Tuesday, September 10, 2013

"All natural" claims against Frito-Lay survive

In re Frito-Lay North America, Inc. All Natural Litig., No. 12–MD–2413, 2013 WL 4647512 (E.D.N.Y. Aug. 29, 2013)

Plaintiffs alleged that Frito-Lay and its parent PepsiCo falsely marketed various Tostitos, SunChips, and Fritos Bean Dip products as “All Natural” when, in fact, the products contained unnatural, genetically-modified organisms, to wit, GMO corn.

The Tostitos and SunChips products bore an “All Natural” label:

The Fritos Bean Dip products bore an “All Natural” label:

Plaintiffs brought warranty, intentional misrepresentation, and consumer protection claims under the laws of multiple states.

The court first dismissed PepsiCo.  Plaintiffs argued that PepsiCo was  “directly involved in the decisions to label and market” the chip and dip products as “All Natural.” They alleged that PepsiCo “markets, advertises and distributes” the products, and “actively coordinates its marketing and advertising activities with Defendant Frito-Lay to promote the products as ‘all natural.’”  It launched a marketing strategy to integrate its food/beverage businesses “to leverage the combined scale of the company’s complementary snack and beverage businesses,” and PepsiCo’s CEO discussed Frito-Lay’s decision to market “all natural” products at an industry conference.

This wasn’t enough for direct liability since PepsiCo didn’t make, sell, or label the products, and plaintiffs didn’t allege that PepsiCo had any role in the decision to label the products at issue “All Natural.”  The CEO’s statement that “we will take that all-natural look to every piece of ... the stores, and all of our temporary displays will showcase and romance the all-natural look” didn’t give rise to direct liability the context made clear that “we” meant Frito-Lay, and “such representations may result from public relations motives or an attempt at simplification.” Failure to distinguish between parent and subsidiary wasn’t sufficient to show control over the subsidiary’s marketing and operational policies.  Plaintiffs also didn’t successfully plead alter ego liability.  Frito-Lay’s separate existence wasn’t a sham.

Frito-Lay argued that the complaint should be dismissed or stayed on primary jurisdiction grounds.  But the FDA doesn’t have any formal rule or policy on “natural,” just a statement that it informally regarded the term as “meaning that nothing artificial or synthetic (including all color additives regardless of source) has been included in, or been added to, a food that would not normally be expected to be in the food.” It also has a statement of policy on GMO foods, which was that GMOs don’t generally present any different or greater safety concerns than traditionally bred foods, so don’t generally require labeling. 

But the primary jurisdiction doctrine does not apply when “the issue at stake is legal in nature and lies within the traditional realm of judicial competence.” “This case is far less about science than it is about whether a label is misleading,” and “the reasonable-consumer inquiry upon which some of the claims in this case depends is one to which courts are eminently well suited, even well versed.”  Even a formal definition from the FDA wouldn’t necessarily dispose of plaintiffs’ state-law claims; there was no telling “how the FDA would define the term, and whether its definition would shed any further light on whether a reasonable consumer is deceived by the ‘All Natural’ food label when it contains bioengineered ingredients.”  

Lots of courts have held similarly, though two district courts recently stayed cases about GMO corn and “natural” for six months.  The court here wasn’t persuaded by them.  Deciding misleadingness was a conventional judicial function and wouldn’t undermine the FDA.  Anyway, the FDA wasn’t likely to respond in a timely manner to any referral.  A 2010 referral in a similar case led to the response: “in the absence of a pre-existing regulatory definition, the agency would expect to act in a transparent manner by engaging in a public proceeding to establish the meaning of this term…. FDA’s experience with such proceedings suggests that it would take two to three years to complete.” The FDA recognized that this wouldn’t be useful to the court.  Indeed, the FDA took nine years to define “gluten-free,” in the face of a congressional mandate to do so.  “[T]here is no reason to believe that the FDA would abandon its deliberative process in order to respond to the Court’s referral through a hurried, ad hoc, and closed manner.”  But if the FDA did act during the litigation, the court would take that into account.

Frito-Lay then argued that the claims were preempted.  The court also disagreed, declining to give preemptive effect to the FDA’s nonbinding guidance on “natural.”  That guidance, even if binding, contained “no actual federal requirements regarding the term ‘natural’ for the Court to endow with preemptive effect.”

