A Cereal. A Rabbi. A Peppercorn.

What can you say about an internet contracting strategy that died?

I’m referring, of course, to General Mills’ abortive attempt to include new terms of service on all its internet and social media products, including an agreement to arbitrate and to waive any right to a class action, that came and went so fast I couldn’t blog about it until it was over. If you’re on Facebook or Twitter, you probably had a friend, like I did, who tried to turn the tables on General Mills and posted some snarky “terms of service” for themselves. As you might guess, those aren’t enforceable.

 

What about what General Mills did? Putting aside the market, especially the PR market, speaking quite loudly about it, to what extent might it have worked? That’s a critical question that involves not just contract law, but the Federal Arbitration Act and the Supremacy Clause of the U.S. Constitution, and it’s something on which the U.S. Supreme Court has a view that’s not too hard to discern. What I’ve tried to do is to analyze it in a more systematic way than simply piling on with conventional wisdom.

 

Some analysis of the case has been pretty good, in that it has pointed out the U.S. Supreme Court’s quite solicitous view of arbitration. Essentially, if the question is “is it arbitrable?” the Supreme Court has recently pretty much said, “yes.” The Federal Arbitration Act is a deceptively short and simple statute, the connection to interstate commerce that is all that is needed to come under the act isn’t hard to find in most cases and enforcing the act has a way of cutting down the workloads of courts, something the Supreme Court likes. 

 

But I wanted to focus on another recent case, a case that passed under the radar somewhat since it was decided the same day as the McCutcheon case on campaign finance, which, to mix metaphors, sucked up all the oxygen of Supreme Court coverage. In this case, Northwest, Inc. v. Ginsberg, which was decided unanimously, the Supreme Court walked a fine line between different ways in which a common law doctrine, which is technically “state law”, can apply to a contract that is governed by federal law under the Supremacy Clause. 

 

The case involved a rabbi who had the highest possible status in Northwest Airlines’ World Perks Club, its frequent flyer club. According to Northwest, he had made so many complaints, particularly about luggage, that they had kicked him out of the club. He claimed that they had done so because of an ulterior motive: to lower the cost of their club upon Northwest’s merger into Delta Airlines. Under Minnesota law, which applied, this was considered a violation of the “covenant of good faith and fair dealing”, which is implied into every contract under most jurisdictions’ common law. Northwest countered that to incorporate this provision of Minnesota common law into its contract would violate a provision of the Airline Deregulation Act that gave airlines the right to set all contract terms. 

 

The Supreme Court agreed and would not enforce Minnesota’s version of the covenant. In doing so, the court distinguished between application of the covenant to situations where the covenant was used “to effectuate the intentions of parties or to protect their reasonable expectations”, which it found not preempted, contrasted with cases where it is used “to ensure that a party does not violate community standards of decency, fairness, or reasonableness.” (internal quotations and cites omitted) The first of these are issues that go toward enforcing a contract the parties have clearly made. The second, in the Supreme Court’s view, were preempted by the express language of the federal legislation.

 

How does this apply to what General Mills sought, for a short time, to do? A good way to look at it is to break a contract down into basic constituent parts.

 

First, we have the issue of contract formation. This comes down to three things:

 

1.      Capacity to contract

2.      Offer and acceptance

3.      Consideration

 

The first issue takes care of anyone’s concerns about denying a ten-year old the right to sue because he or she clicked that they “Like” Cheerios®. Minors are among the group of people who can’t form contracts under the law; the Supreme Court is not going to enforce the Federal Arbitration Act against them.

 

Offer and acceptance goes to the question of whether clicking “I Accept” can be enough to bind you to terms you haven’t read or understood. The answer is “yes” in general. We’ll revisit that in a moment.

 

Third is the “peppercorn” in the title. There must be an exchange of value or of promises in order to have an enforceable contract. A coupon or a prize can certainly be enough; the classic definition of the consideration necessary to enforce a simple contract is indeed a peppercorn. Can it be an electronic photo of a peppercorn? That might be a close question, but the indications are again the Supreme Court might defer to a non-discriminatory state law.

