Advocacy organization lacked standing to litigate over foie gras claims

Voters for Animal Rights v. D’artagnan, Inc., 2021 WL 1138017, No. 19-CV-6158 (MKB) (E.D.N.Y. Mar. 25, 2021)

Plaintiff, a nonprofit dedicated to advancing the interests of citizens who support animal protection, alleged that defendants violated sections 349 and 350 of the NYGBL by deceptively marketing their foie gras products as originating from humanely treated ducks, which injured it by “(1) setting back its organizational mission to reduce demand for foie gras and obtain the passage of laws banning its sale, and (2) requiring it to spend money and resources to counter Defendants’ misleading messages.” The court dismissed the complaint; these injuries were not cognizable and indirect.

Plaintiff maintained that its efforts had been harmed because “[r]esearch commissioned by the foie gras industry specifically shows that consumers who support a ban on foie gras production may change their views, to oppose such legislation, once they are exposed to misleading pro-industry messaging.”

The NY Court of Appeals has denied recovery for a plaintiff’s “derivative injuries,” that is, injuries that arise solely as a result of injuries sustained by another party. This was the case here; plaintiff did not suffer diversion of trade, which is “direct” injury by reason of deceived consumers. [This is, as the Lexmark court recognized, playing with the concept of directness; proximate cause really does better as an explanation because it’s more honest about being a legal judgment and not some ontological step-counting exercise.]

Plaintiff argued that it was directly injured when defendants’ misleading ads decreased support for its mission, analogous to lost sales, and that it was injured by being forced to expend additional resources to counteract the effects of the advertising, as in opioid litigation, where government entities have been held to have suffered relevant injury based on the costs of addiction/overdose to their law enforcement/healthcare resources.

The court disagreed. The NY Court of Appeals has held that an insurer could not sue a tobacco company that “misrepresented the dangers of smoking and engaged in a campaign to encourage consumers to smoke” even though the plaintiff insurer was required to bear the increased medical costs that resulted, because the plaintiff insurer’s claims were “too remote” and derivative of consumers’ injuries. The Court of Appeals found no legislative history in support of the insurer’s theory, and it “warned against ‘the potential for a tidal wave of litigation against businesses that was not intended by the [l]egislature.’ ” So too with later claims by the State that defendants had misrepresented internet purchases of cigarettes as tax-free and New York consumers had bought them, depriving the state of tax revenue.

I have to admit, if the Court of Appeals is serious that “[a]n injury is indirect or derivative when the loss arises solely as a result of injuries sustained by another party,” then I don’t see how any competitor can logically sue under these statutes, but I have no doubt that the magic word “goodwill” will bring different results in practice. (Even disparagement only occurs when a wrong has been done to the consumer—deceiving them about something; the harm to the plaintiff’s goodwill is the changed mental state of the consumer.) Indeed, the court distinguishes other cases as involving “direct harms to a business,” e.g., via allegedly misleading claims to consumers that the defendants provided independent/unbiased mattress reviews. What makes that “direct”? Well, deceived consumers withheld trade from plaintiffs. [That sounds … indirect.] But here, defendants weren’t targeting the plaintiff directly, but merely affecting public opinion, “which in turn affects how Plaintiff allocates resources to fulfill its organizational mission.” The legislative history supported the court’s holding because it “suggest[ed] a balance between allowing individual plaintiffs to seek relief while limiting the potential for mass litigation.” [The legislature was dubious about class actions, which doesn’t seem like the same thing as here and also is trumped by the Federal Rules of Civil Procedure, if I recall correctly.]

Plaintiff’s allegedly unique situation—with empirical research establishing the harm to its mission—didn’t change things, any more than the state’s special position with respect to cigarette taxes did for it.

 

Be kind, certify a class

In re KIND LLC “Healthy and All Natural” Litig., 2021 WL 1132147, Nos. 15md2645, 15mc2645 (S.D.N.Y. Mar. 24, 2021)

Plaintiffs sought class certification of their false advertising claims based on the claims that KIND falsely advertised “All Natural / Non-GMO,” “Non-GMO,” and “No Genetically Engineered Ingredients”; KIND sought to exclude expert reports. Both were partially successful.

Plaintiffs allege that KIND products contain “a conglomeration of chemically-synthesized and highly-processed ingredients,” that “[t]esting ... detected the presence of GMOs in at least some of the products,” and that “approximately 90% of canola, 89% of corn, and 94% of soybeans grown in the United States are genetically modified.” They brought NY, California, and Florida claims.

Numerosity, adequacy, commonality, and typicality were satisfied. “Even if a named Plaintiff did not see all of the label variants, the typicality requirement would still be met. … The differences are slight and all can be litigated in this action with the current class representatives.”

The class was also ascertainable. “While KIND labels varied, all the labeling over the putative class period is allegedly deceptive. As such, the possibility that a potential class member could join the litigation without ever seeing the allegedly deceptive advertising cannot occur here.” Nor was the lack of a receipt requirement fatal. “Imposing a receipt requirement would severely constrict consumer class actions where most consumers do not keep receipts because the purchase price is low and part of a minerun retail transaction.”

The court thought that the three states’ laws were similar enough on the key aspects to analyze predominance together, focusing on (1) the deceptive act, (2) materiality, and (3) injury.

The court agreed that common questions about deceptiveness/materiality predominated, given the extreme similarity in meaning of the three label variants. None of the labels displayed “All Natural” on its own, but always with “Non-GMO.” They could be proved true or false on a classwide, as could materiality (which is an objective inquiry about reasonable consumers under the governing laws). Nor was the fact that plaintiffs offered various definitions of “All Natural” fatal; none of the definitions contradicted each other. Finding commonality also served “important policy considerations”:

This consumer class action spins a familiar tale. A large company produces similar products with different labels. Should employing slightly different labels allow a company to escape liability? … The labels on these products vary slightly but all are sufficiently similar to draw potential customers to the KIND brand. Moreover, as every company does, KIND refined its advertising strategy with the passage of time and market research, resulting in gradual changes to its labeling. … If this Court declined to certify the proposed classes, consumer-product companies would have a roadmap to avoid class actions. And given the relative low cost of most consumer products, those companies could avoid any liability for deceptive labeling.

KIND also argued that the number of ingredients challenged as non-natural defeated predominance. But, if a product contains (what a jury finds to be) a single non-natural or GMO ingredient, the label is incorrect and plaintiffs may be entitled to damages.

Plaintiffs were also prepared to have their expert quantify the alleged price premium. A damages model for a false advertising case must “isolate the premium due only to the allegedly misleading marketing statement.” Plaintiffs’ expert proposed to use a hedonic regression and a conjoint analysis; this could be workable despite the label variations. KIND’s argument to the contrary assumed that different variations of the label would lead to different premiums. First, a liability class could be certified even if damages weren’t amenable to classwide proof. Second, all purchasers were exposed to allegedly misleading advertising and therefore may have paid a premium. Third, the differences among the labels were slight, making it unlikely that any differences were significant.

The court also rejected KIND’s Daubert motion to exclude the damages expert; he did all that was required at this stage: opine what could be done to assess damages and that the data to do so were available. A rebuttal expert from plaintiffs was, however, excluded as untimely.

Finally, superiority favored certification because a class action was the best way to resolve this kind of dispute about a low-cost problem, and it was already consolidated as MDL.

Plaintiffs were, however, not allowed to seek injunctive relief under Rule 23(b)(2). Berni v. Barilla S.p.A., 964 F.3d 141 (2d Cir. 2020), held that past purchasers couldn’t maintain an injunctive class. They weren’t definitely going to buy again, and they knew they’d been deceived before, so they wouldn’t be fooled again. In the Second Circuit, inability to rely on a continuing representation is not sufficient injury.

claims that "infant" formula misleadingly implies special formulation survives

Youngblood v. CVS Pharmacy, 2020 WL 8991698, No. 20-cv-06251-MCS-MRW (C.D. Cal. Oct. 15, 2020)

Youngblood bought an acetaminophen product for infants, believing based on its packaging that it was specifically formulated for infants and therefore different from CVS’s acetaminophen product for children. The word “infants,” photo of a mother and infant, and instruction to “Compare to the active ingredients in Infants’ Tylenol Oral Suspension” allegedly drove that belief. Comparing it to the Children’s product would allegedly reinforce that belief, because the children’s product displays an image of a parent holding what appears to be an older child and states that it is “For Ages 2 to 11.” However, they are both dosed at 160 mg/5 mL. The formulations are identical; the only difference is that the Infant Product comes with a syringe while the Children’s Product comes with a plastic cup. But the Infant product costs $6.49 per ounce of medicine and the Children’s Product costs $8.79 per eight ounces of medicine. Plaintiffs brought the usual California statutory claims.

