Friday, August 03, 2012

Pleading agency and vicarious liability with particularity

Western Sugar Co-op. v. Archer-Daniels-Midland Co., 2012 WL 3101659 (C.D. Cal.)
In theory the courts are divided on whether Rule 9(b) applies to false advertising claims under the Lanham Act (but not, for reasons I think unfortunate, trademark claims based on almost identical statutory language); in practice, these days, they aren’t.  The court here notes the divided case law, but ultimately the plaintiffs’ lawyer conceded the issue, so Rule 9(b) it was.
Plaintiffs are sugar producer and trade associations of sugar growers/producers/refiners.  Defendants are a national trade association, made up of business enterprises in the corn refining industry, and members of the trade organization.  In 2008, the Corn Refiners Association (CRA) began an ad campaign on high fructose corn syrup (HFCS), including  The campaign made claims such as “HFCS is corn sugar” (the FDA rejected this characterization), “HFCS is natural,” and “HFCS is the same as sugar.” Plaintiffs alleged that HFCS is a “man-made product” that does not “naturally occur,” making it different from table sugar. Plaintiffs also alleged that HFCS’s effect on the human body differs from that of table sugar, linking it to the obesity epidemic.  Thus, claims that HFCS is “natural” and should be referred to as “corn sugar” as well as claims that HFCS is nutritionally and metabolically equivalent to other sugars were false advertising under the Lanham Act.
Various defendants moved to dismiss, including the trade association member companies, corn refiners whose officers were board members of the CRA.  They argued that plaintiffs improperly lumped them together without individual allegations.  Under Rule 9(b), plaintiffs must differentiate their allegations and inform each defendant separately of the allegations surrounding its alleged participation in the fraud.  The complaint did set forth individual allegations as to four of the five member companies:
The Cargill and Corn Products websites, for example, provide direct links to the “Sweet Surprise” campaign website to expand exposure to and the audience for the false advertising campaign. Cargill, and others, including Tate & Lyle, have also used spokespersons to disseminate the advertising theme that HFCS is no different than sugar. ADM, Corn Products, and, upon information and belief, the other Member Companies, have similarly repeated, endorsed, and ratified the messaging of the advertising campaign in direct communications to customers, ranging from detailed presentations to simple correspondence.
Tate & Lyle, for example has used the phrase “corn sugar” to denote HFCS in presentations, annual reports, pricing sheets and other communications directed to customers and investors. ADM, Cargill, and Corn Products have also used the phrase “corn sugar” to denote HFCS in pricing sheets and in other communications.
Also, as with the other aspects of the challenged advertising campaign, in speeches and publications, individual Member Companies (sometime through senior executives or other authorized spokespersons) have endorsed, supported and ratified the name change from “HFCS” to “corn sugar.” For example, Mr. Willits of Cargill has expressed his company's motivation for supporting the use of the “corn sugar” terminology to reinforce the notion that HFCS is the same as real sugar.
The court found that these alleged facts alone weren’t sufficient as to the member companies other than ADM and Corn Products.  The website links to the Sweet Surprise campaign weren’t enough to ratify the statements at the Sweet Surprise website.
However, plaintiffs also alleged that Cargill and Tate & Lyle “used spokespersons to disseminate the advertising theme that HFCS is no different than sugar”; that ADM, Tate & Lyle, Cargill, and Corn Products “ratified the rebranding of HFCS” by using the phrase “corn sugar” in place of HFCS; that Tate & Lyle used the phrase “corn sugar” in “presentations, annual reports, pricing sheets, and other communications directed to customers and investors”; and that ADM, Cargill, and Corn Products also allegedly used the phrase “corn sugar” in “pricing sheets and other communications.” The use of spokespersons to disseminate the advertising theme and the use “corn sugar” in documents and communications directed toward customers and investors were sufficient to put the named member companies on notice of their alleged fraudulent conduct.  But that wasn’t enough as to Roquette, another member company, as to which there were no specified facts regarding the creation and dissemination of the ad campaign, so Roquette was dismissed.
The member companies also argued that plaintiffs didn’t plead a principal-agent relationship between the CRA and the member companies with sufficient particularity.  Plaintiffs argued that vicarious liability allegations aren’t themselves based on fraudulent conduct and thus not subject to the heightened pleading conduct, but the court disagreed, citing Seventh Circuit precedent.
Agency requires both principal and agent to manifest assent to the principal’s right to control the agent; a trade organization isn’t necessarily an agent of member companies. Plaintiffs pled: “[u]pon information and belief, both the CRA and the Member Companies assent to the right of the CRA members to control the CRA in this way, in particular with respect to the advertising challenged in this action.”  They further alleged that the member companies, through Board representation, “subject[ ] certain decisions (including, on information and belief, the decisions to fund, design and launch the challenged false advertising campaign) of the CRA's Board of Directors to the approval of the CRA members themselves,” and that the member companies funded the ad campaign.  Further, they alleged that decisions related to the campaign, including day-to-day details, were subject to member companies’ approval, and that the member companies paid special assessments earmarked to design and fund the challenged advertising (to the tune of about $13 million), along with dues that made up the overwhelming majority of the CRA’s revenues.  They also noted that some member companies linked to the Sweet Surprise website and adopted “corn sugar” in their annual reports and pricing sheets.  They listed the names and titles of the officers from each member company on the CRA Board, and the number of hours the officers spent working on CRA business and the ad campaign.
The court found that this constituted sufficient pleading of a principal-agent relationship as to the remaining member companies.
The member companies also contested conspiracy/joint tortfeasor liability.  Plaintiffs argued that they were alleging vicarious liability, and that any use of the word “conspiracy” was just another way of “describing a concert of action and intent which will extend tort liability beyond the active wrongdoer to those who merely planned, assisted, or encouraged his acts.”  Any theory of joint tortfeasor liability required pleading sufficient facts: here, that a defendant knowingly participated in the creation, development, and propagation of the false advertising campaign.  The allegations of control and direction of the ad campaign (including the failed attempt to obtain FDA approval to use “corn sugar” instead of HFCS on ingredient labels) were sufficient as to the remaining member companies.

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