 

Once you have a contract under state law, what we learn from the arbitration cases and the case of the flying Rabbi is that you won’t be able to use state laws to save you from enforcement of an arbitration clause. You won’t be able to have it declared “unconscionable” or “unfair or deceptive”, because Congress has declared that arbitration clauses are the opposite. And you won’t be able to apply a broader definition of the covenant of good faith and fair dealing, one that might have the effect of invalidating the clause in any way. 

 

Similarly, you won’t be able to use any of those doctrines to invalidate the effect of clicking “I Accept”, at least so long as you had the theoretical opportunity, whether you exercised it or not, to read the terms before you did so. 

 

If no one has told you to be careful when you click on things on the internet, consider yourself warned (and wonder how you’ve missed that message so far). 

Turn your Bar Bill Into a Federal Case

A guy walks into a bar . . .

No, seriously, a guy walks into a bar.  He orders a couple of beers and a couple of drinks. His bill comes.  He pays his bill.  He leaves.

Sounds like something that happens everyday, thousands of times a day, right?  Let's try it again.

A guy walks into a bar.  He orders a couple of beers and a couple of drinks.  He doesn't ask what the drinks will cost.  The person who waits on him does not tell him.  His bill comes.  He pays his bill.  He leaves.  He sues. 

If you're wondering what he's suing about, you're not alone. 

Learn what happened after the jump.

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It's not boilerplate, it's part of the contract

At the back of most contracts are provisions that lawyers and parties often refer to as "boilerplate".  The Free Dictionary defines it as "inconsequential, formulaic or stereotypical language."  A recent decision of the Wisconsin Supreme Court supports the interpretation I've given my colleagues for years:  there is no such thing as inconsequential language in a contract.  Yesterday's boilerplate is today's most critical wording.

The case involved the standard guaranty required by federal law.  At the end of the guaranty form, the supplier had added, "This Guaranty shall not render Seller liable for any incidental or consequential damages of whatsoever nature nor shall it extend to the benefit of persons or corporations other than" buyer.  The goods that were shipped under this guaranty were found contaminated with E. coli and the buyer sued for, among other things, its consequential damages.  The Wisconsin Supreme Court affirmed the intermediate appellate court's decision that this language was ineffective to disclaim consequential damages.  After the jump, we'll discuss why.

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Farmers Can Be Article 2 Merchants (but not necessarily always)

A recent case from the Court of Appeals in Tennessee highlighted an important issue in connection with how contracts to purchase farm products will be handled under Article 2 of the Uniform Commercial Code.  In Brooks Cotton Co. v. Williams, the court was faced with essentially a single question:  may a farmer be a "merchant" within the meaning of Article 2?  The court answered the question in the affirmative for the farmer at issue, but it is important to understand both why the question may be critical and that the court's decision does not answer the question for all farmers.

First, what is a "merchant" under Article 2?  Section 2-104(1) of the UCC contains the definition. 

"Merchant" means a person that deals in goods of the kind or otherwise holds itself out by occupation as having knowledge or skill peculiar to the practices or goods involved in the transaction or to which the knowledge or skill may be attributed by the person's employment of an agent or broker or other intermediary that holds itself out by occupation as having the knowledge or skill.

After the jump, we'll explore why it's important to be or not be a merchant, how the Tennessee court applied it to farmers and what it means for the farmers from which you may buy farm products.

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Without Causation, a Plaintiff Has No Case

It is probably an article of faith out there among the lay populace that if you discover that the object causing your previously unexplained cough of two years’ duration is a two-inch long fragment of a plastic eating utensil that has somehow entered your lung, and if you find the logo of a well-known restaurant chain on the utensil, you expect that someone will show up delivering you a large sum of money. A recent decision of the United States District Court for the Eastern District of North Carolina reminds us, not so fast.

In a well-reasoned decision following North Carolina law, the judge found the plaintiff’s claim that the defendants had sold him a food item that contained the utensil and he had unwittingly digested it impossible to swallow. This was because the plaintiff had to stack “inference upon inference” in his attempt to prove that the restaurant had anything to do with this injury. 