Children's Version

Infant Version

Although the consumer protection statutes don’t authorize the court to set retail prices, that’s not what the complaint did. Plaintiffs didn’t contend that the price was the source of the deception, but relied on: (1) the name “Infants’ Pain + Fever”; (2) the instruction to “Compare to active ingredients in Infants’ Tylenol Oral Suspension”; and (3) the picture of what appears to be a mother holding a young child relative to the older child featured on the Children’s Product. Without any express disclosure that the medicine in the bottle is exactly the same, and provided at the exact same concentration, this could plausibly lead a significant portion of the general consuming public to concluded that the product was unique or specially formulated for children under two. Merely displaying the acetaminophen concentration on each package, or including a syringe in the box, didn’t foreclose all reasonable inferences that the medicine is specially made for infants. Even if the box had no literal untruths, a reasonable juror could nevertheless conclude that it is “has a capacity, likelihood or tendency to deceive or confuse the public.’ ”

Vegan butter wins again

Miyoko's Kitchen v. Ross, No. 20-cv-00893-RS (N.D. Cal. Aug. 10, 2021)

Preliminary injunction discussed here; now it’s summary judgment time. The state is allowed to regulate “hormone free” on Miyoko’s “vegan butter,” but Miyoko’s is allowed to use the words/phrases “butter,” “lactose free,” “cruelty free,” and “revolutionizing dairy with plants.” The state’s initial attempt to regulate Miyoko’s website (which had images of cows), not just its label, was concededly beyond its statutory authority and now that part of the case is moot.

front of European Style Cultured Vegan Butter from Miyoko's Creamery

side: the Hormone Free claim must go

back: "revolutionizing dairy with plants"

The key piece of evidence was a 2018 study by Silke Feltz and Adam Feltz, “Consumer Accuracy at Identifying Plant-based and Dairy-based Milk Items.” It didn’t involve “vegan butter,” but studied what happened when producers combined dairy signifiers (e.g., “cheese” and “milk”) with dairy-disclaiming language (e.g., “dairy free”). It indicates, in relevant part, that the public “accurately identifie[s] the source of animal-based milk products 84% of the time, plant-based milk-products 88% of the time, animal-based cheese products 81% of the time, and plant-based cheese products 74% of the time.”

This study could not justify the “heavy” burden imposed by Central Hudson on the state’s attempt to bar the use of these terms (except for “hormone free”).

Hormone free: Miyoko’s “vegan butter” product contains naturally occurring plant hormones;

“hormone free” is thus irrefutably false.

This was the state’s only victory.

It’s true that federal dairy and fat-content requirements for “butter” exclude Miyoko’s “vegan butter.” But Central Hudson doesn’t protect “only what the government leaves undefined.” Even the fact that this definition had been unchallenged for 90 years wasn’t important; the court didn’t agree that it was therefore “especially reflective of what consumers understand ‘butter’ to mean.” Indeed, the court thought that it defied “common sense” to think that consumers’ understanding of “butter” had been shaped by 90 years of seeing the term on its own applied only to dairy products. The state was required to provide “more faithful indicators of present-day linguistic norms,” and it didn’t.

The Feltz study didn’t help either. True, a confusion rate of 26% for plant-based cheese products was “solid evidence” that using a dairy product name/dairy-associated statements on a dairy-alternative product could be confusing. But 19% were also confused by animal-based cheeses. This modest difference didn’t suffice to make “vegan butter” inherently misleading.

Footnote of interest to TM folks: The state argued that, because “the Lanham Act is constitutional,” and because “a handful” of federal trademark plaintiffs have secured injunctions with “survey results where 15% of customers” expressed confusion, the Feltz study should be given strong pro-state weight. But those cases provided no justification for assigning “strong First Amendment significance” to the Feltz’s study’s 26% result (especially given that a 15% threshold would “bode ill for ‘milk’ and ‘cheese’ when used to market dairy products”). [I do note that the concept of “net” confusion might help everyone here. Also: the day is coming when courts in TM cases will note that they have not really done Central Hudson balancing like this, especially when they are dealing with low but nonzero net confusion results.]

Nor did the state show that is regulation served a substantial interest in avoiding customer confusion. And having a “consistent scheme” for the regulation of food labeling wasn’t enough of an interest, at least at this level of generality. “[T]he First Amendment demands proof that restricting Miyoko’s commercial speech will promote the State’s asserted interest.” Result: Sure, you can have standards of identity for food … as long as no one in the industry challenges them.

malt "cocktails" with no wine or spirits were plausibly misleading

Cooper v. Anheuser-Busch, LLC, 2021 WL 3501203, No. 20-CV-7451 (KMK) (S.D.N.Y. Aug. 9, 2021)

Plaintiffs alleged that the labels on the “Ritas” line of beverages (Lime-A-Rita Sparkling Margaritas, Sangria Spritz Sparkling Sangria Cocktail and Rosé Spritz Sparkling Rosé Cocktail, and Mojito Fizz Sparkling Cocktail) were deceptive and misleading, generating claims for (1) violations of §§ 349 and 350 of the New York General Business Law, (2) breach of express warranty, (3) common law fraud, and (4) unjust enrichment. The court partially granted and denied the motion to dismiss.

The Margarita Products allegedly prominently display “LIME-A-RITA” and “SPARKLING MARGARITA,” with an image of a margarita served with a salted rim and lime wedge in the fornt, but do not contain tequila; plaintiffs allege that a reasonable consumer expects tequila in a margarita. The fact that the products are malt beverages flavored to resemble a margarita are only disclosed in “a small font statement” on the bottom panel of the packaging. The allegations for the other products are similar. For example, plaintiffs alleged that the term “Spritz” is “well known as a wine-based cocktail.” The Mojito Products say “SPARKLING COCKTAIL,” and also have, e.g., small images of Collins cocktail glasses and a martini glass next to a number indicating how many cans of each flavor come in the package. (I have to admit, as a cocktail fan, I’m offended.)

"sparkling margarita"

"sparkling classic cocktails" (mojito, cosmo)

"Spritz": sangria, rosé

The plaintiffs also alleged that the misleadingness was enhanced by the market context. Other companies allegedly sell canned beverages with labeling such as “SPARKLING MARGARITA” (Jose Cuervo), “CLASSIC Margarita” (Salvador’s), or “Perfect Margarita” (BuzzBox), but they do have tequila. So too for canned mojitos, canned sangria, and canned rosé.

An actual canned margarita

The misleadingness arguments were not “patently implausible” or “unrealistic.” “To the contrary, Plaintiffs have cogently explained how reasonable consumers might be misled into thinking that the Products were canned cocktails, instead of ‘Flavored Malt Beverage[s].’ Such a mistake is not hard to imagine.” The dictionary agrees that a cocktail is a “usually iced drink of wine or distilled liquor mixed with flavoring ingredients,” a “margarita” is as “a cocktail consisting of tequila, lime or lemon juice, and an orange-flavored liqueur,” “rosé” is as a type of wine, “sangria” is a wine-based “punch,” and a “mojito” is a cocktail containing rum. It was “more than plausible” that a reasonable consumer viewing a package labeled “SPARKLING MARGARITA” would assume the beverage inside contained tequila, and so on. The imagery on the packages did little to dispel misconceptions and, if anything, would reinforce the impression of liquor/wine content.

Defendant argued that consumers would understand these merely as “flavor designators.” That didn’t work at this stage.

Alleged misrepresentations of quantitative aspects may be more easily dispelled by disclaimers than with qualitative characteristics. What about the “truffle oil” case? Well, that was nonprecedential, and also in the special context of “the most expensive food in the world.” Although the ingredient list was a factor, it wasn’t dispositive, and binding Second Circuit precedent says “[r]easonable consumers should not be expected to look beyond misleading representations on the front of [a] box to discover the truth from the ingredient list in small print on the side of the box.” Nor are the recent vanilla cases similar, despite defendant’s argument that these too are merely flavors with non-liquor/wine sources. Fairly construed, plaintiffs alleged that the whole beverage “purports to be something—a ‘margarita’—which it is not,” etc. Margaritas and mojitos can be distinguished from vanilla, “which generally serves as a flavoring agent in other products, as opposed to a discrete item one might order in a bar or restaurant.”
Defendants argued that context made deception implausible, including (1) federal regulations, (2) the “full context” of the packaging, (3) the setting in which plaintiffs purchased them, and (4) the labels of the comparator products.

Defendants argued that federal regulations allowed it to use “a cocktail name as a brand name or fanciful name.” But the regulations prohibit a malt beverage label from containing “[a]ny statement, design, device, or representation that tends to create a false or misleading impression that the malt beverage contains distilled spirits or is a distilled spirits product.” They don’t ban “[t]he use of a cocktail name as a brand name or fanciful name of a malt beverage, provided that the overall label does not present a misleading impression about the identity of the product.” Thus, plaintiffs’ theory was fully consistent with federal regulations. The target of this Action is not Defendant’s use of “a cocktail name as a brand name or fanciful name.”

What about the full context of the packaging?  References to (1) “Ritas,” (2) “ ‘sparkling’ drinks,” and (3) a “wide variety of flavors in both words and images” did not make it “obvious” that these were malt beverage. Anheuser-Busch suggested that because it was “synonymous with beer,” reasonable consumers would conclude that there was no wine or liquor in the products. [Hmm, I wonder if it wants to be bound by that argument at the TTAB?] First, the court wasn’t about to accept that claim as fact at this stage. Second, “Anheuser-Busch” or “A-B” didn’t appear in the images in the complaint, so how would consumers know? Third, “Ritas” and the other flavors/images in the packages wouldn’t obviously mean “no liquor/wine.”

