Monday, March 03, 2014

no Lanham Act standing for misrepresentation by seller to buyer

Nature’s Products, Inc. v. Natrol, Inc., 2013 WL 7738172, No. 11–62409 (S.D. Fla. Oct. 7, 2013)

The parties had business dealings from the late 1990s through 2011. In 2001, they executed an open-ended indemnity agreement applying to any products Natrol bought from NPI. In 2009, NPI took over manufacturing for certain Natrol ProLab products. Natrol provided labels for the products representing that they were wheat and gluten free. In 2010, NPI returned Product Allergen Questionnaires, as completed by NPI’s Regulatory and Compliance Manager, which represented that the ProLab Products created by NPI were free of wheat and gluten allergens.

In September 2011, after an FDA investigation, NPI determined that the ProLab products did contain wheat and gluten, through the ingredient glutamine peptide. NPI informed Natrol of its discovery, and Natrol recalled the ProLab products. Natrol cancelled its contracts with NPI and destroyed the products. NPI sued Natrol for breach of contract and unjust enrichment for Natrol’s failure to pay NPI’s invoices. Natrol counterclaimed for breach of contract, breach of express warranty, breach of implied warranty of merchantability, breach of implied warranty of fitness for a particular purpose, breach of the Florida Deceptive and Unfair Trade Practices Act, and civil remedies for violations of Lanham Act.

The court found genuine disputes of material fact on the breach of contract claim. There was some contractual relationship, but they didn’t have a thorough written contract, so summary judgment couldn’t be entered. This also precluded summary judgment on the breach of express warranty claim. However, the court found that NPI breached its indemnity agreement, which broadly required NPI to indemnify Natrol “from and against any and all damages, losses, expenses, costs, claims, judgments and liabilities ... in any manner related to ... the breach of any representation ... of NPI ... pertaining to the [covered] Products.” “This language is broad and unambiguous. It applies to the instant situation where NPI incorrectly represented to Natrol that the ProLab Products were wheat and gluten free, Natrol sold those Products with a label containing that representation, and Natrol subsequently recalled those Products because of the inaccurate representation.” This was so even though NPI made its inaccurate representations after the order was in and after it had begun manufacturing. If NPI had properly completed the questionnaires, Natrol would have had many more options.

Nonetheless, genuine disputes of fact remained as to the calculation of Natrol’s losses. Likewise, while Natrol established breach of the implied warranty of merchantability, material issues of fact remained on damages. As for breach of warranty of fitness for a particular purpose, though NPI knew of the purpose here, there were factual issues about whether Natrol relied on NPI’s skill and judgment when buying the products, because the contractual terms were unclear.

Florida Deceptive and Unfair Trade Practices Act: A FDUTPA claim isn’t defined by a contract’s express terms, but covers unfair and deceptive practices arising out of business relationships. Again, there were disputed issues of fact: whether the inaccurate representation on the questionnaires that the products would be wheat/gluten free was unfair or deceptive was for the jury, as was the question of the extent to which that conduct caused Natrol’s actual, not consequential, damages.

Lanham Act claims: Natrol lacked prudential standing under Phoenix of Broward (though this is under review by the Supreme Court, it’s unlikely that any standard the Court adopts would change this result, given the fact that Natrol is NPI’s customer rather than direct or indirect competitor). Natrol didn’t lose customers because of NPI’s conduct; rather it put a product on the market with misleading claims. “Had Natrol failed to recall that Product, Natrol’s competitors or consumers may have had valid Lanham Act claims against Natrol. Natrol, as the seller of the product, cannot bring those claims against its own manufacturer.” This wasn’t the kind of injury Congress sought to address.

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