 

First, there was no proof that the object had been in any food (under the Uniform Commercial Code, food is "goods") the restaurant had sold him, a necessary factor in his theory of breach of the warranty of merchantability. The plaintiff relied only on circumstantial evidence—he claimed he had eaten at that restaurant, no other restaurant in its chain and no similar restaurant (though in other restaurants) in the relevant time period. But that was not enough. His doctors merely testified that the object caused his symptoms; they didn’t have anything to say about how it got there. Defendants’ experts, on the other hand, showed what you might expect: objects like that don’t get into your lungs when you simply eat them. Instead, there must be some “severe mental depression” that suppresses the coughing instinct. What can cause that? Drug or alcohol abuse. And there was substantial evidence the plaintiff was using both around the time he took ill.

 

Moreover, when foreign objects get into the lungs, unlike the stomach, they don’t degrade or degenerate. So the absence of any food-related objects in his lungs along with the plastic negated the likelihood that the plastic entered his lungs while he was eating the restaurant’s food.

The utensils were available free to anyone who came to the restaurant, or any other one in the chain, which again did not support any inference that the only way one could have entered his lung was through ingestion of the restaurant’s food. And there was no evidence that anything like this had ever happened before, or that among the tiny number of complaints of foreign objects in the restaurant’s food was there a fact pattern even remotely similar. So the complaint was dismissed on summary judgment.

This case demonstrates more than that there are successful defenses to claims for violation of the warranty of merchantability even in a case where a defendant’s logo is found in an unusual place. Causation is not something that can be assumed, or proven by piling “inference upon inference,” and is a defense that should always be examined. 

Unmitigated Chutzpah: The CSPI's Merchantability Claim Against Safeway

Ken posted about some general issues related to the Center for Science in the Public Interest’s claims against Safeway related to the decision not to use its Club Card data to publicize recalls. Hidden among the claims, however, is a claim for breach of the warranty of merchantability that is so breathtakingly extensive it requires a separate post.

The breadth of this claim is astounding.  To see why, you must understand two things.  First, this is a class action. CPSI and its lawyers seek to represent “All Customers who bought Recalled Products, and whom Safeway did not advise that they bought Recalled Products, for a period of four years prior to the date this complaint is filed until the date of class certification.” “Recalled Products” are those subject to a Class I recall from the FDA or the USDA. I presume the four years states the applicable statute of limitations. If the class were certified, these lawyers would represent everyone in the class. 

 

Second, the count of the complaint that deals with the warranty of merchantability has nothing to do with the requested relief that has garnered so much publicity. It is unrelated entirely to the use of the Club Card to notify customers about recalls. It is a straight breach of contract action. Put simply, these lawyers purport to represent every single person who had a Safeway Club Card, for the value of their Recalled Products. The complaint expressly makes no claim for any injury other than the economic injury of a breach of contract; no one is alleged to have gotten sick, let alone died. Indeed, one of the named plaintiffs consumed some of the eggs subject to recall, apparently without adverse health effects.

 

Moreover, and this is important to understand, these are not Safeway’s recalls. They are in nearly every case recalls instituted by someone up the food chain. The class consists of everyone Safeway didn’t notify, but the named plaintiffs in fact became aware of both recalls through other means: news reports, a letter mailed by another retailer who had sold similar products, a “neighborhood listserv.” Upon becoming aware of the recalls, there was nothing stopping either plaintiff, who, according to the very complaint their lawyers have filed on their behalf, “frequently shops at her local Safeway store”, from asking for a refund. I suspect Safeway would have granted it without complaint or hassle. 

 

But no. Instead, we need a class action. Who is in the class? Everyone who never got notice from Safeway of the recalls, even though they may have (like both named class plaintiffs) received notice from other means. The parties actually responsible for these recalls purposely put that information out onto the news channels; blogs like this one tend to spread the word gratis when recalls occur. Anyone concerned about the food they buy can check numerous news sources, including the FDA’s own website, for news about recalls. I often walk into the office in the morning to be asked, “did you hear about the latest recall?” This stuff isn’t hidden under a pillow somewhere. 

 

By being subjected to the class action, though, Safeway may be in a dilemma. It really doesn’t want to pay consumers twice (nor should it have to). But how is Safeway, now that the class action has been filed, to know that it will not be required to pay twice, once when the consumer comes to the customer service desk at his or her local store and again when the class action is settled? The answer is that it can’t. Which may make Safeway less likely to pay the consumer at the customer service desk. Is that really the result that is in the best interests of the purported class?

