alcohol beverage maker has standing b/c D's non-alcoholic label plausibly attracts alcohol drinkers too

Tortilla Factory, LLC v. Makana Beverages, Inc., No. CV 18-2981-MWF (PLAx), 2018 WL 8130609 (C.D. Cal. Nov. 14, 2018)

Tortilla Factory makes kombucha beverages under the brand name “Kombucha Dog.” Makana also makes kombucha drinks. Kombucha is “a fermented beverage produced from a mixture of steeped tea and sugar, combined with a culture of yeast strains and bacteria.” Many consumers allegedly choose kombucha because it is natural, has low sugar content, and contains healthy probiotics.  Because of fermentation, kombucha may contain alcohol in excess of 0.5% by volume. Because Tortilla Factory “does not dilute the beverage like other manufacturers,” Kombucha Dog beverages allegedly contain alcohol in excess of 0.5% by volume. Such beverages are deemed alcoholic and must adhere to relevant federal laws and Alcohol and Tobacco Tax and Trade Bureau (TTB) regulations, including displaying a health warning statement under the Alcoholic Beverage Labeling Act of 1988.

Makana doesn’t label or market its beverages as alcoholic, but Tortilla Factory alleged that they in fact contained “between 0.6% and 1.9% alcohol,” as confirmed “by utilizing headspace gas chromatography combined with mass spectrometry from a third party lab to test alcohol levels.”  This allegedly “confused and misled consumers (and jeopardized their health and safety).”  In addition, Tortilla Factory alleged that Makana “understate[s] the sugar content of [its] drinks, to mislead consumers into believing the products are healthier than other kombucha drinks on the market that properly advertise their sugar content.” “Given the manufacturing process for a true kombucha product, as [Makana’s] products purport to be, it is highly unlikely that the sugar level is accurate.”

It sued for state and federal false advertising.  Makana argued that Tortilla Factory lacked standing because it wasn’t targeting the nonalcoholic market, and Makana’s flavors were completely different from Tortilla Factory’s “eccentric” flavors, making it not plausible that any Makana drinkers would switch to Kombucha Dog.

“Construed in Tortilla Factory’s favor, as it must be, the Complaint actually suggests that Tortilla Factory and Makana are both targeting health-conscious kombucha drinkers, and that Tortilla Factory accurately discloses the amount of alcohol in its beverages while Makana does not.” Different flavors didn’t necessarily mean different markets.  It was plausible that, properly labeled, Makana’s consumer base would shrink to exclude under-21s, and if, as the complaint indicated, “kombucha drinkers are a relatively abstemious and health-conscious bunch, such a labeling change could presumably reduce the number of over-21 Makana drinkers…. With Makana and Kombucha Dog on equal (or more equal) footing, alcohol-labeling-wise, it is entirely plausible that at least some consumers who had historically purchased Makana based upon its lack of alcohol content might elect to try Kombucha Dog.” Uncertainty about proving that number was insufficient at the motion to dismiss stage.

Applying Rule 9(b), the court then found the alcohol allegations sufficent but not the sugar allegations.  It wasn’t enough to invoke information and belief is that, “[g]iven the manufacturing process for a true kombucha product, as [Makana’s] products purport to be, it is highly unlikely that the sugar level is accurate.” Tortilla Factory could test Makana’s sugar content just as it tested alcohol content. Even if allegations on information and belief were allowed because the information was uniquely under Makana’s control, a plaintiff making a fraud claim upon information and belief “still must ‘state the facts upon which [its] belief is founded.’ ” Tortilla Factory didn’t explain the facts underling its belief that it is “highly unlikely that the sugar level is accurate” “[g]iven the manufacturing process.”

Alcohol content was different; the facts were alleged and allegedly supported by testing.  Makana pointed to a TTB webpage about kombucha stating that: [P]roducers may use any method that has been formally validated (e.g., that underwent a multi-laboratory performance evaluation) or that is otherwise scientifically valid for purposes of determining the alcohol content of beverages, including beverages that contain less than 0.5% alcohol by volume. Makana didn’t argue that Tortilla Factory’s method was not scientifically valid, nor could it at this stage. “Instead, Makana argues, in essence, that Tortilla Factory cannot satisfy its pleading burden unless it alleges that it has tested the alcohol content of Makana’s kombucha drinks using the more permissive scientifically valid testing methods (since the TTB does not specify a particular test) and that the alcohol content registered above 0.5% in this test.”  The court refused to draw inferences against Tortilla Factory at the pleading stage—specifically, that there are other scientifically valid methods that would detect less alcohol in Makana’s beverages.  If Makana can show that other valid tests come out differently, “Makana should be in a position to file a relatively quick and streamlined motion for summary judgment.”

Makana also argued that Tortilla Factory failed to allege which specific Makana kombucha beverages (of various flavors) were tested. The complaint listed each of Makana’s flavors, defined them collectively as “Kombucha Products,” and alleged that, based on third-party lab testing, the “Kombucha Products contain between 0.6% and 1.9% alcohol.” “In this Court’s opinion, and absent any authority suggesting otherwise (which Makana has not cited), these allegations are sufficient to put Makana on notice which products were tested.”