What about the fact that NY doesn’t allow sales of wine and liquor in convenience and drug stores like those in which plaintiffs purchased the products? Although “reasonable consumer[s] do[ ] not lack common sense,” at this stage, the court wasn’t going to resolve questions regarding “the background knowledge, experience[,] and understanding of reasonable consumers” as a matter of law. What consumers know about alcohol regulations “cannot be resolved without surveys, expert testimony, and other evidence of what is happening in the real world…. A consumer’s mistaken assumption that she can purchase a beverage containing wine or distilled liquor in a drug or convenience store is not comparable to a consumer’s putative belief that an ‘Angus’ breakfast sandwich sold for under $5 at Dunkin Donuts is an actual, ‘intact’ steak, or that a ‘mass produced, modestly-priced olive oil [is] made with ‘the most expensive food in the world.’ ” Contextual discrepancy based on price is different from contextual discrepancy based on state alcohol laws, “something that may be far less obvious to the reasonable consumer.”

Comparator products “expressly state that they contain spirits and wine.” Thus, defendant argued, reasonable consumers expect a product that does have liquor/wine to state as much explicitly. Surprising me, the court is most sympathetic to this argument, but it still can’t be resolved on a motion to dismiss. (I would think that instead, the fact that there are actual canned cocktails out there means that consumers are far less likely to read through the full label to see that this “mojito” is not.)

And, of course, putting “flavored malt beverage” on the bottom of the package isn’t enough at this stage. The court wasn’t persuaded that “disclosures aren’t dispositive” only applies when there’s an express claim about ingredients or a suggestion that a particular ingredient dominates; there’s no coherent distinction between those situations and these ones.

Materiality: Under GBL §§ 349–50, a material misrepresentation is one that is “likely to mislead a reasonable consumer acting reasonably under the circumstances.” “In other words, the materiality requirement is incorporated in the legal standard courts use when evaluating whether plaintiffs have adequately pled the second element of a deceptive labeling claim. It does not form some quasi-distinct element that plaintiffs must separately satisfy.” Certainly the court couldn’t say that the type of alcohol was immaterial to a reasonable consumer.

Injury: Plaintiffs alleged that, had they known the products were merely flavored malt beverages that did not contain tequila, wine, or rum, they would not have purchased the them, or would have paid considerably less for them. Defendant argued that more should be required here, especially since plaintiffs brought comparator brands into the complaint without disclosing their prices. At this stage, the allegations of a price premium were enough.  “Although plaintiffs sometimes point to comparators in support of a price premium claim, a plaintiff is not required to do so in order to allege injury.”

The breach of express warranty claims failed for lack of sufficient pre-suit notice, and unjust enrichment was duplicative.

Fraud claims failed because the allegations didn’t establish a “strong inference” of fraudulent intent. “[S]imply alleging a defendant’s self-interested desire to increase sales does not give rise to an inference of fraudulent intent,” and the complaint didn’t allege “strong circumstantial evidence of conscious misbehavior or recklessness,” though this was a closer call. Plaintiffs alleged that defendant ran an ad in which the speaker appears in front of a wine cellar, but that wasn’t enough. 

“The outcome might be different, for example, if Plaintiffs had plausibly alleged that Defendant was aware of consumers’ preferences for beverages with distilled liquor or wine, and then deliberately marketed the Products as such in order to capitalize on that market,” or that “Defendant was losing market share because of competition from canned cocktail manufacturers, and then decided to market its malt beverages deceptively as ‘cocktails’ to salvage its position in the market for alcoholic beverages.” So maybe they’ll replead.

Bank had no duty to disclose limits to PPP loan applicants

Elizabeth M. Byrnes, Inc. v. Fountainhead Commercial Capital, LLC, 2021 WL 3501518, No. CV 20-04149 DDP (RAOx) (C.D. Cal. Aug. 6, 2021)

The CARES Act, among other things, established the Paycheck Protection Program, a $349 billion loan program through which small businesses could obtain forgivable loans backed by the Small Business Administration, but administered by private lenders. As soon as it was enacted,

Fountainhead advertised that it would “soon be tackling the loan inquiries lined up in our queue, providing business owners with capital they need within days.” The next day, Plaintiff submitted a PPP loan application to Fountainhead for a loan of less than $25,000. Fountainhead responded with an e-mail stating that Plaintiff was “in the queue,” and that “[h]elp is on the way,” and asking her to gather certain documentation. The next day, Fountainhead told Plaintiff to expect “an invitation to a secure portal for document upload within the next 48 business hours.” Plaintiff did not receive any such invitation.

Fountainhead continued to promote PPP loans, encouraging applications and stating that it “hope[d] to make these loans within days.” Fountainhead executives made statements touting its advantage over other, bank-based lenders, such as Fountainhead’s ability to approve loans “within a few hours.” Fountainhead further represented that it “require[d] no[ ] prior relationship, no special (money-making) criteria, and [was] processing first come, first serve ... no prioritization.”

Despite followup (and reassurance from Fountainhead) nothing happened. Plaintiff alleged that, on the basis of its representations, it gathered the requested documents, waited for the opportunity to upload them, refrained from submitting a loan application to other lenders, and made other related decisions regarding its small business.

Plaintiff alleged that Fountainhead was not even licensed to engage in lending activities in California until April 21 and had not secured any funding prior to that time, and therefore could not possibly have extended loans “within days.” It also alleged that Fountainhead did prioritize favored customers and higher-value loans that would yield higher fees to Fountainhead than would relatively small loans, such as the one it sought. It sought to represent a class bringing state law claims for fraudulent concealment, unfair business practices, and false advertising.

The court granted the motion to dismiss.

There was no fraudulent concealment because Fountainhead lacked any duty to disclose to the plaintiff.

A duty to disclose may arise in four circumstances: “(1) when the defendant is in a fiduciary relationship with the plaintiff; (2) when the defendant had exclusive knowledge of material facts not known to the plaintiff; (3) when the defendant actively conceals a material fact from the plaintiff; and (4) when the defendant makes partial representations but also suppresses some material facts.” Although plaintiff alleged (2)-(4), all three “presuppose the existence of some other relationship between the plaintiff and defendant in which a duty to disclose can arise.”

The UCL and FAL claims were equitable, and under Sonner v. Premier Nutrition Corp., 971 F.3d 834 (9th Cir. 2020), the plaintiff needed to allege that it lacked an adequate remedy at law, which it did not allege.

data breaches can lead to a potpourri of claims

In re Blackbaud, Inc., Customer Data Breach Litig., No. 3:20-mn-02972-JMC, MDL No. 2972, 2021 WL 3568394 (D.S.C. Aug. 12, 2021)

Query whether this kind of case will come out differently as TransUnion v. Ramirez gets further assimilated into the law.

Blackbaud (good name!) “provides data collection and maintenance software solutions for administration, fundraising, marketing, and analytics to social good entities such as non-profit organizations, foundations, educational institutions, faith communities, and healthcare organizations.”

It stores both PII and Protected Health Information from its customers’ donors, patients, students, and congregants. Plaintiffs “represent a putative class of individuals whose data was provided to Blackbaud’s customers and managed by Blackbaud,” thus they weren’t direct customers of Blackbaud.

In early 2020, “cybercriminals orchestrated a two-part ransomware attack on Blackbaud’s systems,” copying plaintiffs’ data and holding it for ransom. The cybercriminals then attempted but failed to block Blackbaud from accessing its own systems. “Blackbaud ultimately paid the ransom in an undisclosed amount of Bitcoin in exchange for a commitment that any data previously accessed by the cybercriminals was permanently destroyed.” [Um. That commitment seems … hard to believe?]

Plaintiffs alleged that the attack resulted from Blackbaud’s “deficient security program” and failure to comply with industry and regulatory standards. Its forensic report found that “names, addresses, phone numbers, email addresses, dates of birth, and/or SSNs” were disclosed in the breach but allegedly improperly concluded that there was no credit card data taken. Plaintiffs also alleged that Blackbaud failed to provide them with timely and adequate notice of the attack and the extent of the resulting data breach. In its July 2020 disclosures, Blackbaud asserted that the cybercriminals did not access credit card information, bank account information, or SSNs. But its September 2020 Form 8-K with the Securities and Exchange Commission said that SSNs, bank account information, usernames, and passwords might have been taken. This litigation followed.

This opinion addresses certain statutory claims, highlighting variation around the country in both specific data breach and general consumer protection claims.

California Consumer Privacy Act :

The CCPA

provides a private right of action for actual or statutory damages to “[a]ny consumer whose nonencrypted and nonredacted personal information ... is subject to an unauthorized access and exfiltration, theft, or disclosure as a result of the business’s violation of the duty to implement and maintain reasonable security procedures and practices appropriate to the nature of the information to protect the personal information[.]”

Blackbaud argued that it was not a “business” regulated by the Act. Short answer: it was adequately alleged to be one.

California Confidentiality of Medical Information Act: One plaintiff plausibly alleged that her “medical information” was disclosed during the attack, and that Blackbaud plausibly qualified as a “medical provider” under the CMIA despite its lack of direct contact with her.