 

My guess, however, is that this won’t happen. Both because Safeway doesn’t want to have a few thousand store managers explaining to real live customers that some lawyers in California make it impossible to refund your two dollars, and because Safeway’s lawyers, despite the unmitigated chutzpah of CSPI in claiming the right to represent all Safeway’s customers wherever located in connection with their refund rights, think the chance of class certification on this issue is of vanishingly low probability. 

Why CSPI's Loyalty Card Suit Has No Merit and Does Not Promote Food Safety

Following the playbook it has followed in the past with sodium and other issues, the Center for Science in the Public Interest (CSPI) has filed yet another complaint of very questionable legal merit to promote a policy agenda. This time CSPI seeks to compel all retailers to use loyalty cards as a recall alert system.

Some retailers use their loyalty card systems to alert customers of product recalls. Other retailers do not. Retailers who don't use loyalty cards as a recall alert system may have a variety of legitimate reasons why they don't or can't create the technology that CSPI wants a court to order retailers to implement. For example, some may lack the technological ability, have privacy agreements with customers that do not allow loyalty cards to be used as a recall alert system, or have other legitimate privacy concerns.

Like CSPI's sodium litigation, this complaint has serious flaws. It seeks broad certification of a "nationwide class" of customers who bought recalled products and whom the retailer "did not advise that they had bought Recalled Products." Even supposing that the claims had some legal merit, few "common issues of fact and law" are apparent. State law varies on the type of consumer fraud claims asserted. Some putative class members surely did get notice of the recall (through means other than loyalty cards).

On the merits, the claims are problematic because we suspect that many (and perhaps most) jurisdictions do not recognize a retailer’s affirmative duty to create some technology to alert customers of manufacturers’ recalls. The complaint utterly fails to acknowledge that retailers employ mechanisms other than loyalty cards to assure customers are aware of recalls.

On its face, a claim for breach of the warranty of merchantability is completely incongruent with a request that the court order retailers to employ new technologies. And, a loyalty card is not a good subject to the warranty of merchantability.

What might be most shameful about CSPI's complaint is its conflict with the Food Safety Modernization Act (FSMA), which CSPI purports to support. Section 211 of the FSMA modifies the Reportable Food Registry to enhance consumer notification of Class I recalls by grocery stores. FDA is tasked to, "[n]ot more than 1 year after the date of enactment of the [FSMA,] . . . develop and publish a list of acceptable conspicuous locations and manners" for grocery stores to notify customers of Class I recalls. CSPI (as well as anyone else) will have the opportunity to submit comments to FDA as part of the rule-making process.

Even if CSPI were somehow successful in its litigation, the outcome of the litigation may be supplanted or even in direct conflict with the FDA's rulemaking and the FSMA. Litigation is rarely a productive, efficient or useful way to create industry regulation. Litigation in the wake of legislation creating the actual policy that CSPI seeks to promote seems utterly wasteful and counterproductive.

"Sweet" and "Natural": Can One Word Have Meaning And One Not?

Two news items are our topic today:  Ben & Jerry's removed the term "all natural" from its ice cream and was immediately sued by someone; and some people are labelling ordinary onions as "sweet" and charging a premium for them.

First, "natural."  The FDA, of course, has declined to define "natural" outside of the context of flavorings (where its regulations are already lengthy).  Here is what Tom Standage, bestselling author of "An Edible History of Humanity," has to say: 

Accordingly, almost none of the food we eat today can truly be described as natural.  Nearly all of it is the result of selective breeding--unwitting at first, but then more deliberate and careful as farmers propogated the most valuable characteristics found in the wild to create new, domesticated mutants better suited to human needs.

And further on in the same chapter:

The simple truth is that farming is profoundly unnatural.  It has done more to change the world, and has had a greater impact on the environment, than any other human activity.  It has led to widespread deforestation, environmental destruction, the displacement of "natural" wildlife, and the transplanting of plants and animals thousands of miles from their original habitats.  It involves the genetic modification of plants and animals to create monstrous mutants that do not exist in nature and often cannot survive without human intervention.  It overturned the hunter-gatherer way of life that had defined human existence for tens of thousands of years, prompting humans to exchange a varied, leisurely existence of hunting and gathering for lifes of drudgery and toil.  Agriculture would surely not be allowed if it were invented today.

