Before the Outbreak, Preapprove Defense Counsel with Insurer
When a food-borne illness outbreak happens, few food companies (especially those whose brand is at stake) want an unfamiliar defense lawyer who has little knowledge about food-borne illness responding to claims asserted against them. Unless a food company maintains a high, self-insured retention or has the lawyer of its choosing preselected, its insurer might appoint on the food company’s behalf low-cost defense counsel ill-equipped to respond to the claims and protect the brand.
Commercial General Liability insurance and Products liability insurance commonly maintained by food companies to protect them from the risks of food-borne illness outbreak usually will not cover the damage an outbreak can have on a company’s brand, stock value or sales. Lawyers appointed by insurers may have little understanding of the insured’s business or the impact the outbreak can have on its brand. Unlike in other areas, such as securities litigation, insurers are not as likely to have a panel or preapproved list of experienced food liability lawyers ready to deploy.
What a food company should consider before a food-borne illness outbreak happens:
1. Identify lawyers who are:
A. Familiar with (or will pledge on their dime to learn) the food company's business and brands;
B. Experienced in responding to consumer claims and food-borne illness; and
C. Knowledgeable about potential expert witnesses (about both those that the company will hire and those that plaintiffs will hire).
For companies with active crisis management plans , these lawyers likely have already been identified and included on the crisis management team.
2. Work with your broker, insurance coverage lawyer and preselected defense lawyer(s) to get preapproval of your chosen lawyers and agreement on their fees
For the sake of the business relationship (and self-interest), many insurers may agree to preapproval. Consider seeking preapproval at the time of renewal when a commercial insured may have the most leverage with an insurer.
For those with preapproved defense counsel, please consider sharing your experiences and insights. Comment or email.
Ninth Circuit Decision Casts Doubt on Merchantability Claim in CSPI Suit Against Denny's
Along, I am sure, with many of you, I was intrigued at Ken's recent post on the case of DeBenedetto v. Denny's Corporation, filed recently in Middlesex County, New Jersey by the Center for Science in the Public Interest. Most interesting to me, of course, was the claim that Denny's food violated the warranty of merchantability contained in contracts for the sale of goods under Article 2 of the Uniform Commercial Code. I have blogged on the warranty of merchantability in connection with food recalls.
Paragraph 59 of the complaint states as follows:
59. Denny's meals purchased by Plaintiff and New Jersey Consumers are not adequately described on the menu to advise Plaintff and New Jersey Consumers that they are consuming high amounts of sodium in one meal that are in excess of the advised daily limit.
In Paragraph 60, the complaint claims that this violates the warranty of merchantability because of, among other claims, the alleged inadequate description.
A recent decision of the Ninth Circuit Court of Appeals, Millenkamp v. Davisco Foods International, Inc., seriously calls into question the validity of the plaintiff's claims in the case against Denny's. That case involved the implied warranty of fitness for a particular purpose, not the implied warranty of merchantability, but the reasoning is sufficiently applicable that it can be inferred that Denny's should prevail on this claim.
In Millenkamp, the plaintiffs had purchased milk permeate as cattle feed. The cows fed the milk permeate subsequently died and the plaintiffs sued the supplier as well as a feed company that had advised them about how to use the milk permeate (they later settled against the feed company). One of the claims was that the failure to label the milk permeate as required by Idaho law resulted in a breach of the warranty of fitness for a particular purpose. After prevailing in the trial court, judgment for the plaintiffs was reversed by the Ninth Circuit, which held,
compliance with Idaho's Milk Permeate Labeling Requirement does not address whether Davisco breached a warranty of fitness for a particular purpose.
In order to breach the warranty, a mislabeling must breach "a part of the bargain between the parties." In Millenkamp, the contract between the parties did not include an express requirement that the milk permeate comply with all laws, or comply with all labeling laws.
Is there a difference with the warranty of merchantability?
Continue Reading...Challenges of a Lanham Act Injunction in Food Cases: Lessons from an Advertising Battle Between Two Major Consumer Products Companies
The recent decision in Stokely-Van Camp, Inc. v. Coca-Cola Co. (i.e., Gatorade vs. Powerade) illustrates the hurdles a company has to overcome to convince a court to stop a competitor from using arguably false advertising. Stokely-Van Camp, Inc. (“SVM”) was challenging advertising that compared Powerade ION4 to Gatorade Thirst Quencher.
Judge John G. Koeltl of the Southern District of New York characterized the case as “an advertising battle between two major consumer products companies over one company’s comparison of its beverage to human sweat.”
