair care products represent an important revenue source for salons; indeed, the profit margin on these products is generally higher than the margin for the hair care services provided in the salons.” Plaintiffs alleged that defendants claim on product labels, websites, and print ads that their products are available exclusively through salons and not through mass-market retailers. However, defendants have allegedly engaged in widespread diversion to mass retailers, now accounting for more than $1 billion of the industry’s $5 billion in annual sales of salon-only products. This allegedly damages plaintiffs’ reputation with consumers “who purchase products at their salons, only to discover that the products are also available at mass retailers.”

Plaintiffs sought to certify a class of all professional hair salons and licensed cosmetologists that purchased a defendant’s professional products for resale to customers within the US from July 1, 2004 to now, except for salons identified as having engaged in diversion itself. (As it happens, defendant L’Oreal’s distribution contracts state that diversion damages L’Oreal’s goodwill with consumers and provide for liquidated damages of $100 per unit a salon diverts.)

As the court explained, “[t]he primary reason that this motion to certify a class fails is the unresolved tension between the legal claims brought by the plaintiffs and their theory of damages.” The legal theory was false advertising, but the evidence of damages arose from diversion rather than from false advertising.

The defendants all had salon-only labeling. Paul Mitchell even added “Guaranteed only when sold by a professional hairdresser, otherwise it may be counterfeit, black market, and or tampered with,” and had similar anti-diversion provisions in its contracts.

The plaintiffs were a group of salons located in Georgia and Alabama, as well as Salon FAD (Fight Against Diversion), a non-profit organization founded to address diversion.

Under Rule 23(a), a class requires numerosity, common questions of law or fact, typicality, and adequate representation. Then, the class must qualify under at least one Rule 23(b) category. Plaintiffs sought to certify a 23(b)(3) class, or, in the alternative, a 23(b)(2) class. Rule 23(b)(3) permits certification "if the questions of law or fact common to class members predominate over any questions affecting only individual members, and ... a class litigation is superior to other available methods for fairly and efficiently adjudicating the controversy," while Rule 23(b)(2) permits class certification if "the party opposing the class has acted or refused to act on grounds that apply generally to the class, so that final injunctive relief or corresponding declaratory relief is appropriate respecting the class as a whole."

Predominance tests whether proposed classes are sufficiently cohesive to warrant class treatment. The representative must show that the issues subject to generalized proof predominate over issues that require individual proof. In this case, proof of injury was bound up in proof of damages; plaintiffs can show that these elements are susceptible to generalized proof by disclosing a suitable methodology.

Here, the causation/damage theory rested on the idea that “customers read the labels on the defendants' products, find the representations about those products being exclusively available in salons material, come to believe that the representations are false, attribute the false labeling to the salons, and decide to act on that knowledge and belief in a way that harms the salons.” For purposes of this motion, defendants conceded falsity and the existence of widespread diversion, but argued that a host of individual issues existed because plaintiffs wouldn’t be able to show that the false advertising played any role in consumers’ decisions to patronize stylists.

Here, it was difficult to imagine class-wide proof of causation and injury:
How salon customers would react to learning that a product which was advertised as exclusively sold in salons was also available in another retail environment is inherently an individualized question. To some consumers, it may be of little significance …. Even if a consumer were affected by the discovery of false labeling and also came to conclude that the salon was implicated in the deception, whether and to what extent that leap of association would affect the consumer's loyalty to the salon would necessarily depend on a multitude of factors. A consumer may feel that he or she has no convenient or less expensive alternative to purchasing the products in the salon, may have a strong loyalty to the salon or stylist that outweighs any concern about the false labeling, or may find that every convenient salon is similarly tainted. Alternatively, a consumer may choose to follow a stylist to a new salon, or to change salons for a host of reasons that have nothing to do with the false labeling at issue here.
Plaintiffs offered a methodology in a “skeletal” expert report by an economics professor at Emory. However, the model failed to distinguish between harm to the salons caused by diversion and harm caused by false advertising. Sales may have declined because consumers punished salons for the falsity, or because consumers bought defendants’ products at mass retailers for reasons of price or convenience. Nor did the expert offer a consumer survey to gauge reputational harm.

Plaintiffs also offered an internet survey of over 3200 female respondents, 1261 of whom had ever purchased professional hair products in a salon. After they identified the brand they’d purchased, they were then shown either a print ad or package for that brand that described the product as being available exclusively in salons. The survey asked, "Based on what is said or suggested by the ad/package, where would you expect (brand) hair care products to be available for purchase?" The available answers were: only in spas or salons, only in mass retailers, or in both spas and mass retailers. Seventy percent of respondents chose the answer that the products were exclusively available in salons. The survey asked whether the "salon-only" claim on the packaging "suggested anything about the quality" of the product, and 53% said it suggested that the product was of a higher quality.

Finally, the respondents were asked about their "reaction" to seeing products on the shelves of a mass retailer with "salon-only" claims. Response options included that the packaging "raised questions" about the following: "whether the salon lied to me about the hair care products available in the salon" (38% chose this, and 60% answered that it made them question the truthfulness of the salon), "the truthfulness of the (specific salon-only claim)," "the quality of other hair products sold in the salon," and "the expertise of the stylist who recommended (brand)."

The court found this survey “riddled with methodological flaws.” The sample size was quite small, raising questions about its representativeness. (Comment: this is just bizarre—the sample size is huge for a consumer survey; that they had to screen out a lot of people who didn’t fit doesn’t mean the sample size is small.) The survey questions were overly suggestive, and respondents weren’t given the option to respond that they took nothing away from this claim, or that they blamed the manufacturer and not the salon. (This, I have more sympathy with.)

Plaintiffs argued that class certification was appropriate because of the nationwide scope and uniformity of the advertising at issue. But the theory of injury in cases allowing certification based on misleading product labels was much more direct: that consumers were misled by the labels into buying the products. “Here, the consumers who were allegedly misled by the false advertising are not parties to the litigation, and the plaintiff class representatives assert that the consumers associated the false advertising not with the manufacturers but with the plaintiff salons.”

Nor could defendants’ profits from diversion serve as an alternate measure of damages absent class-wide proof of causation. “The plaintiffs have not shown that there is any generalized link between the defendants' profits from diversion and the injury that they have alleged from the defendants' false advertising.”

The court also denied 23(b)(2) certification, which provides for class-wide injunctive or declaratory relief. Rule 23(b)(2) is not for cases in which the appropriate final relief relates exclusively or predominately to money damages. It was unwarranted here because the claim for injunctive relief was secondary to plaintiffs’ pursuit of money damages. The plaintiffs couldn’t even agree on the injunction they wanted—some wanted an end to the salon-only ads, and others wanted to preserve the exclusivity message of such ads but to make them true by stopping diversion. The plaintiffs didn’t even seriously pursue injunctive relief, adding their request late and devoting little argument to it.

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