Monday, March 19, 2012

Lawsuit over beetle parts in infant formula survives, in part

Leonard v. Abbott Laboratories, Inc., 2012 WL 764199 (E.D.N.Y.)
Abbott recalled 5 million containers of Similac infant formula powder that were potentially contaminated with beetle parts and larvae, “which could cause gastrointestinal discomfort and refusal to eat.”  (Apparently there is such a thing as a “common warehouse beetle.”)  Plaintiffs alleged that Abbott engaged in unfair and deceptive practices by misrepresenting Similac’s safety and failing to warn consumers in a timely fashion under the laws of New York, Texas, Ohio, and New Hampshire.
Abbott moved to dismiss and the plaintiffs moved to amend; the court ruled in favor of each in part.  Among other things, the court addressed Abbott’s arguments that the Ohio plaintiff couldn’t sue on behalf of a class because the Ohio Consumer Sales Practices Act has a notice requirement as a prerequisite for a class action, and the Ohio Deceptive Trade Practices Act gives standing only to competitors. 
The OCSPA bars class actions unless a violation was either: (1) “an act or practice declared to be deceptive or unconscionable by a rule adopted [by the Attorney General] before the consumer transaction on which the action is based” or (2) “an act or practice determined by [an Ohio state court] to violate [the OCSPA] and committed after the decision containing the determination has been made available for public inspection ….”  The Ohio plaintiff argued that this bar didn’t apply in federal court, but the court disagreed.  The relevant Supreme Court precedent was a 5-4 decision with a concurrence from Justice Stevens stating that some state procedural rules are so linked with the substance of a state right that federal courts should apply them.  Based on the concurrence, the court found that Ohio’s restriction on class actions was intertwined with the state substantive right and therefore not preempted by Rule 23.
The ODTPA has been called a state analogue to the Lanham Act, and some courts have therefore concluded that only competitors have standing.  Comment: Once again, the sloppy equation of state and federal law does damage to the law!  I’m not saying that the standards shouldn’t be the same when competitors do sue, or even that consumers must have standing; instead, courts too often shorthand “for these particular situations before the court, the statutes should be read the same way” as “the statutes should be read the same way” regardless of whether they differ in language, intent, or other relevant respects (e.g., an interstate commerce requirement, rarely at issue but clearly something that federal law might care more about, or the availability of damages).  Anyway, the federal district courts in Ohio are divided on the issue.  The court here picked the Lanham Act analogy, especially because “reading the ODTPA to permit consumer claims would render the OCSPA superfluous.”  (Because no one’s ever had two causes of action!)  So that claim went too.
Abbott also argued that the Texas plaintiffs failed to satisfy Texas’s 60-day notice requirement before seeking damages.  The court agreed; the remedy is to hold the case in abeyance for 60 days to allow the parties to engage in settlement discussions as contemplated by the Texas statute.
Abbott further challenged the sufficiency of the complaint, which the court analyzed under New York, New Hampshire and Texas law.
New Hampshire, quite typically, bars “any unfair or deceptive act or practice in the conduct of any trade or commerce,”  including “Representing that goods or services have sponsorship, approval, characteristics, ingredients, uses, benefits, or quantities that they do not have ...,” and “Representing that goods or services are of a particular standard, quality, or grade, or that goods are of a particular style or model, if they are of another.”  Courts have also found that “the failure to warn of a defective or dangerous condition can, under appropriate circumstances, constitute an unfair or deceptive trade practice under New Hampshire's Consumer Protection Act.”  To violate the law it must “attain a level of rascality that would raise an eyebrow of someone inured to the rough and tumble of the world of commerce.”
NY requires a showing that (1) the defendant's deceptive acts were directed at consumers, (2) the acts were misleading in a material way, and (3) the plaintiff has been injured as a result.  Omissions are actionable “where the business alone possesses material information that is relevant to the consumer and fails to provide this information.”
Texas also protects consumers against false, misleading, or deceptive acts enumerated in its statute that were a cause of their damages.  The statute’s coverage is similar in relevant respects to New Hampshire’s. The TDTPA explicitly prohibits “failing to disclose information concerning goods or services which was known at the time of the transaction if such failure to disclose such information was intended to induce the consumer into a transaction into which the consumer would not have entered had the information been disclosed.”
Abbott argued that the relevant statements weren’t pled with particularity under Rule 9(b) and that even under Rule 8(a) the alleged misrepresentations were either too vague to state a claim or were nonactionable puffery.