Following a two-day preliminary injunction hearing, the court denied a request to enjoin various advertising claims about Powerade ION4. Ultimately, to succeed, SVM, makers of Gatorade, had to show (1) likelihood of irreparable harm and (2) either a likelihood of success on the merits or serious questions going to the merits that were sufficient to make them fair grounds for litigation, with a balance of hardships tipping decidedly in its favor.
As with any request for a preliminary injunction, this is a difficult standard to meet. Personal experience is that no matter the legal standards, judges often revert to the “is a building going to collapse?” gut-check approach.
“Unclean hands” are also a big deal when it comes to injunctions. Courts are very reluctant to grant injunctive relief if they get a sense that the moving party is itself guilty of the acts it complains of.
In the SVM case, the court came down against SVM on the second prong concerning the merits of its Lanham Act false advertising and trademark dilution claims. The court ruled that the claims were moot (because Coca-Cola already dropped the aggrieved advertising campaign), nonactionable puffery or, for the implied falsity claims, not supported by extrinsic evidence.
The court went further in addressing irreparable harm. Even if SVM’s claims were merited, the court did not believe SVM was entitled to a presumption of irreparable harm, because Coca-Cola discontinued the comparison ads. The court also found SVM’s arguments of a public health risk unconvincing.
Perhaps the most interesting lesson is the court’s final conclusion of law that SVM had “unclean hands.” Even if SVM’s injunction motion had met the legal standard, fatal to its motion would have been that “SVC complains about Coca-Cola’s claims regarding the presence of calcium and magnesium in Powerade ION4, but it has made virtually identical claims about calcium and magnesium in its own Gatorade Endurance Formula.”
The court concluded by saying, “SVC cannot, having jumped on the bandwagon of calcium and magnesium first, now jump off and claim that Coca-Cola must get off too.”
Facts Alleged in CSPI Sodium Suit Incongruent with Claims Asserted
Thought to be the first putative class action against a restaurant chain related to disclosure of sodium content on menus, Center for Science in the Public Interest (CSPI) has filed what appears to be a test case against Denny’s. Best guess is the case will fail on its merits (though for CSPI, success in litigation may not be the point).
The case, DeBenedetto v. Denny’s Corporation, asserts claims under New Jersey law for consumer fraud, N.J.S.A. 56:8-1, et seq., and breach of the implied warranty of merchantability under the New Jersey U.C.C., N.J.S.A. 12A:2-314(1)-(2). The theory advanced in CSPI’s complaint is that consumers have been “duped” about sodium content and that the “ordinary consumer, unschooled in nutrition and perhaps preoccupied with other matters, would not reasonably expect to encounter these high levels of sodium in one meal.”
Big incongruency in the complaint is that Denny’s does disclose sodium content in its meals. CSPI admits that Denny’s provides this information both online and in store pamphlets, but it complains that the information is “incomprehensible.” A review of Denny’s online disclosures shows a detailed nutritional chart, including sodium levels for every item on its menu. Here's an excerpt of Denny's online disclosures:
But, CSPI's complaint does not really seem to be that disclosures are not clear enough. Indeed, CSPI argues that regardless of such disclosures by restaurants, studies show that “almost no one reads the nutrition information . . . .”
What CSPI is really saying is that sellers of salty foods (not unlike foods contaminated with E. coli) are strictly liable no matter the disclosures. If this were the law (which as of now, it is not), few restaurants (or food manufacturers) would be exempt from paying the medical bills of their customers who develop heart disease. No doubt CSPI's real goal is "regulation through litigation" and the jury is still out whether CSPI's penchant for the court system will affect change.
Snapple Decision - FDA's Policy Concerning Use of "Natural" Not Entitled to Preemptive Effect
High Fructose Corn Syrup Labeling: Opening the Floodgates For Consumer HFCS Claims?
The Third Circuit ruled this week in Holk v. Snapple Beverage Corp., reversing the district court and reinstating the state law putative class claims for consumer fraud and breach of warranty for use of the term “all natural” despite the inclusion of high fructose corn syrup (HFCS) (though the court noted that the manufacturer no longer uses HFCS in its products).
The case is significant and is getting attention because the Third Circuit concluded that “FDA’s policy statement regarding the term ‘natural’ is not entitled to preemptive effect.” The court was persuaded because “the FDA declined to adopt a formal definition of the term ‘natural’ choosing instead to simply enforce its long standing ‘informal policy’”:
[T]he agency has considered “natural” to mean that nothing artificial or synthetic (including colors regardless of source) is included in, or has been added to, the product that would not normally be expected to be there. For example, the addition of beet juice to lemonade to make it pink would preclude the product being called “natural.”