That's pretty profound, and obviously more than a little hyperbolic.  But it points out the entirely subjective nature of the term "natural."  

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Aurora Dairy Organic Milk Case: Eighth Circuit Preempts Some Claims And Remands Others

As we reported some time ago, a class action suit was pending in the Eastern District of Missouri against Aurora Dairy, its organic certifier and certain retailers for violation of state consumer protection laws. The district court had dismissed the case on the grounds that all claims were preempted by the Organic Foods Production Act of 1990 (OFPA), and the plaintiffs appealed to the court of appeals for the Eighth Circuit. On September 15, the Eighth Circuit affirmed the dismissal of some of the claims and remanded the remaining claims to the district court.

Nineteen class action suits across the nation had been consolidated into a single action in the Eastern District of Missouri. In a consolidated class action, the plaintiffs made claims against Aurora Dairy Corporation, a certified organic dairy located in Boulder, Colorado, QAI, Inc., a certifying agent under the National Organic Program administered by the USDA, which had certified Aurora’s milk as organic, and certain retailers who had sold Aurora’s milk under Aurora’s brand as well as under their own store brands. A total of 57 counts were brought against the several defendants, on theories ranging from violation of state consumer protection laws to violation of implied warranties under the Uniform Commercial Code to unjust enrichment and negligence per se. The district court dismissed all the claims on the grounds of so-called “conflict preemption”, where allowing states to regulate an area would conflict with Congress’s regulation scheme.

The Eighth Circuit agreed with the conflict preemption analysis as it related to QAI, the certifying agent, which was dismissed from the case in full, and as it related to the labeling of the products as “organic” based on the certification by QAI.

To the extent the class plaintiffs, relying on state consumer protection or tort law, seek to set aside Aurora’s certification, or seek damages from any party for Aurora’s milk being labeled as organic in accordance with the certification, we hold that state law conflicts with federal law and should be preempted.

The court of appeals disagreed, however, with the district court on other claims, stating,

Preempting state law claims unrelated to the decision to certify, and certification compliance, does not advance the purpose of establishing national standards for organic foods. Nor does preemption of the facts underlying certification advance the goals of assuring consumers that organics meet a consistent standard, or in facilitating interstate commerce in organics.

The court remanded the case to the district court to determine, based on the standards in its decision, which claims would survive against Aurora and the retailers. This was due in part to the district court having not decided, on the grounds that it was moot, motions by the defendants to strike the consolidated complaint and by the plaintiffs’ motion to the amend it. Thus, the district court’s first task would be to decide those motions before it can determine what claims, if any survive.

How Virgin is Your Olive Oil?

The Agricultural Marketing Service (AMS) of the U.S. Department of Agriculture is finally revising its standards for olive oil, promulgated way back in 1948, to bring them in line with the International Olive Council (IOC), an organization established under United Nations auspices that represents 98% of the world’s olive oil production, nearly all in the Mediterranean basin (the U.S. is not a member). It is doing so at the behest of the California Olive Oil Council (COOC), which is the trade association of U.S. olive oil producers, essentially all of whom are in California.

The new regulations, which are effective on October 25, can be found here, and here is a release the AMS put out describing them. Pretty clearly, terms like "U.S. Fancy" are quaint and obsolete with respect to how olive oil is marketed, and standards for what the terms "Extra Virgin" and "Virgin" olive oil mean are important for olive oil producers, distributors, retailers and consumers.

COOC was also a funder of a study, which has received much press attention, about the accuracy of olive oils labeled as “extra virgin” in advance of the effectiveness of the new AMS regulations. The study has resulted in headlines like, “Olive Oil Study Questions ‘Extra Virgin’ Claims” and the even more provocative, “Olive Oil Study Questions Claims of Virginity.

The study showed, among olive oils purchased by the researchers in three parts of California (the Bay Area, Sacramento and Los Angeles County) a difference in the accuracy of “extra virgin” labeling between domestic and imported olive oils. Using tests that are used by IOC and in the AMS regulations, as well as other tests used by the German Fat and Oil Society and Australian Olive Association (neither Germany nor Australia being IOC members), there was a distinct difference in the quality of the oils tested, with the domestic olive oil coming off better.