Florida Deceptive and Unfair Trade Practice Act: Monetary recovery requires “(1) a deceptive act or unfair practice; (2) causation; and (3) actual damages.” Blackbaud’s alleged bad practices were failing to adopt reasonable security measures and adequately notify customers and Plaintiffs of the data breach; misrepresenting that certain sensitive PII was not exposed during the breach, that it would protect Plaintiffs’ PII, and that it would adopt reasonable security measures; and concealing that it did not adopt reasonable security measures. However, the Florida plaintiffs failed to sufficiently allege actual damages, which under FDUTPA are “economic damages related solely to a product or service purchased in a consumer transaction infected with unfair or deceptive trade practices or acts.” A plaintiff may not recover for “damage to property other than the property that is the subject of the consumer transaction.” Here, Blackbaud’s data management software was “the property that is the subject of the consumer transaction,” not the data itself. And these plaintiffs didn’t allege damage to that property, only to their own bank accounts, emotional well-being, and data.

However, the Florida plaintiffs did state a claim for injunctive relief, since FDUTPA makes “declaratory and injunctive relief available to a broader class of plaintiffs than could recover damages,” as long as a plaintiff is “a person ‘aggrieved’ by the deceptive act or practice.” Plaintiffs alleged that Blackbaud’s misrepresentations and omissions about its security efforts and the scope of the Ransomware Attack “prompted them to take mitigation efforts out of fear that they were at an increased risk for fraud or identity theft.”

New Jersey Consumer Fraud Act: Blackbaud argued that its services weren’t within the scope of the NJCFA because it sells services to sophisticated businesses and entities, not the general public. The NJCFA prohibits a person from using an “unconscionable commercial practice, deception, fraud,” or the like “in connection with the sale or advertisement of any merchandise or real estate.” Merchandise is defined as “any objects, wares, goods commodities, services or anything offered, directly or indirectly to the public for sale.” New Jersey courts have said that the law’s applicability “is limited to consumer transactions which are defined both by the status of the parties and the nature of the transaction itself.” Although the NJCFA does not define “consumer,” New Jersey courts have interpreted the term to mean “one who uses economic goods and so diminishes or destroys their utilities.” A plaintiff does not qualify as a “consumer” if they do not purchase a product for consumption. Thus, the NJ plaintiffs weren’t “consumers” entitled to the protection of the NJCFA. Nor were donations to the entities that transacted with Blackbaud enough. Donors are not “consumers” under the NJCFA because they are “not being approached in their commonly accepted capacity as consumers” and a donation “involves neither commercial goods nor commercial services.” Plaintiffs didn’t allege that they purchased or used Blackbaud’s services, knew Blackbaud existed, or perceived that Blackbaud managed their data.

New York General Business Law § 349: This requires a consumer-oriented practice, which occurs if it has “a broader impact on consumers at large,” or “something more than a single-shot consumer transaction or a contract dispute unique to the parties.” However, GBL § 349 does “not impose a requirement that consumer-oriented conduct be directed to all members of the public[.]” Unsurprisingly, the allegations here adequately established consumer-oriented conduct.

Privity isn’t required under GBL § 349, so it was irrelevant that the NY plaintiffs weren’t direct consumers of Blackbaud. Section 349(h) specifically empowers “[a]ny person who has been injured by reason of any violation of this section” to bring an action. GBL § 349(h). “The critical question, then, is whether the matter affects the public interest in New York, not whether the suit is brought by a consumer or a competitor.”

Pennsylvania Unfair Trade Practices and Consumer Protection Law: The UTPCPL provides a private cause of action to “[a]ny person who purchases or leases goods or services primarily for personal, family or household purposes and thereby suffers any ascertainable loss of money or property, real or personal, as a result of the use or employment by any person of a method, act or practice declared unlawful” by the Act. “It is the plaintiff’s burden to prove justifiable reliance in the complaint.” Again unsurprisingly, the Pennsylvania plaintiff failed to sufficiently allege reliance on Blackbaud’s misrepresentations and omissions. She instead alleged that she was “required to provide her PHI to her healthcare provider as a predicate to receiving healthcare services[,]” and didn’t allege that she knew that Blackbaud maintained her data or was that she was exposed to representations Blackbaud made to her or her healthcare provider. Her allegation that she “would not have entrusted her Private Information to one or more Social Good Entities had she known that one of the entity’s primary cloud computing vendors entrusted with her Private Information failed to maintain adequate data security” was merely conclusory. Courts sometimes presume reliance, but only in cases involving life-threatening defects.

South Carolina Data Breach Security Act: The provision plaintiffs sued under covered only entities that “own[] or licens[e] computerized data or other data that includes personal identifying information,” requiring them to notify South Carolina residents in the event of a data breach; Blackbaud didn’t own or license the data; its possession was insufficient. True, a separate provision of the law required someone “maintaining computerized data or other data that includes personal identifying information that the person does not own” to notify the owner or licensee after a data breach, but plaintiffs didn’t assert claims under that provision.  

reasonable consumers of manuka honey know its price and grading scheme

Moore v. Trader Joe’s Co., 4 F.4th 874 (9^th Cir. 2021)

Trader Joe’s markets its store brand Manuka honey as “100% New Zealand Manuka Honey” or “New Zealand Manuka Honey,” but Moore alleged that because Trader Joe’s Manuka Honey actually consists of only between 57.3% and 62.6% honey derived from Manuka flower nectar, Trader Joe’s engaged in “false, misleading, and deceptive marketing” of its Manuka honey. FDA guidelines permit labeling honey by its “chief floral source,” given that busy bees cannot be prevented from foraging on different types of flowers, despite their keepers’ best efforts, and plaintiffs’ own tests indicated that Manuka was the chief floral source. The court concluded that the 100% claim wouldn’t deceive a reasonable consumer, with some plausible arguments and one really bad argument (it was so cheap that no reasonable consumer would believe it was Manuka honey, which assumes a lot of highly calibrated knowledge among consumers that seems a bit inconsistent with a motion to dismiss).

100% New Zealand Manuka Honey and New Zealand Manuka Honey jars

Identical nutrition panel on both showing the only ingredient as manuka honey

Manuka honey supposedly has antibacterial properties and health benefits; this, plus geographic barriers to widespread production, result in high demand and low supply and “a price far in excess of other honeys.” Manuka honey producers grade the purity of Manuka honey on the Unique Manuka Factor (UMF) grading system, from 5+ to 26+ based on the concentration of honey derived from Manuka flower nectar. A bottle of Manuka honey 92% derived from Manuka flower nectar costs approximately $266, or $21.55 per ounce.

TJ’s Manuka Honey is labeled with a UMF grade of 10+, “a relatively low grade, and sells for the comparatively low price of $13.99 per jar, or $1.59 per ounce.”  The ingredient statement lists Manuka honey as the sole ingredient.

Plaintiffs brought the usual California claims. I think that the court wouldn’t have to rest on factual claims about the details of what consumers understand about Manuka honey if it had admitted that what is really going on here is balancing: given the unique production/collection of honey products, there’s no simple way to explain to consumers what’s going on, so requiring a more complicated explanation would obscure more than it prevented deception. (Though a 5 to 26 scale is pretty weird, LSAT-level weird, and perhaps it really would be more helpful if they indicated that 10+ wasn’t all that Manuka-y.)

Anyway, TJ’s Manuka Honey met the FDA standard, being derived from between 57.3–62.6% Manuka flower nectar (as estimated by pollen count). Taking into account “all the information available to consumers and the context in which that information is provided and used,” “other available information about Trader Joe’s Manuka Honey would quickly dissuade a reasonable consumer from the belief that Trader Joe’s Manuka Honey was derived from 100% Manuka flower nectar.”

Specifically, “information available to a consumer is not limited to the physical label and may involve contextual inferences regarding the product itself and its packaging.” Though, as the Seventh Circuit has held, “[d]eceptive advertisements often intentionally use ambiguity to mislead consumers while maintaining some level of deniability about the intended meaning[,]” as with the “100% Grated Parmesan” full of non-cheese, there was nothing like such conduct here. “Bees make the Manuka honey, without input from Trader Joe’s or any other manufacturer. Trader Joe’s does not insert any additional ingredients to produce the product or mix Manuka honey with other, non-Manuka honeys to dilute it.” And a consumer wouldn’t make an unreasonable or fanciful interpretation of “100% New Zealand Manuka Honey” because of: (1) the impossibility of making a honey that is 100% derived from one floral source, (2) the low price of Trader Joe’s Manuka Honey, and (3) the presence of the “10+” on the label, all of which is readily available to anyone browsing the aisles of Trader Joe’s.

“Although a reasonable consumer might not be an expert in honey production or beekeeping, consumers would generally know that it is impossible to exercise complete control over where bees forage down to each specific flower or plant.” Of course, consumers are unlikely to think of (1) when they browse the aisles. They may very well assume to the contrary even if they’d see the unlikelihood—surely not the impossibility; are there not greenhouses and fields of monocultures around the world?—if forced to work the problem through. (1) is really a cost-benefit analysis: consumers may assume the wrong thing, but correcting that assumption isn’t worth the information costs especially given that there are no single-source honeys.

