9th Circuit orders district court to reconsider statutory damages award to NY class under NY law

Montera v. Premier Nutrition Corporation, --- F.4th ----, 2024 WL 3659589, No. 22-16375, 22-16622 (9^th Cir. Aug. 6, 2024)

The key legal issue here arises from the quirk that NY bans GBL §§ 349 and 350 class actions in state court, but they can be brought in federal court. Premier sold Joint Juice for treating/preventing joint pain; a jury found it liable to a consumer class for false advertising under NY law; and the district court awarded statutory damages to the class, but cut them by over 90%. The court of appeals affirms liability/class certification and remands for recalculation based on an intervening appellate decision, as well as reversing the grant of prejudgment interest—overall, seems like a win for Montera.

The evidence showed that Premier targeted Joint Juice ads to people who suffer joint pain as a result of osteoarthritis. The packaging used the Arthritis Foundation logo and name, and made claims such as “Use Daily for Healthy, Flexible Joints” and “A full day’s supply of glucosamine combined with chondroitin helps keep cartilage lubricated and flexible.” On liability, “Montera introduced peer-reviewed, non-industry-funded studies finding that Joint Juice’s key ingredients, glucosamine and chondroitin, have no effect on joint function or pain; Premier maintained the product’s efficacy based on industry-funded studies.” Premier was aware of the no-effect studies; in 2011, the brand director for Joint Juice wrote, “there is no scientific evidence for chondroitin at 200 mg.” When Premier considered running its own study, its president wrote: “if poor—don’t publish.”

Montera’s expert testified that 92.5 percent of respondents to his study “believed that the product packaging was communicating one or more of [the packaging’s claimed] joint health benefits,” and 56% of respondents said that Joint Juice’s claimed joint health benefits “were material to their purchase decisions.” Montera also introduced Premier’s internal customer survey in which 96% of those surveyed said they were managing chronic pain, 75% said they bought Joint Juice because they have joint pain and thought the drink would help them, and 56% said they had been diagnosed with arthritis. In Premier’s expert’s survey, 21.5% of respondents said that information on Joint Juice’s packaging influenced their purchase decisions, and 32.3% said they had generally heard about the benefits of glucosamine.

GBL §§ 349 and 350 require courts to award the greater of actual damages or statutory damages of $50 or $500, respectively. Montera sought $550 per unit sold in statutory damages, totaling over $91 million. The district court, though, thought that would violate due process and awarded statutory damages of $50 per unit sold—the amount available under § 349—totaling roughly $8.3 million, along with roughly $4.5 million in prejudgment interest.

The court of appeals rejected Premier’s argument that there could be no misleadingness as a matter of law because it possessed substantiation for its claims. But deceptiveness is a question of fact, and the jury appropriately considered the studies introduced by both sides. This wasn’t a case where the plaintiff’s interpretations were implausible or unrealistic.

The court of appeals also rejected Premier’s argument that it was entitled to an instruction on safe harbors: Section 349 provides that “it shall be a complete defense” to liability if a challenged practice is “subject to and complies with the rules and regulations of” a federal regulatory agency. Premier argued that it complied with the FDA’s supplement regulations, which permit structure/function claims as long as those aren’t disease claims. But, to comply with this regulation, “a manufacturer must notify the FDA within 30 days of first marketing a supplement that the product’s label includes a qualifying claim, and certify that the claim is substantiated, among other requirements.” Premier didn’t dispute that it failed to comply with the 30-day notice—it began making the claims at issue in 2009 but didn’t notify the FDA until 2012. There was no evidence that the FDA excused its failure to comply or that the 2012 notification cured the earlier noncompliance. Thus, the district court did not err by declining to instruct the jury on the safe harbor provision.

Injury: The district court instructed the jury that the class was “injured by purchasing Joint Juice if it was valueless for its advertised purpose.” The jury found, by special verdict, that the class was injured by purchasing Joint Juice, and it awarded damages equal to the total amount spent on Joint Juice during the class period based on average purchase price. It thus the jury declined to reduce the damages amount on account of Joint Juice having any residual value for hydration/containing vitamin C apart from its advertised purpose.

NY law does not require a price premium or a physical injury. It requires only, as here, that class members didn’t get what they paid for: they bought a product that was advertised to improve joint health but in reality did not.  Indeed, “this case arguably takes the price premium theory to its logical endpoint: the jury found that Joint Juice was entirely ‘valueless for its advertised purpose,’ so the entirety of the purchase price could be viewed as a price premium.” Adopting Premier’s view would “immunize from liability the age-old deceptive tactics of the ‘grifting snake oil salesman,’ which spurred the adoption of some of the earliest consumer protection laws in this country.”

The court next rejected Premier’s argument that Montera did not show that each one of the class members’ injuries were caused by the statements on Joint Juice’s packaging. But that’s not the rule in NY. It is emphatically the law that reliance isn’t required to show causation under GBL §§ 349 and 350. New York uses “an objective definition of deceptive acts and practices.” Liability “turns on what a reasonable consumer, not a particular consumer, would do.” “Because the test is objective and turns upon the reasonable consumer, reliance is not at issue, and the individual reason for purchasing a product becomes irrelevant and subsumed under the reasonable consumer standard, i.e., whether the deception could likely have misled someone, and not, whether it in fact did.” As a result, “Rule 23(b)(3)’s predominance requirement poses no barrier to class treatment of [§ 349] claims because it’s unnecessary to make any individualized inquiry into what each plaintiff knew and relied on in purchasing his or her [product].”