The study makes no claim to any statistical significance for its findings, which is not surprising considering they only examined 14 imported and five domestic brands, buying one of each imported brand in three different places in California and one of each domestic brand in two. Equally unsurprisingly, the North American Olive Oil Association (NAOOA), which represents olive oil importers, has questioned the study's conclusions, which they say are not in line with the results of their own periodic tests of their members' products. Both groups appear to be supportive, however, of the AMS regulatory action.

One thing in the NAOOA press release about the new regulations struck me, however.

But the practice of labeling lower-quality olive oil as top-end — and charging a premium for it — is technically legal in the U.S.

The reason is simple: There are no federal rules that define what is — or is not — "virgin" or "extra virgin" olive oil, said Vito S. Polito, professor of plant sciences at UC Davis and co-chairman of the school's Olive Center, a research group.

I suppose we can all have our own definition of "technically legal." Something could be thought of as technically legal if doing it does not result in criminal sanctions, or result in the product being forcibly recalled from store shelves. In those senses, I suppose selling something as "extra virgin" olive oil would be, until the AMS regulations come into effect in October, "technically legal."  But if one took it to mean there are no adverse legal consequences, may I beg to differ? Readers of this blog will remember the implied warranty of merchantability contained in Section 2-314 of the Uniform Commercial Code. One key provision of that warranty is that the goods "conform to the promise or affirmations of fact made on the container or label if any." It doesn't require federal standards to say what extra virgin olive oil is; any form of evidence of a standard, such as, say, the IOC standards, would presumably be admissible into evidence to show what the common understanding of the term is. If the goods sold do not conform to the standard found by the court or jury, then damages under Article 2 will be available.

For consumers, it should be even easier. If you buy something labeled extra virgin olive oil and the bottle, when opened, smells rancid, take it back to your retailer. If it smells delicious, enjoy one of nature's true wonders.

The Ninth Circuit's iPod Opinion and the Warranty of Merchantability

The warranty of merchantability is a favorite tool of plaintiff's attorneys in food liability cases.  We have blogged a good deal about it. 

In a case that does not involve food at all, but is sure to get a lot of publicity, the Ninth Circuit yesterday ruled that the common iPod does not breach the warranty of merchantability even if it can be used to damage your ear while wearing ear buds.  The decision in Birdsong v. Apple, Inc. will be very helpful in defending future claims of breach of the warranty in many areas, including in relation to food.

The plaintiffs in Birdsong did not allege any injury to themselves.  Rather, they alleged that the iPod earbuds were capable of producing 115 decibels of sound, that consumers may listen at unsafe levels and that iPod batteries last 12 to 14 hours and may be recharged, meaning that a consumer may listen for a long time.  The plaintiffs requested relief in the form of iPods being modified to have noise-reduction features, better warnings and a decibel meter.  The court was having none of it.

The plaintiffs do not allege the iPods failed to do anything they were designed to do nor do they allege that they, or any others, have suffered or are substantially certain to suffer inevitable hearing loss or other injury from iPod use. Accordingly, the district court correctly determined that the plaintiffs failed to allege sufficiently the breach of an implied warranty of merchantability.

The court's analysis may apply equally well to many of the recent food liability cases we've examined where the plaintiffs allege no specific injury to themselves or any inevitable injury to someone consuming the food they have targetted.  The warranty of merchantability does not work to protect a consumer from misuse of an item, or use of the item in an absurd, unnatural or harmful way.  No one should play heavy metal music on an iPod for 14 hours straight at full volume, and should not claim a breach of the warranty of merchantability if they do.  And no one who has been diagnosed with any particular health condition should expect to be able to order anything off the menu at a national chain restaurant, in any quantity, and assume it will not exacerbate that condition. 

The noted New York restaurateur and curmudgeon Kenny Shopsin takes this attitude toward people who expect his restaurant to cater to their health needs:

Some people tell me they're deathly allergic to something and that I have to make sure it's not in their food.  I kick them out.  I don't want to be responsible for anyone's life-or-death situation.  I tell them they should eat in a hospital.

Most restaurateurs, big and small, are  more accommodating than Kenny (whose autobiography/cookbook has the title Eat Me for a reason).  But ultimately, they are providers of food, not doctors, dieticians, the FDA or the Health Department. 