(2) assumes a really high degree of calibration of understanding, beyond “it is expensive” to “I know the right retail price for high grade honey and I understand that this goes beyond what TJ, a savvy buyer known for its good deals on house brands, could do.” I think that’s a bad idea on a motion to dismiss; it, as with the truffle oil case that invented this consideration, authorizes sellers to deceive bargain-hunters because they aren’t as sophisticated about pricing as the court thinks (without actual evidence) they should be. But plaintiffs didn’t help themselves by alleging that manuka honey consumers “know[s] that the concentration of manuka [nectar, as measured by pollen,] as opposed to other honey pollens can vary significantly from brand to brand depending on what measures have been taken to maximize manuka purity” and “attach importance to representations that communicate a higher purity level.”

The court here thought that consumers of Manuka honey, “a niche, specialty product, are undoubtedly more likely to exhibit a higher standard of care than ‘a parent walking down the dairy aisle in a grocery store, possibly with a child or two in tow,’ who is ‘not likely to study with great diligence the contents of a complicated product package.’ … Rather, an average consumer of Manuka honey would likely know more than most about the production of the product and the impossibility of a honey that is 100% derived from Manuka flower nectar.” In a footnote, the court pointed to Broad City’s parody of the “perceived high-brow nature of the product,” where a main character under the influence of heavy medication buys it at Whole Foods in a grocery trip costing $1,487.50; it’s sarcastically described as “so reasonably priced.” Yeah, that’s real motion-to-dismiss-worthy evidence, speaking of sarcasm. Anyway, the $1.59 per ounce cost of the honey should have signaled relatively low pollen count.

(3) assumes that consumers know the rating scheme, and don’t think it’s 1-10, which is possible though not necessary given the allegations of the complaint. I myself had certainly heard of manuka honey and its purported special properties, but I had no idea of a 5-26 rating scale. The court:

While there are no other details on the jar about what “10+” means, the presence of this rating on the label puts a reasonable consumer on notice that it must represent something about the product. Reasonable consumers of Manuka honey would routinely encounter such ratings and would likely have some knowledge about them. … Thus, even a consumer with cursory knowledge of the UMF scale would know Trader Joe’s Manuka Honey was decidedly on the lower end of the “purity” scale.

Why is a reasonable consumer of Manuka honey someone used to encountering the expensive stuff, rather than someone who’s read about it and happy to find an affordable version in the local TJ’s?

Anyway, the name was ok, and so was the use of “Manuka Honey” as the sole ingredient on the ingredient statement, as provided for by the FDA’s Honey Guidelines.

Claims that timeshare exit services are legal and effective were not puffery

Bluegreen Vacations Unlimited, Inc. v. Timeshare Lawyers P.A., 2021 WL 3552175, No. 20-24681-Civ-Scola (S.D. Fla. Aug. 11, 2021)

Another timeshare versus timeshare exit false advertising case. Marketing Defendants allegedly falsely advertise timeshare exit services by promoting a legitimate process to exit timeshare contracts. The Marketing Defendants allegedly advertise their services on the Third-Party Marketing Defendants’ websites that rate various timeshare exit companies. The Lawyer Defendants allegedly execute a letter directed to Bluegreen that is intended to “cut off any communication between Bluegreen and the Bluegreen timeshare owners, and constitutes the entirety of the ‘service’ the Lawyer Defendants perform.” And the Credit Repair Defendants allegedly manipulate the timeshare owners’ credit reports and remove negative trade lines related to the timeshare owner’s default on the timeshare contracts and file false police reports claiming identify theft on behalf of timeshare owners to discourage credit bureaus from reporting negative information.

This opinion considered only the marketing defendants. First, the court rejected the argument that Rule 9(b) applied to the false advertising claims. Noting only that local courts “tend to apply Rule 8 when addressing motions to dismiss claims under the Lanham Act,” the court followed that trend. And it found that the particularity requirements of Rule 9(b) do not apply to the FDUPTA claims. Under FDUPTA, “the proscription against unfair and deceptive acts and practices sweeps far more broadly than the doctrine of fraud or negligent misrepresentation, which asks only whether a representation was technically accurate in all material respects.” And because “FDUTPA’s elements are more particularized than those of common law fraud,” Rule 9(b)’s concerns with subjecting defendants to unfounded allegations of fraud are lessened by the required specificity. Because “FDUTPA claims seek a remedy for conduct distinct from traditional common law torts such as fraud[,]” “the uniqueness of the cause of action place[s] it outside the ambit of Rule 9(b).”

So too with tortious interference.

There is in general a division among courts on the pleading standard for state consumer protection claims; I wonder if there's any correlation between whether the defendants are, in the court's perception, ordinary advertisers, and the results.

Bluegreen also stated a claim for Lanham Act false advertising by alleging that the Marketing Defendants falsely claimed their services were legal and effective: “Our team at Timeshare Compliance as has a proven track record of persuading developers to exit timeshare contracts. We will remove all liability from your timeshare contract.” They advertised a “proprietary strategy of resolving timeshare contracts,” which was allegedly “to trick timeshare owners to withhold payments to Bluegreen and to hide their fraud through credit repair services and letters from lawyers falsely affirming the legality of the Marketing Defendant’s services.” Their cold calls allegedly said that “TSC’s service permits the Bluegreen owner to safely stop payments to Bluegreen” and that “the Bluegreen owner is guaranteed to receive a legal release from their timeshare obligation.” Evidence of misleadingness or of specific timeshare owners fooled by the scheme wasn’t required at this stage.

This wasn’t puffery/opinion: Claims about “a 100% guarantee and top ratings, as well as advertisements that owners would not be liable at all under the timeshare contracts could constitute facts on which a consumer may rely.”

The other claims survived too.

Illinois unfairness claims against opioid marketers continue

City of Chicago v. Purdue Pharma L.P., No. 14 CV 4361, 2021 WL 1208971 (N.D. Ill. Mar. 31, 2021)

Chicago alleged unfair and deceptive misconduct in multiple defendants’ marketing, commercializing, and promoting their opioid products. (Perdue is first in the list but it’s a bunch of them, so parts of this case will survive the bankruptcy whatever happens there.) There were a bunch of kinds of allegedly deceptive marketing related to misrepresentations and failures to disclose. There were also alleged unfair practices related to diversion of opioids into illicit channels. Defendants allegedly didn’t comply with their statutory duties to maintain suspicious-order-monitoring systems (“SOMS”), and concealed their failure from the public, misrepresenting that they were in compliance with their obligations under the law. This led to the rise of “pill mills” and an increasing number of deaths and hospitalizations.

Among other things, the court addressed whether the City adequately pled unfairness under the Illinois Consumer Fraud Act. Courts look to the FTCA for guidance on ICFA, and thus consider: “(1) whether the practice offends public policy; (2) whether it is immoral, unethical, oppressive, or unscrupulous; (3) whether it causes substantial injury to consumers.”

The parties focused on the public policy element; the City argued that defendants violated their duties to monitor and prevent diversion under the CSA (Controlled Substances Act). Defendants rejoined neither the CSA nor its implementing regulations impose any duties owed to consumers that might reveal a relevant public policy; it just guided the DEA in enforcement. But, as the MDL court earlier in this case held, the CSA and its implementing regulations impose an ongoing duty on DEA registrants. “Given that, as the Court has explained, defendants were under legal duties, imposed under the CSA, to monitor for suspicious orders and halt shipments of them, the Court has little doubt that their alleged failure to do so offends public policy, particularly under circumstances in which consumers of their products and the consumers’ communities were likely to be injured by addiction and its consequences.”

However, public policy wasn’t dispositive, “because plaintiff’s allegations of immoral, unethical, oppressive, or unscrupulous conduct causing substantial injury to consumers are sufficient to state a claim on their own.” In particular, this was “oppressive” conduct because it deprived consumers of choice:

By promoting the use of their products for chronic or long-term pain while concealing the risks, including the risk of addiction, they not only caused consumers with chronic pain to use their product, but also, a reasonable factfinder could conclude, they put these consumers in a position in which they were compelled by their addiction to continue buying defendants’ product, whether via legal or illicit channels. In other words, the consumers, having been tricked into buying defendants’ products, had little alternative but to submit to defendants’ alleged misconduct and continue to buy the products, even in illicit channels, if necessary. This is enough to state a claim by itself.

There was also no preemption by the CSA.

Defendants contested harm causation because the City alleged oversupply in the aggregate without identifying specific orders that should have been refused, but the court agreed with others that the “very existence of the duties to maintain effective controls supports the notion that opioid misuse is foreseeable.” Any intervening acts, “including decisions by prescribers, patients, distributors, pharmacies, and third-party criminals,” were “reasonably foreseeable, and thus not superseding acts” that broke the chain of proximate causation.

