Proposed Bill Would Eliminate the Corporate and LLC Shield for Many Washington Contracts
Note: This blog entry was authored by Douglas Batey and originally published on the LLC Law Monitor blog.
The Washington legislature is currently considering a bill that would apparently require any contract that calls for the payment of money by an LLC or corporation, to include an extra signature by an authorized representative that would render the representative personally liable for any amounts due on the contract. HB 1535. In other words, under this bill any LLC or corporation making a contractual commitment that involves the payment of money would have to include a personal guarantee from a natural person.
This would be an extraordinary change to Washington law. No other state has anything comparable in its laws.
The Background. The bill would upend the familiar principle of the law that “when an agent makes a contract on behalf of a disclosed or partially disclosed principal whom he has power to bind, he does not thereby become liable for his principal’s nonperformance.” Griffiths & Sprague Stevedoring Co. v. Bayly, Martin & Fay, Inc., 71 Wn.2d 679 , 686, 430 P.2d 600 (1967). See Restatement (Second) of Agency § 320 (1958).
When an LLC manager (or a corporate officer) signs a contract on behalf of a company, the manager usually signs only as an agent of the company. The fact that the manager is signing as an agent is reflected in the typical signature block:
Acme Corporation
______________________
By: Wile E. Coyote
Vice President of Product Development
Under these well-accepted rules, LLC managers and corporate officers can sign contracts on behalf of their company without fear of becoming personally liable. If the rule were otherwise it would be exceedingly difficult to find a manager willing to sign for an LLC or corporation.
The Bill. The heart of the bill is a requirement that any “business payment contract” must contain an additional signature line, directly following and on the same page as any other signature line that the authorized business representative must sign. The additional signature line must be immediately preceded by the following legend in bold, 14-point or larger typeface:
By signing this contract you, the undersigned, agree to become PERSONALLY LIABLE for any sums due pursuant to this document, regardless of whether you are signing on behalf of a limited liability company, corporation, or nonprofit corporation.
This bill, if passed, will clearly make it difficult for LLCs to find managers willing to sign contracts for their LLC.
Drafting and Interpreting Statutes. The language of HB 1535 has some internal conflicts. I have described above the interpretation that I and other business lawyers that I have talked to have given to the bill. It is possible, however, that it was intended to simply require a warning legend on guarantee contracts, although that is a more difficult interpretation. In any event it needs to be clarified.
It is not an easy thing, to draft statutes so that they are clear, unambiguous and sufficiently detailed. This has repeatedly been driven home to me in my participation on a Bar committee that has reviewed proposed legislation.
HB 1535 is scheduled for public hearing in the Washington legislature’s House Committee on Business & Financial Services at 1:30 p.m. Tuesday, February 1, 2011, in Olympia, Washington. At the hearing I expect we will learn what is behind this bill and what the intent of its sponsors is. More information is available about the bill’s scheduled hearings here.
FDLI Publishes Stoel Rives Guidance on Environmental Marketing
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The Food and Drug Law Institute's ("FDLI") Update Magazine just published our article addressing the FTC's proposed regulations on green marketing: "New Green Guides Lay Out Rules for Environmental Marketing," available here. Authored by Ken Odza, Anne Glazer, and Joseph Eckhardt, the article reviews the scope of the new proposed Green Guides and describes best practices to avoid challenges to green marketing claims.
Beyond Statistics: What the FDA's RFR Report Means for Food Manufacturers
Last week, the FDA issued its first annual report on the Reportable Food Registry (RFR). The report provides statistics on the first year of the RFR (2240 entries, 229 "primary reports," a breakdown of the report by hazards, etc.).
Beyond the statistics, the FDA report should be noted by food companies for two reasons:
- Food Safety Plans
FDA Deputy Commissioner for Foods Michael Taylor says that “[s]everal key U.S. industries are already re-evaluating their hazard and preventive controls, core principles of the Food Safety Modernization Act recently passed by Congress. We also anticipate improved reporting as we continue our vigorous outreach to food facilities through federal, state, local and foreign agencies, to help us expand the positive effect of the RFR on the safety of the U.S. food supply.”
The new hazard analysis and preventative controls requirements in the Food Safety Modernization Act (FSMA) are not effective for 18 months following passage. Deputy Commissioner Taylor's comments suggest that industry standards may already be moving in that direction . To mitigate exposure and risk, FDA enforcement actions, product liability claims, supply chain contract claims and recalls, food manufacturers may want to consider updating and/or creating food safety plans that address the hazard analysis and preventative controls prescribed by the FSMA.