As expected, the court followed its previous ruling in Fellner v. Tri-Union Seafood, LLC (our blog entry about it is here), ruling that neither the FDA’s “informal policy” nor their enforcement letters were entitled to any preemptive weight.
Practice Tip: For the next HFCS case, preemption may not be a dead issue. The Third Circuit did not rule (though it expressed its skepticism) on the “express preemption” argument based on 21 U.S.C. § 343-1(a)(3). The court ducked the issue by concluding that Snapple waived the argument by not “advancing it” in the district court.
FDA Draft Guidance on Tomatoes, Leafy Greens and Melons
On July 31, the FDA issued draft guidance on three categories of produce: tomatoes, leafy greens and melons. Comments on the drafts are due, according to Hyman, Phelps & McNamara P.C.'s FDA Law Blog, by November 3 at www.regulations.gov using docket numbers FDA-2009-D-0346 (tomatoes), FDA-2009-D-0347 (melons), or FDA-2009-0348 (leafy greens). They may also be submitted directly to the FDA at Division of Dockets Management (HFA-305), Food and Drug Administration, 5630 Fishers Lane, rm. 1061, Rockville, MD 20852, using the same docket numbers to identify comments.
The purpose of the guidance is to provide advice on the FDA's current thinking of the best practices to minimize contamination, comply with legal requirements and identify and stop outbreaks as soon as possible. The guidance is intended to cover all stages of food production and handling up to the final retail sale of either raw or prepared foods.
The tomato guidance is particularly detailed. It covers everything from selecting the field to grow, including assessing the uses of nearby land, to detailed hygienic recommendations for those with access to the fields, to harvesting practices, including documentation to facilitate product tracing, to packing and repacking, storage and transportation, and preparation by food service providers. A special section covers greenhouse production.
The guidance is based on practices developed by the produce industry with the assistance of the FDA, but does not necessarily agree with the practices used in the industry. Consider this discussion of "top icing" of melons. The FDA notes, "Melons are typically top iced after cooling as a means of temperature control during transport and distribution." The first recommendation, though, is to ditch the practice entirely.
FDA recommends:
- Employing alternative means of keeping melons cool because top icing is not particularly effective in cooling or keeping melons cold.
It will be interesting to see the comments and how the FDA responds to them as the process continues.
DOJ and DOA Announce Workshops to Evaluate Agricultural Markets and Competition
By Guest Blogger Joel Dahlgren
Last week the Justice Department and U.S. Department of Agriculture announced that the two federal agencies will hold joint public workshops to explore competition issues affecting agriculture in the 21st century, including the appropriate role of the federal government in antitrust and regulatory enforcement. The first workshop will be held in 2010. Some workshops will be held in Washington, D.C., while others will be held regionally around the country.
The public and press are invited to attend these conferences. Written comments may be submitted ahead of time at agriculturalworkshops@usdoj.gov. Paper copies of comments should be submitted in addition to electronic copies, preferably by courier or overnight services. Agendas and schedules for the workshops will be posted at www.usdoj.gov/atr.
The federal government has a long, firmly held interest in agricultural markets, the competition in those markets, and concentration of the firms that compete in those markets. Just since the turn of the century, the General Accounting Office (GAO) has produced 15 reports on these issues. The latest report prepared by the GAO on the subject of concentration and competitive issues in agriculture was released a little over a month ago on June 30, 2009. The GAO summarized its findings to Senators Kohl and Grassley as follows:
In summary, we found the following:
• Concentration generally has increased at all levels of the food marketing chain in all agricultural sectors since the 1980s. At the farm level, less than 2 percent of farms accounted for 50 percent of total sales in 2007. At the food processors’ level, in general, a small number of companies accounted for a large and growing portion of sales in each of the five major agricultural sectors. For example, in the pork sector, the market share of the largest four hog slaughtering firms increased from 36 percent in 1982 to 63 percent in 2006. In addition, at the retail level, the share of grocery store sales held by the largest four firms more than doubled, from 16 percent in 1982 to 36 percent in 2005.
• While real annual per capita food expenditures have increased since 1982, households now spend a smaller share of disposable income on food. Total annual per capita food expenditures rose from $3,358 in 1982 to $3,888 in 2007, in constant 2008 dollars. Meanwhile, household spending on food decreased from 13 percent of disposable incomes in 1982 to 10 percent in 2007. Since 1982, overall food prices and food prices in each of the five major agricultural sectors have increased about as much as prices for consumer goods and services overall. However, from July 2008 through December 2008, food prices increased faster than the prices of other goods and services. Since then, food prices generally have not changed significantly.
