Friday, November 18, 2011

Sugar is sugar, but false advertising is false advertising

Western Sugar Cooperative v. Archer-Daniels-Midland Co., 11-cv-03473-CBM (C.D. Cal. Oct. 21, 2011)

Late to this because it didn’t show up in Westclip. Table sugar producers sued producers of high fructose corn syrup (HCFS) and their trade association, the Corn Refiners Association, for false advertising under California and federal law based on a campaign to rebrand HCFS or corn syrup as “corn sugar.” CRA began a TV, print, and other media campaign, including, to make claims such as “HFCS is corn sugar,” “HFCS is natural,” and “sugar is sugar.” Plaintiffs alleged that, to the contrary, HFCS is a “man-made product” that does not “naturally occur,” distinct from table sugar extracted from cane and beets. Further, they alleged that HCFS is linked to the obesity epidemic and that its effect on the human body differs from that of table sugar. Moreover, they alleged that consumers and entities that make/provide food and beverages “are conscious of the difference between sugar and HFCS and are making business decisions based on that difference.” CRA filed a petition with the FDA seeking to change the name of HFCS to “corn sugar.”

CRA argued that it was engaged in an education campaign, not advertising, and that as a trade association it’s not in competition with the plaintiffs and doesn’t promote or sell any products or services. Nope. Statements can be related to a public health issue and still be advertising. Also, though CRA’s ads don’t explicitly say “buy” or “purchase” HFCS, “it is clear that the purpose of CRA’s statements is to promote HFCS to purchasers. As a trade organization made up of corn refiners, an economic motive exists, and the statements refer specifically to high fructose corn syrup.” Moreover, the allegations that CRA represents the interests of corn refiners were sufficient to establish competition with plaintiffs. CRA was engaging in commercial speech because it was advertising a specific product for an economic purpose–the economic gain of its members. CRA disputed that its goal was to sell goods (wow: that does not pass the laugh test), but the court found that this was a factual dispute that couldn’t be resolved on a motion to dismiss (but, one hopes, would be readily resolved on a motion for summary judgment!).

CRA argued that plaintiffs failed to plead that the statements (1) that HFCS is “natural”; (2) that “sugar is sugar” (referring to HCFS as sugar); and (3) that HFCS is “corn sugar” were false. The court disagreed. For (1), plaintiffs alleged that HCFS is is not “found in nature” and cannot simply be extracted from an ear or stalk of corn CRA argued that the FDA doesn’t define “natural” as plaintiffs did, but cited no authority holding that the FDA can conclusively determine naturalness. (Actually, the FDA has been reluctant to define natural at all.)

As for (2), statements equating HFCS with sugar (“sugar is sugar,” “HFCS is nutritionally the same as table sugar,” “your body can’t tell the difference,” and “HFCS is corn sugar”), CRA argued that the statements weren’t literally false. Though the chemical makeup of HFCS is different than table sugar, CRA said, the difference was not qualitatively significant. That determination’s not appropriate for a motion to dismiss.

As for HCFS being “corn sugar,” plaintiffs’ allegations that CRA’s use of this term to claim that HCFS is natural and that it’s equivalent to table sugar was false sufficiently stated a claim.

CRA also argued that plaintiffs failed to allege that consumers would be deceived. First, ads can be presumed deceptive if the falsity is deliberate, when a plaintiff can allege that the defendant has expended substantial funds in an effort to deceive consumers and influence their purchasing decisions. Plaintiffs alleged that the CRA has spent about $50 million on its advertising
campaign. That was sufficient.

CRA’s arguments on materiality were also unavailing. CRA contended that food and beverage buyers are too sophisticated to be confused by any potential deception in advertising. However, given alleged consumer concerns regarding the presence of HFCS in food products and food and beverage producers switching from HFCS to sugar with consumer preferences in mind, the court found the complaint sufficient.

CRA then challenged the allegations of likely injury. However, plaintiffs alleged that the $50 million campaign was aimed to “turn consumer sentiment around” on HFCS, injuring plaintiffs in the form of price erosion and lost profits. That was enough.

Given this result under the Lanham Act, plaintiffs’ California claims also survived.

The court, however, dismissed claims against the other defendants, corn refiners who were board members of the CRA. Plaintiffs argued that they’d pled that CRA was an agent of the other defendants: it represents their interests, the other defendants are CRA members, members financed the ad campaign, and that they use CRA as their agent to affect consumer sentiment. The court found these allegations conclusory, and insufficient to establish that the other defendants had the authority to control CRA as required to show an agency relationship. There were no false advertising allegations directly against the member defendants. Thus, the claims against them were dismissed.

In a footnote, the court dealt with defendants’ argument that plaintiffs failed to comply with Rule 9(b). Noting the split on whether 9(b) applies to false advertising claims, the court made the usual move of courts rejecting motions to dismiss and declared the 9(b) standard satisfied regardless.

Finally, CRA argued that the complaint should be stayed or dismissed pursuant to the primary jurisdiction doctrine, which covers issues within the special competence of a government agency. Courts consider: (1) the need to resolve an issue that (2) has been placed by Congress within the jurisdiction of an administrative body having regulatory authority (3) pursuant to a statute that subjects an industry or activity to a comprehensive regulatory authority that (4) requires expertise or uniformity in administration. CRA argued that its pending petition with the FDA seeking approval of the “corn sugar” name for corn syrup justified dismissal of the case. (The petition also necessarily requested an amendment to the standard of identity for a product already labeled as “corn sugar,” dextrose monohydrate.)

Plaintiffs responded that misappropriation of “corn sugar” wasn’t the centerpiece of their claims. Instead, they were challenging the totality of CRA’s advertising, which the FDA doesn’t have the authority to regulate. Some of the alleged falsehoods, including the statements that HFCS is “natural” or “equivalent to real sugar,” aren’t even covered by the petition.

The court found the primary jurisdiction doctrine was inapplicable to a challenge to an ad campaign. Resolution of the petition wouldn’t resolve the issues raised by the lawsuit, and the question of whether HCFS is just like table sugar isn’t something Congress allocated to the FDA. Moreover, evaluating whether defendants engaged in false advertising doesn’t require FDA expertise.

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