 

reasonable consumer isn't required to interpret ingredient list for naturalness

Moore v. GlaxoSmithKline Consumer Healthcare Holdings (US) LLC, No. 20-cv-09077-JSW,  2021 WL 3524047 (N.D. Cal. Aug. 6, 2021)

Moore alleged that GSK falsely labeled certain ChapStick products with the claims “100% Natural,” “Natural,” “Naturally Sourced Ingredients,” and “100% Naturally Sourced Ingredients.” The products allegedly contain non-natural, synthetic, artificial, and/or highly processed ingredients. The products are

100% Natural Lip Butter; Total Hydration 100% Natural Lip Balm; Total Hydration Essential Oils Lip Balm; Total Hydration Moisture + Tint Lip Balm; and Total Hydration Natural Lip Scrub, which come in a variety of scents and shades, though Moore alleged that they were substantially similar, identifying twelve allegedly non-natural (etc.) ingredients. Moore alleged that she routinely the Total Hydration 100% Natural Lip Balm in Eucalyptus Mint and Fresh Citrus scents and the Total Hydration Essential Oils Lip Balm in the Happy scent, relying on the natural representations on the label. She alleged a continued desire to purchase the products if they didn’t contain any non-natural ingredients but was currently unable to rely on the truth of the natural representations. She brought the usual California statutory claims, along with breach of express warranty and unjust enrichment.

Based on these allegations, Moore had Article III standing for products she didn’t buy, because the products and alleged misrepresentations were substantially similar. Differences might impact class certification or summary judgment, but they weren’t enough to defeat substantial similarity for the purposes of standing. She also had standing to seek injunctive relief. As with prior cases, desire to buy the properly labeled product plus inability to rely on the truth of the packaging constituted a cognizable risk of future harm. Moore alleged that as “an average consumer who is not sophisticated in the chemistry, manufacturing, and formulation of cosmetic products,” she would not be able to differentiate between cosmetic ingredients that are natural and those that are synthetic. Thus, she alleged that she was at risk of reasonably, but incorrectly, assuming that GSK fixed the formulation. “[E]ven if Plaintiff is now aware of some synthetic ingredients, it is plausible that she would still be unable to rely on the Products’ labeling in the future given her allegations that she cannot differentiate between synthetic and natural ingredients.” In any event, the court didn’t think that she should be required to bear the burden of scrutinizing the ingredient list to figure out if the products were really natural.

Moore also adequately stated a claim under Rule 9(b). As to misleadingness, she alleged a definition of natural and alleged that she interpreted the natural representations as claims that the products contained no non-natural, artificial, and/or synthetic ingredients. She also provided a definition of “synthetic” and alleges how each challenged ingredient is non-natural, synthetic, or artificial. Moore further plausibly pled deception by reasonable consumers. Numerous courts in the Ninth Circuit have found it plausible that a reasonable consumer could understand similar ‘natural’ statements, including ‘100% natural,’ ‘natural,’ and ‘naturally-sourced,’ to mean that a product does not contain any non-natural ingredients.” Contrary cases involved limited natural representations, such as “Made with 100% Natural Moisturizers.”

no preemption of state claims where FDA didn't regulate cosmetic talc at all

Johnson & Johnson v. Fitch, No. 2019-IA-00033-SCT, --- So.3d ----, 2021 WL 1220579 (Miss. Apr. 1, 2021)

The Mississippi AG sued J&J under the Mississippi Consumer Protection Act for selling talcum powder products, alleging that J&J failed to warn of the risk of ovarian cancer in women who used talc. J&J argued that the MCPA didn’t cover FDA-regulated labels and that if it did it was preempted. In 1994 and 2008, citizen petitions to the FDA requested a cancer warning on cosmetic talc products; the FDA denied both because it “did not find that the data submitted presented conclusive evidence of a causal association between talc use in the perineal area and ovarian cancer.”

The MCPA prohibits acts that constitute “unfair or deceptive trade practices in or affecting commerce,” and provides that “[i]t is the intent of the Legislature that in construing what constitutes unfair or deceptive trade practices that the courts will be guided by the Federal Trade Commission and the federal courts to Section 5(a)(1) of the Federal Trade Commission Act (15 USCS 45(a)(1)) as from time to time amended.” But the FTCA, J&J argued, explicitly excludes the regulation of labels on cosmetics, which it commits to the FDA. The state pointed out that “[t]he FTC Act’s false advertising prohibition does not include labeling, but that limit explicitly applies only ‘For the purposes of sections 52 to 54,’ not § 45(a)(1), the section in which the Act instructs courts to be ‘guided’ by.” Also, “guided by” doesn’t mean “determined by.” Given that, at the federal level, the FDA and FTC together cover the waterfront, but that “[i]f judges in Mississippi were bound by the federal Act, then Mississippi would be left without a legal mechanism to address labeling issues,” the state supreme court agreed with the AG.

Moreover, federal law didn’t preempt the claim. The FDCA has an express preemption provision covering cosmetics. Except as otherwise provided, “no State or political subdivision of a State may establish or continue in effect any requirement for labeling or packaging of a cosmetic that is different from or in addition to, or that is otherwise not identical with, a requirement specifically applicable to a particular cosmetic or class of cosmetics” under relevant federal law.

However, by its plain language, preemption only applies if the FDA adopts “a requirement specifically applicable” to a given cosmetic, which it has not. Instead, the FDA decided not to act.

Comment: I would think that the natural reading would be that if there are no federal requirements at all for talcum powder—which seems to be the missing premise here, itself somewhat unlikely—then there’s preemption if the state tries to add any. But: “the preemption statute requires the existence in federal law of a positive expression of regulation applicable to a specific product.”

Nor did implied preemption apply.

Reading list: Discrimination is Unfair: Interpreting UDA(A)P to Prohibit Discrimination

Stephen Hayes & Kali Schellenberg, Discrimination is "Unfair": Interpreting UDA(A)P to Prohibit Discrimination

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3832022

This Article explores a theory that discrimination is a type of “unfair” practice covered by federal and state laws prohibiting unfair, deceptive (and sometimes abusive) acts and practices (“UDA(A)Ps”). An “unfair” practice is defined by statute as something “(1) likely to cause substantial injury to consumers; (2) which is not reasonably avoidable; and (3) that is not outweighed by countervailing benefits to consumers or competition.” Discrimination fits neatly within this statutory language, and its incorporation as an unfair practice is consistent with the purposes and traditional guardrails around application of UDA(A)P law, as well as general principles in civil rights jurisprudence

 

Applying the “unfairness-discrimination” theory would fill important gaps in the existing patchwork of antidiscrimination laws, which currently leave large swaths of the economy unregulated and unprotected from a variety of discriminatory practices, including those with a disparate impact. By taking seriously the plain language of UDA(A)P law, federal entities like the CFPB and FTC, state attorneys general and agencies, and in some cases private individuals, could make great strides towards ensuring that entire markets and industries are not free to discriminate.

Reading list: native ad disclosures that work?

Eyal Peer & Dalia Shilian, Improving Consumers’ Ability To Detect Native AdvertisingUsing Identified Disclosure:

Native advertising of online content, such as articles embedded within news websites, is a covert attempt by marketers to affect consumer attitudes and behavior. Because such marketing can have detrimental consequences for consumers, regulators worldwide have begun mandating that disclosures accompany marketing content. Despite these mandated disclosures, studies repeatedly find that consumers still fail to detect native ads even when they include various disclosure labels. We argue that the failure of these and other such disclosures, (e.g., software licensing), results from consumers becoming so habituated to these notices that they fail to recognize or use them effectively. We propose an improved form of disclosure for native ads requiring explicit identification of the name of the company or marketing agent paying for the non-original content. Identified disclosure can be more effective because it is more salient and can vary between ads and platforms. In two studies, we show how adding identified disclosures to native advertising increases detection rates significantly and consistently. We also discuss important implications arising from using smart disclosures for consumer protection.

Payoff: at the end of the article, the authors note that Israel’s consumer protection authority has adopted its recommendations as a native advertising disclosure standard.

unconscionability prevents enforcement of arbitration agreement for consumer claims

Cabatit v. Sunnova Energy Corp., No. C089576, --- Cal.Rptr.3d ----, 2020 WL 8365909 (Ct. App. Dec. 31, 2020)

California isn’t fond of mandatory consumer arbitration. Here, the court finds the arbitration agreement unconscionable and refuses to enforce it against a claim relating to the solar power lease agreement between the Cabatits and Sunnova. The rule of McGill v. Citibank, N.A., 2 Cal.5th 945 (2017)—that an arbitration agreement waiving statutory remedies under California consumer protection law is unenforceable—was unnecessary to the decision. Because Sunnova didn’t argue in the trial court that the arbitrator had to determine the unconscionability issue, that issue was waived; the arbitration clause was procedurally and substantively unconscionable under general principles independent of McGill. Some details:

The salesperson said the Cabatits did not need to read the agreement language because he would go over the details, but the Cabatits would need to sign the agreement and initial certain parts before any work could be done. The salesperson scrolled through the agreement language quickly, indicating where signatures or initials were needed.

Indiana Cabatit speaks and understands English fairly well, but she does not understand complicated or technical terms. As the salesperson scrolled through the agreement language, Indiana Cabatit signed or initialed where the salesperson indicated, even though she did not understand most of what he was saying. The salesperson did not explain anything about arbitration.

The Cabatits had no computer and no internet access. They did not receive a copy of the agreement until this dispute arose and their daughter obtained a copy.