- Allergen Controls
The FDA reports undeclared allergens/intolerances accounted for 34.9 percent of the primary reports. Industry experts assert that the FDA believes that the industry does not in general have good control over the issue of undeclared allergens. These experts believe that the FDA will give special attention to the issue of undeclared allergens/intolerances in promulgating regulations under the FSMA's requirements for hazard analysis and preventative controls (see point 1 above). In anticipation of the FDA's concern, manufacturers should consider now how they can change manufacturing processes to address the undeclared allergen issue.
Strategies to Defeat Putative Class Claims Challenging Labeling and Marketing of Food Products
April 8, 2011 – Scott Rickman from Del Monte, Lara White from Adams and Reese, and I will be talking at the Defense Research Institute (DRI) food law break-out. This event is held in conjunction with the DRI annual product liability conference in New Orleans.
Click here for the complete manuscript that we’ve prepared to accompany our presentation. The manuscript summarizes some of the most significant and recent rulings concerning putative class claims arising from labeling and marketing of food products. The manuscript also offers suggestions on possible strategies to defeat these claims.
The type of claims discussed involves small-dollar state law “fraud” claims aggregated over millions of products sold. The common fact pattern is this: plaintiffs challenge the labeling or marketing of a food product, alleging that consumers would not have purchased the product or paid the price they did had they known the “truth” behind the representations made. Often, the plaintiffs’ strategy is to achieve class certification and then leverage the threat of a judgment into a settlement that involves a handsome payment of attorneys’ fees.
Recently, we’ve seen a trend toward legal action for labeling and/or marketing claims of products in the “natural” area and those touting health benefits. In many of these cases, preemption has not been successful to knock out claims in their entirety. State law varies considerably, and this can often work to the advantage of a food company. When that doesn’t work and when a jurisdiction doesn’t require an individualized showing of causation or reliance, here’s an alternative strategy to dismiss claims at an early stage:
- In states where plaintiffs need not show individualized reliance/causation, they may still have to demonstrate that an objectively reasonable consumer would have been damaged by the marketing/advertising campaign.
- The Supreme Court in Iqbal/Twombly said that a court must disregard conclusory allegations and scrutinize the complaint’s factual allegations to determine whether it nudges the alleged wrong-doing “across the line from conceivable to plausible.” The complaint must have meat on its bones. In the case of a consumer fraud class complaint, the plaintiffs’ counsel, to survive a motion to dismiss, must include references to evidence or other substantiation for the claim such as consumer surveys or perhaps a government finding.
- Without a strong factual basis as to how an “objectively reasonable consumer” might behave, consumer fraud/unfair trade practices putative class claims concerning the marketing of a food product may be in jeopardy.
How the Food Safety Modernization Act Changes the Status Quo
Yesterday (while taking a break from the Sustainable Food Summit in San Francisco), I traveled to Modesto, California to speak to the Manufacturer's Council of the Central Valley. I spoke about the new Food Safety Modernization Act (FSMA).
The focus of my talk was how the FSMA changes the status quo for food businesses. And when I mean changes the status quo, I mean not only what a food company needs to do to comply with the FSMA, but also how the FSMA is likely to affect exposure from recalls and product liability. I also discussed in some detail the dilemmas faced by food businesses and the FDA by the Reportable Food Registry (RFR) and its fallout. Here is a link to my slide deck.
I'm willing to tailor this talk to your company or trade association; just let me know.
Please also consider attending the ABA's Food and Supplements CLE at Coke World Headquarters in Atlanta on February 17. I'll be moderating with Ricardo Carvajal a panel of experts on the FSMA including Robert Brackett (formerly head of CFSAN), Art Liang from CDC, Miriam Guggenheim and Fred Degnan.
At the upcoming GMA food litigation conference in Scottsdale, Arizona, I'll be speaking with my law partner Lee Smith about specific strategies and action steps to take to reduce the increased risks from FDA compliance, and recalls and product liability exposures created by the FSMA and the RFR. We'll also touch on strategies to deal with some current trends in marketing and labeling putative class claims.
Hershey and Mars Battle Over the Color Orange
The Hershey Company and Mars Inc. are fierce competitors. They have clashed with each other in the past over Hershey’s asserted rights in the color orange, when Hershey sued Mars for using orange on the individual wrappers for its Dove Promises peanut butter chocolate candies. Matters recently came to a head again, when Hershey sued Mars for trademark infringement, dilution, and unfair competition in the US District Court for the Eastern District of Virginia. This time, the lawsuit claims that Mars’s Dove Promises outer packaging infringes Hershey’s trademark in the Reese’s Peanut Butter Cups orange packaging design. Hershey claims that Mars is trading on Hershey’s goodwill, and that the Dove packaging will confuse consumers.
Days before Hershey’s lawsuit, Mars filed a declaratory judgment action in the US District Court for the Middle District of Pennsylvania, claiming that Hershey does not own exclusive rights in the color orange for peanut butter confections. Mars argues that orange is used industry-wide to designate peanut butter flavors.