Happy (and healthy) New Year, everyone. 

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?

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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.

Settlements and Implied Warranties

Article 2 of the Uniform Commercial Code contains powerful tools for buyers and sellers of food and other goods.  A recent case out of the Georgia Supreme Court emphasizes the critical gatekeeper function of the scope section of Article 2, Section 2-102.  This section provides:

Unless the context otherwise requires, this Article applies to transactions in goods;  it does not apply to any transaction which although in the form of an unconditional contract to sell or present sale is intended to operate only as a security transaction nor does this Article impair or repeal any statute regulating sales to consumers, farmers or other specified classes of buyers.

Prior case law has generally distinguished between contracts whose primary purpose is the sale of goods or services.  For instance, when you deal with a roofing contractor, are you buying the shingles or the installation services?

In Olé Mexican Foods, Inc. v. Hanson Staple Co. (Ga. April 28, 2009), the parties disputed whether certain packaging had met contract specifications.  Without lawyers present, they negoiated a handwritten settlement agreement.  The agreement included a provision whereby the buyer

would “purchase a minimum of $130,000 worth of current inventory from” [seller] and would “test the remainder of inventory and ... purchase additional inventory if it meets quality expectations.”

On a motion to enforce the settlement agreement, buyer got the court to agree that "that such purchases would “be governed by the Georgia Uniform Commercial Code [UCC], and [buyer] shall retain the right to reject [seller's product pursuant to the Georgia [UCC].”

The Georgia Court of Appeals reversed and the Georgia Supreme Court upheld the intermediate appellate court's decision.  The reasoning was that the purpose of the settlement agreement was not the sale of goods, but the settlement of a dispute over the sale of goods. 

The fact that the document at issue is labeled “agreement reached in settlement” “is a good barometer of the parties’ intentions. Though the label that contracting parties affix to an agreement is not necessarily determinative of the agreement’s predominant purpose, it can constitute potent evidence of that purpose.”

Citing a number of cases, the court held that where the purpose was settlement, it would be wrong to treat the case instead as a sale of goods, bringing in the implied warranties that the language of the parties' settlement indicated should not apply to the mandatory purchase of goods pursuant to the settlement.

As a UCC matter, the case is undoubtedly correct.  Kristen David Adams, a professor at Stetson Law School and one of the few others who possess the cap that illustrates this entry, has written:

one reason why the court’s holding is so clearly correct is that a contrary holding would essentially eviscerate the purpose of this particular settlement: since one of the central disputes in the underlying litigation was whether Hanson’s goods were merchantable within the meaning of the Uniform Commercial Code, and since the case was settled rather than having this issue decided by the court, applying the implied warranty of merchantability to the settlement agreement would almost certainly require the parties to relitigate the question of merchantability.

When settling a case involving goods that are alleged not to conform to the contract, then, it is often the case that the terms of the settlement might involve future shipments.  It is therefore critical to recognize that the question of whether implied warranties and other Article 2 default terms should be addressed by the parties directly in the contract, and not left for later interpretation by a court.  In this case, the parties settled without the benefit of counsel, and it is not inconceivable that each had a different take on whether the default warranties would apply.  It is also conceivable that neither gave the question a moment's thought until their respective lawyers looked over their handiwork

Which is another reason to have the advice of counsel when settling a case.

 

The Missing Menu Item: the Farm Products Exception

I just got the latest issue of Business Law Today, published by the Business Law Section of the American Bar Association.  The cover has an intriguing title:  "Food and the Law."  The lead article has a title even closer to my heart:  "Le Menu: the UCC and Food", written by Steven O. Weise of Proskauer Rose LLP.  Steve is, in the interest of full disclosure, a friend, but in the interest of a full introduction, one of the most prolific writers and speakers on commercial law topics on the planet, someone who has been a mentor to many (myself included) and is engaging, witty and unbelievably smart.

Only he left out an item on his menu. 

In his discussion of Article 9 of the Uniform Commercial Code, he left out section 9-320(a), which is called the "Farm Products Exception."

I think I know why he left it out:  he practices in Los Angeles and California has never had the Farm Products Exception. 

After the jump, more on the Farm Products Exception.

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