And now we get the inevitable standing argument for products none of the named plaintiffs purchased.  The question, the court concluded, was one of class standing rather than Article III standing. Plaintiffs had alleged Article III standing for themselves.  The question was whether they could represent putative class members who suffered a similar injury based on purchases of products that plaintiffs didn’t purchase.  (When put this way, I’m always confused why this is even a question.  No one disputes that they all bought different bags.  Their injuries, by definition, were not the same, though they were similar.  Why isn’t the issue always and obviously whether the injuries were similar enough?  Even defendants rarely have the gall to claim that a plaintiff who bought a 4-ounce bag lacks standing to represent the purchaser of an 8-ounce bag.)  The court here held that once there was a plaintiff with standing to assert a claim against a defendant because the plaintiff suffered some actual injury as a result of the defendant’s conduct, the analysis shifted to class action doctrine, following NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co., 693 F.3d 145 (2nd Cir. 2012) (allowing plaintiff to assert class claims with respect to securities that the plaintiff itself didn’t buy).  Thus, the court left the determination of class representation, and sufficient similarity between the products, for another day.

The court turned to Frito-Lay’s main argument, that no reasonable consumer would view the “All Natural” label and understand it to contain an “implicit representation that its products contain only corn grown without bioengineering technology.”  The court took judicial notice of various federal agency publications and reports by industry and consumer organizations, all of which, Frito-Lay argued, agreed that “natural” didn’t mean GMO-free.  Frito-Lay argued that, based on them, “it would be objectively unreasonable for any consumer to view the inclusion of the word ‘natural’ on a product label as an implicit representation that the corn from which the product is made was grown without bioengineering technology.”  Rather, “organic” addresses how food was grown and produced (GMO-free).

The court concluded this raised a factual question inappropriate for a motion to dismiss.  In the judicially noticed materials, the FDA acknowledged that “‘natural’ claims are confusing and misleading to consumers and frequently breach the public’s legitimate expectations about their meaning.”  There is, in the FDA’s view, a “general lack of consumer understanding and scientific agreement about the meaning of the term.”  The FTC thought similarly (though it terminated its notice of proposed rulemaking in 1983).  The USDA’s website directs viewers to a Food Marketing Institute publication that says that “natural” labeling isn’t regulated except for meat and poultry, and that “most foods labeled natural are not subject to government controls.” But, the FMI continues, the term “natural” does apply “broadly to foods that are minimally processed and free of synthetic preservatives; artificial sweeteners, colors, flavors and other artificial additives.” By contrast, “organic” crops have to be grown without bioengineered genes.  In addition, California voters recently rejected a ballot initiative that would’ve banned the use of the term “natural” on foods containing genetically modified ingredients.  The Center for Science in the Public Interest published a document telling its readers that the best way to avoid GMO food is to buy organic.

The court found that these materials demonstrated that what a reasonable consumer would believe about “natural” was a factual issue:

That “organic” means GMO-free says nothing about whether a reasonable consumer would understand the term “natural” to mean the same. Nor can the Court conclude that a reasonable consumer, or any consumer, is aware of and understands the various federal agencies’ views on the term “natural.” None of them, by the way, state explicitly that foods containing GMO ingredients may be labeled “natural.” The inferences Frito–Lay asks the Court to draw are too many and doing so—in its favor—is inappropriate on a motion to dismiss.

This case was distinguishable from cases in which no reasonable consumer would think that there was a real fruit known as a “crunchberry,” especially given the labeling, and in which no reasonable consumer would think that “Froot Loops” contained real fruit.  In those cases, the claims “border[ed] on fantasy.”  No reasonable consumer could view the cereals at issue and conclude that they contained fruit, then check the ingredients list to confirm that belief.  By contrast, a reasonable consumer viewing Frito-Lay’s “All Natural” labels “could reach a variety of conclusions about their potential for containing genetically modified ingredients.” The labels listed corn and corn derivatives among their ingredients, but didn’t specify whether they were genetically modified.  Thus, this was a “heartland” case in which the issue of reasonability was a factual one.

Frito-Lay argued that the court should consider the entire context of the label.  The labels included an explanatory ring surrounding the “Made with ALL NATURAL ingredients” center, stating “No MSG—No Preservatives—No Artificial Flavors.”  Those statements did provide context, but the court wouldn’t hold that as a matter of law they would stop any reasonable consumer from being deceived about GMO ingredients.

The court turned to arguments directed at specific claims.  The Magnuson-Moss Warranty Act claim was dismissed because “All Natural” didn’t warrant a product free from defect or promise that the product “will meet a specified level of performance over a specified period of time.”  At most, it was a product description and not covered.