The court also rejected challenges to certain evidentiary rulings at trial. Montera offered, among other things, “a list of Google AdWords that Premier purchased to market Joint Juice, many of which related to arthritis, and a television commercial featuring a celebrity recommending Joint Juice to help joint stiffness.” Although not every NY purchaser would have seen these, the evidence was not irrelevant; it was relevant to show the message conveyed by the packaging, including that the packaging was meant to convey a disease claim, not a structure/function claim. The trial court also properly instructed the jury to limit its analysis to the packaging.

Likewise, it wasn’t improper to admit a letter Premier’s tax advisor sent to the California Department of Resources Recovery and Recycling in 2010. The letter argued that Joint Juice should not be subject to a five-cent bottle deposit tax because it did not qualify as a “beverage” under California law, but rather was a “medical supplement” and “over-the-counter medication.” The letter also stated that “the only reason to purchase Joint Juice® supplement is for the medicinal value of the glucosamine and chondroitin it contains.” [On the one hand, ouch; on the other, this is glaringly obvious.] Again, this was relevant to the structure/function versus disease claims argument, and references to California law were not unduly confusing.

Likewise, Montera’s counsel’s arguments were not unduly inflammatory. Suggesting that Premier was “prey[ing] on the vulnerable” was allowed because counsel “is allowed to argue reasonable inferences based on the evidence,” and counsel’s argument that “Joint Juice set out to target people who suffer from arthritis” was consistent with the evidence of Premier’s marketing strategy. Counsel’s argument that Premier used “paid hacks and certified [q]uacks in the articles that they publish” was not “untethered from the record; it was consistent with evidence about Premier relying on industry-backed studies, evidence that some of the sponsoring companies refused to release the underlying data for external review, and the note written by Premier’s president not to publish the study Premier contemplated if it yielded unfavorable results.” References to the company’s size/consumers banding together were limited and not inappropriate as a response to defense counsel’s suggestion that Premier was a small company.

Statutory damages: The relevant statutes aren’t explicit about whether statutory damages are calculated on a per-person or per-violation basis. The district court, looking at federal cases (remember, there can’t be state cases on this), concluded that the statutory damages should be assessed on a per-unit basis. The court reasoned that GBL §§ 349 and 350 create private causes of action for persons “injured by reason of any violation” of either statute. “In our view, the plainest reading of that phrase is that a cause of action arises for each violation. Here, a class member suffered a violation each time they purchased a unit of Joint Juice bearing a deceptive label, whether packaged in a six-or thirty-pack, and New York law entitled them to receive either actual or statutory damages for each violation.” The history and consumer protection purpose of the statutes supported this reading, including an increase from $50 to $500 for § 350 because “[c]urrent limits are too low to be effective.”

The court noted that, given that class actions are not allowed in state court, “the Legislature was surely aware that the statutes’ deterrent function would not be accomplished by aggregating statutory damages across a large number of plaintiffs.” Individual filing fees were at least $400 when NY amended the law; using a per-person calculation would mean that “a consumer deceived into making several purchases of the same low-cost item might have to pay $400 in up-front filing fees to potentially recover $550 in combined statutory damages under §§ 349 and 350. We are not persuaded that the Legislature would have considered that such a meager incentive would accomplish the Legislature’s express goal of deterring statutory violations.”

So, does a $91 million statutory damages award violate due process? Wakefield v. ViSalus, Inc., 51 F.4th 1109 (9th Cir. 2022), concerned a company that placed over 1.8 million robocalls in violation of the Telephone Consumer Protection Act (TCPA). The TCPA’s statutory penalty is $500 “for each [ ] violation.” The district court ordered the defendant to pay $925.2 million. Instead of using the factors the Supreme Court has applied to common-law torts, the 9^th Circuit mandated the use of seven factors to decide “when an award is extremely disproportionate to the offense and ‘obviously’ unreasonable”: “1) the amount of award to each plaintiff, 2) the total award, 3) the nature and persistence of the violations, 4) the extent of the defendant’s culpability, 5) damage awards in similar cases, 6) the substantive or technical nature of the violation, and 7) the circumstance of each case.” This was intervening precedent because of how long 9^th Circuit cases take. [The underlying precedent is Lochner-era caselaw letting courts strike down statutory damages as excessive as a matter of substantive due process. Judicial supremacy over legislators strikes again, I guess. Compare how courts treat this argument in copyright cases.]

The court thus remanded without expressing an opinion about what would be unreasonable. The district court previously considered the NY legislature’s goals in barring aggregate damages in class actions, and concluded that such an intent supported reducing the total damages award. On remand, it should also consider the legislature’s goals for deterrence and compensation in enacting GBL §§ 349 and 350.

Prejudgment interest was unwarranted because the statutory damages award wasn’t compensatory; it exceeded the jury’s actual damages award of roughly $1.5 million, and thus awarding both statutory damages and prejudgment interest would constitute a windfall.