The Second Circuit has held that NY’s § 349 extends well beyond common-law fraud, and thus an action thereunder is subject to Rule 8(a) rather than Rule 9(b).  Abbott argued that this case should be limited to its facts as involving an “advertising scheme” and not “literally false statements of material fact with scienter intending to induce reliance.”  The court disagreed.  The Second Circuit has applied Rule 8(a) to NYCPA claims alleging “intentional” failure to disclose relevant facts to customers and to specific factual claims.  As to the non-NY statutes, Abbott presumed that, “because federal district courts in New Hampshire and Texas apply a heightened pleading standard to the claims under their state statutes, this Court should as well.”  The court disagreed: pleading requirements are governed by federal law, and whether a complaint sounds in fraud is a federal law issue.  Like the NY law, the New Hampshire and Texas statutes didn’t require scienter and weren’t based on common-law fraud.  Thus, notice pleading was the rule.
Turning to the specific statements, plaintiffs identified four: (1) Similac was “safe for the consumption by infants”; (2) Abbott was “dedicated to the highest standards of manufacturing and marketing—and to complying with all applicable laws and regulations in the countries where [they] do business”; (3) Similac “provid[es] babies with excellent nutrition for growth and development and has been clinically proven to aid brain, bone and immune system development”; and (4) Abbott is “committed to conducting research to ensure that formula-fed infants receive the highest quality products to meet their nutritional needs.”
The court held that most of these statements “either have nothing to do with the safety of Similac, or are too vague to mislead a reasonable consumer and therefore are immaterial.” Specifically, (3) and (4) were not material because they had no bearing on the safety of the product and “[a]n infant formula containing beetles could nonetheless improve immunity, bone strength, and brains and eyes, and provide important nutrition.”  Statement (2) was also nonactionable; it was “aspirational” and “simply too vague for a reasonable consumer to rely on it in any material way in making a decision to purchase the Defendant's products. General statements about compliance with safety and quality standards are non-actionable ‘puffery’ where, as here, they fail to identify specific requirements or standards.”  Such a statement was distinguishable from statements that mislead a consumer to believe that a product is FDA-approved, which involve a specialized meaning.  Abbott markets in more than 130 countries, and “[a] broadly stated goal to comply with the laws of 130 countries is puffery and therefore cannot materially mislead a reasonable consumer.”
However, the allegation that the “product packaging describes Similac as being a formula approved and used most by hospitals, because it is safe for the consumption by infants” plausibly supported a claim of affirmative misrepresentation.  While some “safe” claims may constitute puffery, “it is an actionable deceptive practice to mislead consumers into believing a product is safe for a particular use when it is not.”  The court couldn’t, without looking at specific ads, find that advertising that a product is “approved and used most by hospitals, because it is safe for the consumption by infants” was puffery.  
Likewise, plaintiffs stated a claim based on knowing omissions.  They specifically alleged that Abbott was aware of a beetle infestation in its facility that became progressively worse from 2007-2010 based on reports from its exterminator; that Abbott was aware that its anti-contamination equipment was defective and poorly maintained; and that between January-August 2010, Abbott received 238 infestation complaints for products manufactured at the facility.  Whether failure to disclose was a material omission depends on the volume and accuracy of those complaints; complaints alone are insufficient, but the issue of actual knowledge was a factual one that couldn’t be resolved on a motion to dismiss.
The court then turned to whether Abbott’s recall mooted the damages claims by offering to reimburse consumers.  Though plaintiffs alleged personal injuries to their children, they didn’t expressly seek damages for that.  Even assuming that plaintiffs were only seeking out-of-pocket costs, the recall didn’t moot their claims: though courts in other Similac cases have found mootness, the court here reasoned that there was no bar to the plaintiffs rejecting the voluntary refund in order to pursue class action claims.  The court questioned the wisdom of this decision, given the difficulty certifying class actions when “a voluntary recall and/or refund program provided a superior method of compensating the putative class members,” since the remedy went directly to the consumers instead of having some skimmed off by class action lawyers.  However, NY and New Hampshire provide statutory damages, and thus the recall program didn’t render those claims moot. 
Texas, however, provides a defense if, within 30 days of receiving notice of the claim, the defendant tenders to the consumer “(1) the amount of actual damages claimed; and (2) the expenses, including attorneys' fees, if any, reasonably incurred by the consumer in asserting the claim against the defendant.”  There hadn’t yet been proper notice under Texas law.  Abbott wanted the court to find, as a matter of law, that the recall reasonably satisfied any potential damages.  But the Texas plaintiffs sought damages for mental anguish as well as out-of-pocket losses.  “The Court cannot say at this stage in the litigation that the Texas Plaintiffs will be unable to recover for mental anguish.”  The court cautioned that it was unlikely to find a request for all the attorneys’ fees associated with the case to be reasonable.  “Indeed, it would undermine the statute to reward attorneys who disregard the plain language of its provisions by failing to provide ‘presuit’ or even “timely” notice. However, there may be some reasonable level of attorneys' fees associated with preparing the notice and litigating any disputes over the reasonableness of the tender.”  At this point, Abbott’s Texas defense was not ripe.

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