• Since 1982, farmers have generally received higher monthly prices for their commodities, but these prices have increased less than food prices and inflation in the broader economy. Specifically, prices farmers received, including for beef, pork, dairy, and grains, increased by 34 percent from January 1982 to April 2009. For the same period, food prices rose by 128 percent, and prices in the general economy rose 102 percent. Commodity prices increased significantly in 2008, reaching a high of 68 percent above their 1982 levels in July 2008, but have declined since then.
• The empirical economic literature has not established that concentration in the processing segment of the beef, pork, or dairy sectors or the retail sector overall has adversely affected commodity or food prices. Most of the studies that we reviewed either found no evidence of market power or found efficiency effects that were larger than the market power effects of concentration. While a few studies found some evidence of market power, it is unclear whether this market power was caused by concentration or some other factor. All of the experts we spoke with said that concentration probably did not cause the 2008 increase in commodity and food prices, which were more likely due to factors such as higher energy costs and growing global demand for grains. Experts generally said that concentration is likely to increase in the future. Some said further increases in concentration may raise greater concerns in the future about the potential for market power and the manipulation of commodity or food prices. One expert said further increases in concentration would continue to generate efficiency gains and be beneficial. Enclosure II provides further information on the views of experts, and enclosure IV lists the studies we reviewed prices in these sectors.
The report (GAO-09-746R, June 30, 2009) is titled U.S. Agriculture: Retail Food Prices Grew Faster Than the Prices Farmers Received for Agricultural Commodities, but Economic Research Has Not Established That Concentration Has Affected These Trends. It can be found at http://www.gao.gov/new.items/d09746r.pdf.
Opening the Door to More Litigation Between Food Companies? See POM v. Ocean Spray Decision
False advertising claims under the Lanham Act and corresponding state law claims for food companies can be tough going. Many intersect issues regulated by the FDA under the Federal Food, Drug, and Cosmetic Act (FFDCA). No private right of enforcement of the FDA regulations exists. Only the FDA is allowed to bring a legal action to enforce its regulations. Lanham Act claims are generally barred where private litigants ask the court to determine preemptively how the FDA will interpret its own regulations.
Now comes the recent decision in POM Wonderful LLC v. Ocean Spray Cranberries, Inc. POM is aggrieved because Ocean Spray markets pomegranate and cranberry blended juices though, according to POM, the juices are “almost entirely comprised of apple and grape juice.” POM is alleging Lanham Act false advertising claims and California state law false advertising and unfair competition claims.
The court denied a Rule 12(b)(6) motion to dismiss. Threading the needle, the Court found that the claims were not seeking FFDCA enforcement. According the Court, POM’s claims are not for “mislabeling,” but for false advertising and promotion. The court determined it would not have to interpret FDA regulations and that “POM’s Lanham Act claim ‘extend beyond the packaging and name . . . to its advertising and marketing including . . . website.” Applying similar logic, the court found that the FFDCA did not preempt POM’s state law claims.
Lesson from the POM court: Whether one food company can bring false advertising claims against another depends in part on whether a court believes that the claims are focused on non-FFDCA-regulated issues such as advertising, websites, social media or other marketing efforts.
Tool For Food Companies and Litigators - New Guidelines for Foodborne Disease Outbreak Response
Council to Improve Foodborne Outbreak Response (“CIFOR”) has published new guidelines designed to help local, state and federal agencies to improve their response to outbreaks. I became aware of this (again) through Ricardo Carvajal, who was a reviewer for the guidelines, and his firm’s FDA Law Blog. I agree with Ricardo that while the guidelines are designed for public agencies they have value for food businesses.
According to CIFOR, “[t]he guidelines are intended to give all agencies a common foundation from which to work and to provide examples of the key activities that should occur during the response to outbreaks of foodborne disease.”
Anticipating how the public health agency will behave will not only assist in crisis management, but it may also prevent the crisis. As discussed previously in this blog, one of the benefits of good crisis management is the ability to reach out and offer assistance to the investigating public health agencies. Keeping current on protocols that we can expect agencies to follow is a good practice.
The guidelines are also of some value to litigators. In the face of an outbreak investigation, they provide tools to assess the merits of the agency investigation. While it is always difficult to challenge a public health agency’s findings (no matter how flawed), the guidelines may help.