This was a procedurally unconscionable contract of adhesion, with no opportunity to bargain over terms, which were not explained anyway. It wasn’t enough that Indiana Cabatit signed a statement that she had read the terms of the agreement, and even if the arbitration provision was “conspicuous” in the abstract, the evidence was that the salesperson scrolled through the agreement, and the arbitration clause was not called to the Cabatits’ attention. And any right to cancel within 7 days “was meaningless because Sunnova did not give them a copy of the agreement during the relevant time period and there is no evidence such a right was explained to the Cabatits.” The context indicated oppression and surprise, resulting in “a high degree of procedural unconscionability.”

Substantively, this was a one-sided agreement which required the Cabatits to arbitrate their claims, but allowed Sunova to file in court if the Cabatits defaulted (defined as failure to make a payment, failure to perform an obligation under the lease, providing false information, or assigning the lease without prior authorization). “In other words, Sunnova reserved the right to take most of its claims to court but purported to deny the Cabatits the same opportunity.” Although the Cabatits were allowed to go to court to seek (1) injunctive relief for any threatened conduct that could cause irreparable harm, (2) a judgment confirming the award, or (3) a small claims judgment, that was still too one-sided given the breadth of “default” favoring Sunnova. Sunnova didn’t show it had special need for this one-sidedness.

surveys/expert evidence of deception still not required in consumer protection claims

Hawkins v. Kroger Co., 2021 WL 210843, No. 15cv2320 JM (AHG) (S.D. Cal. Jan. 11, 2021)

Hawkins sued, with the usual California claims, because Kroger breadcrumbs said “0g Trans Fat Per Serving”  on the front and the nutrition label said “Trans Fat 0g”; the breadcrumbs included partially hydrogenated vegetable oil (PHO), which meant that they contained “trace amounts” of trans fat.

The use of PHO in food products was legal during the class period: the FDA allowed producers until June 18, 2018 to remove PHO after it was removed from the “generally regarded as safe” classification.

So the use of PHO was not unlawful, but was it unfair? During the class period, there was no public policy against it, and the FDA declined to prohibit its use then, weighing against unfairness. But the degree of harm associated with PHO was a material and genuinely disputed fact. “[D]espite the legality of the use of trans fat during the class period, reasonable jurors could disagree as to whether the danger of trans fat to human health was sufficient to render its use ‘immoral, unethical, oppressive, unscrupulous or substantially injurious to consumers,’” so the court declined to grant Kroger summary judgment on UCL unfairness.

Labeling claims: The court rejected Kroger’s argument that a reasonable consumer would understand the breadcrumbs contained trans fat because the ingredient list included PHO. Not only are reasonable consumers not required to look beyond misleading representations on the front of the box, but here it was not clear that typical consumers understood that PHO necessarily meant trans fat. Moreover, no reasonable juror could find that interpreting “0g Trans Fat” to mean “no” trans fat was unreasonably “sweeping.” [The FDA did require rounding down for amounts under .5g, in contradiction to what reasonable consumers would think. As the court explains, the cases have therefore held that, “although the FDA mandates the disclosure of ‘0g Trans Fat’ on the nutrition label when the product contains less than 0.5 grams of trans fat, it does not mandate or allow for the product to be labeled ‘0g Trans Fat’ elsewhere.”]

The court also rejected an attempt to impose a survey/expert evidence requirement for determining reasonable consumer expectations in California consumer protection cases. Here in particular, “it is not clear what else the claim ‘0g Trans Fat’ would lead a reasonable consumer to believe other than the product contains no trans fat.” Certainly Kroger wasn’t entitled to avoid a trial.

Hawkins also got summary judgment on the argument that “0g Trans Fat” violated 21 C.F.R. § 101.62(a)(1)-(2), “[a] claim about the level of fat .... in a food may only be made on the label .... if ... (1) [t]he claim uses one of the terms defined in this section [or] (2) [t]he claim is made in accordance with the general requirements for nutrient content claims in § 101.13.” Section 101.13 then provides “the label or labeling of a product may contain a statement about the amount or percentage of a nutrient if .... [t]he statement does not in any way implicitly characterize the level of the nutrient in the food and it is not false or misleading in any respect (e.g., ‘100 calories’ or ‘5 grams of fat’)[.]” Previous cases have held that this provision doesn’t “authorize” a “No Trans Fat” claim on the label. Though this was in a preemption context, the logic held here: “No Trans Fat” outside of the nutrition facts panel was misleading, given that the conceded use of PHO and thus of “some” trans fat content was actual evidence the “0g Trans Fat” label was false or misleading. Thus, Hawkins established a predicate for her “unlawful” UCL claim.

However, even if Hawkins didn’t have to show that a reasonable consumer would be deceived, there was a genuine dispute of material fact on reliance/causation, so she didn’t win summary judgment on the entire claim.

Kroger’s statute of limitations defense also failed because Hawkins wasn’t required to look beyond the front of the box.

Also, the “0g Trans Fat” label was “too specific to be puffery.”

WVa SCt immunizes religious schools and camps for false advertising about services

State ex rel. Morrisey v. Diocese of Wheeling-Charleston, 851 S.E.2d 755 (W.Va. 2020)

In response to a certified question, the West Virginia Supreme Court, over a dissent, held that the AG could not sue the Diocese and a former bishop for violating the deceptive practices provisions of the West Virginia Consumer Credit and Protection Act, reasoning that the law didn’t apply to educational and recreational services offered by a religious institution.

The allegations of deception related to the Diocese’s knowing employment, for decades, of people who admitted to sexually abusing others or who were credibly accused of sexual abuse at its schools and camps. The Diocese allegedly neither disclosed that material information to consumers nor warned them of the alleged dangers inherent to the educational and recreational services it provided, and also falsely represented that it conducted background checks (an allegation of affirmative misrepresentation that is buried in a footnote of the main opinion). The alleged deceptive practices were advertising services not delivered and failing to warn of dangerous services.

The relevant statute says: “Unfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce are hereby declared unlawful.” “ ‘Trade’ or ‘commerce’ ” is “the advertising, offering for sale, sale or distribution of any goods or services and shall include any trade or commerce, directly or indirectly, affecting the people of this state.” “ ‘Services’ include[ ] ... ‘privileges with respect to ... education[ and] recreation.’ ”

Nonetheless, West Virginia Code §§ 18-28-1 to 7 created a conflict by imposing requirements on “private, parochial or church schools or schools of a religious order” (church schools), such as observance of a 180-day instructional term, maintenance of attendance and immunization records, compliance with the West Virginia school bus safety regulations, administration of a nationally-normed standardized achievement test, and establishment of a school specific crisis response plan. If a church school meets those requirements, then the Legislature has directed that it “shall [not] be subject to any other provision of law relating to education except requirements of law respecting fire, safety, sanitation and immunization” (emphasis added). The majority held that, though church schools might not be exempted from the entire CCPA, this preemptive provision barred “the regulation of educational services offered by a church school under the deceptive practices provisions of the CCPA.” [Are living circumstances part of “educational services”?]

The deceptive practices provisions were “provisions of law relating to education” when the AG tried to apply them to educational services. “[W]hile the deceptive practices provisions may regulate the commercial relationship between a church school and consumers, its enforcement depends on the assessment of the qualities of the education actually supplied by the church school.” Finding a violation would require “passing judgment upon the substantive educational services actually provided.”

Because of this preemption and because of West Virginia’s public policy of freedom of religion in education, there was also implied preemption of any regulation of educational and recreational services by a religious institution, because it was silly to preempt regulation as to only school-related services, thus allowing the AG to regulate false statements made by a church about a trip it sponsored but not false statements by a church-affiliated school about the same trip. [I’m not sure that argument proves what the majority wants it to prove, and it’s also pretty odd as a theory: explicit preemption is usually limited to what it explicitly covers.] Thus, and despite the fact that the CCPA is a remedial statute intended to be liberally construed, “[i]t would also be absurd to conclude that the Legislature intended to exempt a church school’s representations about its educational services from regulation under the deceptive practices provisions of the CCPA, but not those same representations when made by the affiliated religious institution regarding its recreational services.”

The majority ended by commenting that the allegations were nonetheless “deeply troubling,” and might have allowed liability under other legal theories, such as a violation of mandatory reporting law, which definitely covers religious institutions and their schools and camps.

Justice Workman’s dissent was persuasive:

The majority opinion is transparently result-oriented which explains its logical incoherence and sins of omission. The issue before the Court is one of fairness and honesty in commercial communications to the public---potential purchasers of goods and services. The fundamental question involves matters of unfair or deceptive acts or practices in advertising or selling and in advertising based on false promises. That is all. Nothing else is at issue. This case has absolutely nothing to do with the free exercise or expression of religious thought and nothing to do with regulating religious institutions in the sense of excessive State entanglement. As brought and pled by the State, what is at issue is alleged false promises and deceptive advertising promoting a safe environment aimed at getting students and campers to attend for-fee-based schools and camps, when alleged facts indicated the contrary to be true.

As the dissent pointed out, the yearly fees ranged from $6,000 to $8,000. “The Diocese also provides partial scholarships, arranges financing through third parties, and uses in-house installment payment plans. Just as any other creditor may act, the Diocese has availed itself of the courts and legal system to enforce credit agreements.” The Diocese advertises to the public at large with no faith-based restrictions for either schools or camps. Starting in 2002, it advertised its “Safe Environment Program for the protection of minors from abuse by religious and lay employees of the Diocese and volunteers,” which plainly sought to “attract consumers away from competitors that did not advertise similar safety measures.” 