What’s your opinion?
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These lawsuits bring up a couple of important points. First, color alone can be a trademark. Therefore, designers and marketers should be careful not to tread on any well-known colors used by competitors. Second, companies should consider developing trademark or trade dress rights in colors that are important components of the brand. A manufacturer can add a powerful element to its overall brand identity and trademark rights by selecting a unique shade of color and sticking with it over time.
Plaintiffs Question "Carbon Negative" Water
The Fiji Water Company has attracted the attention of plaintiffs lawyers with its “carbon negative” bottled water. The Newport Trial Group, a law firm representing California consumers, sued Fiji Water last month, arguing that Fiji’s carbon offset claims are deceptive and misleading. The complaint against Fiji Water argues that the product is not necessarily carbon negative because Fiji’s offsets are premised on a speculative carbon offset method that “may or may not happen in the future.”
According to the California consumers, Fiji’s carbon offsets are misleading because they rely on “forward crediting,” a method of accounting for carbon offsets based on future offsetting activities. The complaint explains that this method of carbon offsetting is unreliable and speculative according to the Stockholm Environment Institute, an independent scientific think tank.
Fiji claims that its products are “carbon negative,” based on the purchase of carbon offsets equal to 120% of the company’s carbon emissions. Even if Fiji can prove that its carbon offsets will ultimately meet that goal, expect the plaintiffs to argue that the carbon negative claim is still deceiving, on the theory that consumers were not apprised of the fact that offsets will occur in the future. If Fiji’s future carbon offsets are found to be mismanaged, disorganized, or even false, consumers may succeed in obtaining a substantial judgment at trial, or a cash settlement.
The question of whether Fiji Water has actually deceived consumers will certainly be the focus of litigation in the California proceeding for at least a couple years. In the meantime, while the Federal Trade Commission’s proposed new Green Guides, released last fall signal increasing federal enforcement against greenwashing, the Fiji Water case is an important reminder that environmental marketing claims may also be challenged by private parties.
Another interesting aspect of this case is that while the California Consumers do not make reference to the FTC’s new Green Guides, the theory of their case is consistent with FTC policy. The proposed new Guides tell marketers that they should “clearly and prominently disclose if [their] carbon offset represents emission reductions that will not occur for two years or longer.” FTC regulations are not California law, but California’s consumer protection statute actually makes reference to the Green Guides, establishing a legal defense for companies if they can prove that their marketing claims comply with the Guides.
Finally, regardless of how the Fiji water case proceeds, it teaches another valuable lesson. Whether the claim is for carbon offsets, renewable energy, or another type of green claim, marketers must follow the key principles of clarity and disclosure. A bare claim is risky – but clear, concise disclosure can reduce and potentially eliminate that risk.
It's Official: The Food Safety Modernization Act Is Law. What Food Companies Need to Do Right Now
President Obama signed into law today the Food Safety Modernization Act (FSMA).
Companies with facilities subject to FDA jurisdiction should take immediate steps to review and, where necessary, modify SOPs, policies and procedures.
For example, given the FDA's expanded access to business records, companies should set SOPs that anticipate (before a crisis occurs) what records they may have to turn over and what they may not. Food companies should take steps to protect confidential and proprietary information.
Companies also should anticipate now how they need to change their policies and approaches to mandatory recalls and whistleblower protections.
These parts of the legislation take effect today:
- Stronger records access authority by FDA (FSMA § 101)
- When FDA determines a "reasonable probability" of "serious adverse health consequences"
- FDA can access records of other food affected in a similar manner
- But FDA must show proper credentials and provide written notice
- Mandatory recall authority (FSMA § 206)
- FDA can order a recall if it finds a "reasonable probability" that
- food is adulterated or misbranded; and
- there may be serious adverse health consequences
- FDA has to provide an opportunity for a voluntary recall
- FDA will provide an informal hearing within two days of the order’s issuance
- FDA can order a recall if it finds a "reasonable probability" that
- Increased frequency of inspections (FSMA § 201)
- FDA will immediately increase the frequency of inspections
- FDA will apply a risk-based approach to determine priorities
- Whistleblower protection (FSMA § 402)
- Protects employees who:
- Provide information re violation of FDC Act ,
- Testify, assist or participate in a proceeding re a violation, and/or
- Object to "activity, policy, practice or assigned task" they "reasonably believe to be a violation"
- Protects employees who:
- Refused admission of imports if foreign facility refuses inspection (FSMA § 306)
- Foreign establishments must allow entry to U.S. inspectors within 24 hours of requesting entry
- Or imported food will be refused admission.
Future blog entries will discuss compliance with other provisions of the FSMA scheduled to be phased-in. If you are interested in a more detailed in-house discussion of the FSMA and its effect on your company, please let us know.