Also, plaintiffs couldn’t bring New York claims on behalf of non-New York citizens.  New York’s limitation of the GBL to New York citizens is substantive, not procedural, and choice of law also meant that the New York breach of warranty and intentional misrepresentation claims had to be limited to New York citizens.

However, the statutory safe harbors in the various states’ laws didn’t protect Frito-Lay. Florida law provides that the FDUTPA does not apply to “an act or practice required or specifically permitted by federal or state law.” Frito-Lay’s conduct was not required by federal law, nor was it “specifically permitted” by the FDA’s voluntary “natural” labeling guidelines, since it wasn’t clear that the guidelines constituted a specific law affirmatively authorizing such conduct.  “The fact that FDA’s guidance on ‘natural’ labeling is so open to interpretation suggests that it could hardly be viewed as a federal law that ‘specifically permits’ Frito–Lay to label its products ‘All Natural.’” Florida courts have required defendants to show a high degree of specificity; a statement that the FDA wouldn’t object to a label, for instance, wasn’t specific authorization.  Similar reasoning applied to the New York and California safe harbors.  California exempts “natural” from its regulations of “organic,” but the products here weren’t labeled organic.

The court then concluded that plaintiffs’ claims met the heightened standard of Rule 9(b).  The “what” was that the products were labeled “All Natural” but in fact weren’t—and plaintiffs provided additional detail by alleging that the products contained GMOs, which aren’t natural because they are modified “by the insertion of DNA material from outside the organism into the plant’s DNA sequence, allowing the plant to express novel traits that normally would not appear in nature.”  And the “where” was the prominent placement on the products’ packaging.  Plaintiffs weren’t required to plead precisely in which store they bought the products, or at what price—the court found no reason to require those things (it’s hard to imagine how that affects Frito-Lay’s fair notice of the claim).  However, to the extent that the claims were predicated on materials beyond the labeling, the complaint didn’t survive 9(b).  They didn’t specify enough detail about alleged print ads, TV commercials, and websites: “one cannot glean from the First Amended Complaint whether the marketing and advertising to which plaintiffs were exposed, and whether that material is identical to, or in what ways is different from, the ‘All Natural’ stamp that appeared on the products’ packaging.”

The intentional misrepresentation claims were also dismissed because there weren’t sufficient allegations to give rise to a strong inference of fraudulent intent.  This requires either alleging facts to show that defendants had both motive and opportunity to commit fraud, or alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness.  Allegations that Frito-Lay knew that the products weren’t all natural because they contained GMOs were conclusory and insufficient.  Frito-Lay’s desire to increase sales and revenue didn’t in itself support a strong inference of fraudulent intent.  And plaintiffs didn’t directly allege that Frito-Lay knew about the GMO content; rather they alleged that tests confirmed the presence of GMOs and that Frito-Lay could easily have done this testing if it wanted to know the truth.  Without knowledge, Frito-Lay couldn’t have intended to defraud; at most this would show negligence.

Turning to the warranty claims, which were the same for each state at issue, “any affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain creates an express warranty.” Moreover, “[a]ny description of the goods which is made part of the basis of the bargain creates an express warranty that the goods shall conform to the description.”  Thus, plaintiffs adequately stated warranty claims; they alleged that they relied on the “All Natural” statement when they bought the products.

Frito-Lay fared better with other arguments.  Presuit notice is required under Florida and New York law.  Plaintiffs argued that notice provided by a California plaintiff was sufficient; the court was inclined to agree with Frito-Lay, but ruled on different grounds.  Plaintiffs simply alleged that the conditions precedent to Frito-Lay’s liability were performed by the plaintiffs when they bought the products for their ordinary purposes.  This seems to allege that the plaintiffs gave notice of their warranty claims by virtue of their purchases, but that couldn’t be the case. 

Whether the California plaintiff’s notice was sufficient to alert defendants to the same claims by plaintiffs from other states was a “thornier” question, though the court was inclined to consider such notice insufficient.  The purpose of the notice requirement is to inform the seller that the buyer considers it to be in breach.  Awareness of a defect isn’t enough; the seller should be made aware “that this particular transaction is troublesome and must be watched.” The California plaintiff purported to provide notice on behalf of “other consumers,” but that was “quite ambiguous and open-ended and does not readily signal that claims are brought on behalf of the other named plaintiffs in this case.” One court addressing a class certification motion held that each putative class member would have to demonstrate that she gave the required notice to the defendant of her breach of warranty claim; blanket notice on behalf of the entire class was not enough. But the court didn’t definitively reach the issue, given its holding on the pleadings.

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