In the dissent’s view, truthful advertising and safety are purely secular concerns. The majority agreed that “services” encompassed the activities here, and that should have been enough.

Instead, the majority wrongly asserted that enforcing the deceptive practices provisions would require “assessing the qualities and substance of the education actually provided.” But the allegations here did not require anything of the sort. “Requiring fairness when selling advertising and selling educational and recreational services simply does not interfere with the services themselves. Rather, it is the marketing of the services that is at issue.” Given the CCPA’s specific coverage of educational services, this manufactured conflict was even more unjustified; the legislature has exempted other institutions from the CCPA, such as lawyers, accountants, stockbrokers, and licensed pawnbrokers, but not religious institutions.

The majority approach authorized religious schools to advertise one tuition but, halfway through the year and as a matter of policy, demand more or the student will be expelled. Religious schools could advertise ten-to-one student/teacher ratios and deliver forty-to-one. This freedom would provide them an unfair advantage over nonreligious schools.

I share the dissent’s view that “most incredible is the sophistry exhibited in the opinion’s bootstrapping into its unfounded conclusion the issue of recreational services.” As it pointed out, the supposedly preemptive code provisions simply do not cover recreational services or camps, but now religious institutions can advertise whitewater rafting or other dangerous activities, promise fully certified instructors, and deliver nothing of the sort. This results both in consumer danger and competitive disadvantage to regulated camps.

“[N]othing about religious freedom, thought, or instruction is infringed upon by virtue of enforcing an act mandating that entities offering services for-fee tell the truth about the services.” Fear of overly broad enforcement actions wasn’t a justification for disallowing these specific claims, even if remedies would have to be carefully crafted to avoid infringing on religious freedom.

 

product changes as false advertising: TM may serve as express warranty of formulation & quality

Starr v. VSL Pharmaceuticals, Inc., No. TDC-19-2173, 2020 WL 7694480 (D. Md. Dec. 28, 2020)

This putative class action is related to the longstanding trademark/false advertising litigation between the VSL parties and Claudio De Simone parties, and probably qualifies as a follow-on class action.

Plaintiffs alleged violation of RICO, breach of express warranty, unjust enrichment, and violations of various state consumer protection statutes. Many claims survive, including RICO claims—at least at the motion to dismiss stage.

The relevant proprietary probiotic formulation, aka the De Simone Formulation, was sold for many years under the name “VSL#3,” a trademark owned by VSL. Relevant VSL parties are now enjoined from (1) stating or suggesting in VSL#3 promotional materials directed at United States consumers that the present version of VSL#3 produced in Italy continues to contain the De Simone Formulation, including by stating that VSL#3 contains the “original proprietary blend” or the “same mix in the same proportions” as the earlier version of VSL#3; and (2) “citing to or referring to any clinical studies performed on the De Simone Formulation or earlier versions of VSL#3 as relevant or applicable to Italian VSL#3.” Plaintiffs allege that defendants made equivalence claims despite scientific evidence establishing that the new VSL#3 was neither the same, nor as clinically effective, as the De Simone Formulation.

In addition, plaintiffs alleged that “Defendants improperly continued to use the VSL#3 trademark to identify the new probiotic, even though that mark had become associated with the De Simone Formulation.” At some point, the packaging was changed to remove listing specific bacterial strains, but on the product information sheet inside the package, defendants allegedly continued to state that the new VSL#3 had been the subject of extensive clinical research and cited to clinical studies establishing the efficacy of the De Simone Formulation, not the new formulation. Defendant Leadiant also sent a letter to all health care providers who had previously recommended VSL#3 to their patients stating that production of VSL#3 would be moving to Italy but assuring customers that they would be receiving “the same quality product, containing the same genus and species of bacteria, in the same proportions you have come to expect.” “Other Leadiant marketing materials made similar representations,” such as that the new VSL#3 remained “the same multi-strain probiotic” and was “supported by more than 170 studies.” Defendant Alfasigma took over the distribution of VSL#3 and allegedly advertised the same message, including in an August 2016 press release asserting that the new VSL#3 “maintain[ed] the original proprietary mix of eight strains of live bacteria” and was “supported by more than 170 published studies over the past 15 years.”

The named plaintiffs alleged that they purchased the new VSL#3 in reliance on the packaging and marketing materials and the recommendation of their doctors, believing that the new VSL#3 continued to contain the De Simone Formulation.

As mentioned, the RICO claims survived because the misrepresentations were sufficiently alleged.

Express warranty: Was there an express affirmation of fact or promise as to the quality or characteristics of VSL#3? Plaintiffs identified the product information sheet statement that “VSL#3 has been the subject of extensive clinical research in the dietary management of IBS, UC, and an ileal pouch” and that seemed to be an affirmation of fact or promise about the new VSL#3.

Plaintiffs also alleged that the continued use of the term “VSL#3” on the packaging of the new VSL#3 itself constituted an affirmation of fact that the product was the same as the prior version of VSL#3. This was a more interesting argument, because defendants rejoined that this was just a trademark use, rather than a warrant of particular ingredients and of particular quality. The court was not persuaded by cases finding no warranty in the use of “Gap” on clothing or “Apple” on electronics: “[T]hese cases focus on the meaning conveyed by the use of a brand name or trademark for multiple products at the same time and do not address the present issue of whether a brand name or trademark can, over time, become so identified with a particular product that its continued use constitutes an affirmation of fact of continuity.” McCarthy holds that “a sudden or substantial change in the nature or quality of the goods sold under a mark may so change the nature of the thing symbolized that the mark becomes fraudulent.” 3 McCarthy on Trademarks and Unfair Competition § 17:24 (5th ed. 2020). In Royal Baking Powder Company v. Federal Trade Commission, 281 F. 744 (2d Cir. 1922), Royal Baking had for 60 years produced a “superior” baking powder under the brand name “Dr. Price’s Cream Baking Powder” which contained cream of tartar, rather than phosphate or alum, and had in its advertising touted the benefits of cream of tartar while warning of the dangers of phosphate and alum. When it substituted phosphate in place of cream of tartar for cost reasons, but kept the same product name and used the reference “Makers for 60 years,” the court upheld an FTC cease and desist order unless the word “cream” was omitted and the word “phosphate” included, because it was a “deception of the public” to sell an “inferior powder” “under an impression induced by its advertisements that the product purchased was the same in kind and as superior as that which had been so long manufactured by it.” Likewise, the Eighth Circuit held that “[i]f the manufacturer makes a change in the article and that change be of a character which would, considering all of the attendant circumstances, naturally affect the attitude of the purchasers of that article, fair dealing and the law require that such purchasers be effectively informed of that change.” Royal Baking Powder Co. v. Emerson, 270 F. 429, 440 (8th Cir. 1920).

The case law supported the conclusion that “a brand name can come to function as a representation of a continuity of product contents and quality that could deceive those ‘familiar with the old brand and ignorant of any change.’” Thus, the trademark-as-warranty legal theory was at least plausible, especially when accompanied by a product information sheet containing more specific false affirmations.

Defendants argued that the product information sheet wasn’t visible pre-purchase and thus couldn’t become part of the agreement. But “[t]he focus is not on any particular language at a particular point in time but whether the seller’s actions or language when viewed in light of his relationship with the buyer were fairly regarded as part of the contract to purchase the good.” No dismissal at the pleading stage.

Defendants also argued that privity was required for express warranty claims under various state laws, but the court noted that many states relax that requirement where the manufacturer makes warranties directly to the consumer on product packaging, though Tennessee and Michigan did not and so those claims were dismissed. Of the claims under the surviving state laws, where reliance was required, plaintiffs adequately pled it, based on pleading past purchases under the VSL#3 brand name.

Consumer protection claims under Florida and Texas survived, but the court thought that the Michigan, and California law claims didn’t plead reliance sufficiently, which I find a bit puzzling given that the allegations are the same. The court treated the consumer protection claims as largely resting on failure to disclose, which can be harder to plead, but I would think the affirmative misrepresentation argument is the same here: VSL#3 allegedly had a meaning and defendants did not honor that meaning. If they’d sold margarine as butter based on an undisclosed definition of “butter” that included all dairy-like spreads, we’d easily see that as deceptive. Challenges to the plaintiffs’ claims under the consumer protection statutes of Washington, Wisconsin, Illinois, Tennessee, Massachusetts, and New Jersey under the heading of causation failed; causation is typically a factual question, and plaintiffs sufficiently alleged that, where the VSL#3 packaging identified no material change to the product, they bought VSL#3 believing it to continue to contain the De Simone Formulation, “resulting in the foreseeable loss of monies spent on a product that was no longer of the quality and content that it appeared to be.” To the extent required, plaintiffs also sufficiently alleged intentional deception.

Ascertainable loss: In general, there is “no pleading requirement of a specific quantity inherent in this term.” But for New Jersey, the state supreme court emphasized the importance of the ascertainable loss requirement “as an integral check upon the balance struck” under the New Jersey Consumer Fraud Act “between the consuming public and sellers of goods.” Thus, courts applying New Jersey law have required pleading an actual quantification of the loss, even if not entirely specific. Thus, the NJCFA claim was dismissed.