DOJ Pursues Tomato Processors - One Executive Pushes Back

By Guest Blogger Jay Eckhardt

On April 29, the Department of Justice (DOJ) announced that it had obtained a criminal indictment against the former CEO of SK Foods, Scott Salyer, for his participation in a conspiracy to fix prices and rig bids in the market for tomato paste. (SK Foods is now owned by Olam International, of Singapore.) This followed on the heels of a prior indictment against Mr. Salyer, obtained in February, for fraud, obstruction of justice, and violations of the Racketeer Influenced and Corrupt Organizations Act (RICO). Mr. Salyer was arrested by the FBI in February and has been held in federal custody since his arrest.

While entering a guilty plea is frequently the most prudent tactic for executives charged in criminal antitrust cases, when the stakes are high it may make more sense to fight back. In this case, Mr. Salyer has challenged the indictments against him and pleaded not guilty to the price fixing and bid rigging charges this week.

Government lawyers generally tend to prefer to shoot their fish in a barrel – which is to say, they seek cases that they think they will win. Of course juries didn’t agree with DOJ lawyers in 2008, when a hung jury refused to convict executive Gary Swanson for his role in a conspiracy to fix prices for dynamic random access memory chips (DRAM), and in 2007, when a jury found that the Stora Enso company did not conspire to fix prices for coated magazine paper. Mr. Salyer apparently hopes to join the successful minority that has avoided prosecution.

But what about the tomato processing industry? The LA Times reports that DOJ has been focused on bid rigging, corruption, and bribery investigations in the industry since 2007. With only five companies processing 95% of the tomatoes grown in the U.S., the industry is fertile ground for federal prosecutors, as the concentrated group of close competitors has turned out to be too friendly. Who are the victims? They are actually some of the largest American food companies: Kraft, Safeway, Frito-Lay, B&G Foods, and others. Government investigations have shown that these companies purchased tomato paste and other processed tomato products at inflated prices. In some cases, processors also lied about the contents of their products, mislabeling products at higher “grades” in order to get higher prices.

In the tomato investigation, Mr. Salyer is the first to fight his conviction. The first big conviction came from a broker for SK Foods who pleaded guilty in December 2008. According to the LA Times, DOJ has secured guilty pleas from at least nine individuals in the tomato processing industry. The same pattern emerged in the DOJ’s DRAM investigation. While Mr. Swanson avoided his prosecution, 14 others involved in the DRAM price fixing conspiracy pleaded guilty, and the DOJ secured fines and penalties of over $700 million from individuals and the corporations they worked for. With a little luck (and perhaps a misstep by the prosecution) Mr. Salyer may evade conviction. It appears that the industry as a whole will not be so lucky. The government, and the tomato processors’ customers, will likely pursue claims for some time.

Cleaning Up the Docket - Northern District of California Dismisses Lanham Act Claim Alleging Mislabeling of Personal Care Products

As we have blogged about, litigation regarding product labeling has been a hot topic within the food and beverage industry. A recent decision from the Northern District of California could hold interesting implications for Lanham Act claims centering on the labeling of products as “organic.” While the case, One God Faith, Inc. v. Hain Celestial Group, Inc., involved personal care products rather than agricultural products, the rationale used by the court in reaching its decision to dismiss the claims of the plaintiff is illustrative for the general category of “organic”-labeled products.

In One God Faith, plaintiff, a manufacturer of personal care and cosmetic products, including soap labeled as United States Department of Agriculture (“USDA”) certified “organic” or “Made with Organic” oils in compliance with USDA National Organic Program (“NOP”) standards, sued multiple defendants under § 43(a) of the Lanham Act alleging defendants falsely, misleadingly, and confusingly labeled and advertised similar products as “organic” even though they did not meet NOP standards for the designation, resulting in a loss of sales for plaintiff.

As we blogged about in our discussion of the POM v. Ocean Spray decision, pursuing a false advertising claim under the Lanham Act can be a difficult task for plaintiffs. When Congress enacted the Organic Food Products Act (“OFPA”) in 1990, the legislation that authorized the USDA to implement the NOP, it expressly declined to create a private right of action to enforce the statute or any of its implementing regulations. The plaintiff in One God Faith argued that the OFPA by its statutory language applies only to “agricultural products,” and the USDA has made clear that its comprehensive regulatory scheme governing the use of the term “organic” does not apply to personal care products, the category of products at issue in the case.

However, the court in One God Faith was not persuaded by this argument. While the court did find that it was undisputed that the USDA has declined expressly to impose the NOP standards on personal care products, this was not sufficient to justify the exercise of subject-matter jurisdiction by the Northern District. The court noted that the issue of amending existing regulations to include “organic” claims with respect to personal care products has generated significant recent discussion and that the USDA has asserted its authority over personal care products in other significant ways, including allowing producers and handlers of such products (including the plaintiff) to seek USDA certification under the NOP. As stated by the court, the mere fact that the USDA has not to date expressly imposed the NOP standards does not excuse plaintiff from exhausting available remedies under the USDA’s administrative appeal procedure. Consequently, the court held that granting the plaintiff its requested injunctive relief would negate the legislative bar on private actions and effectively enforce the NOP standards against defendants. As such, plaintiff’s complaint was dismissed for lack of subject-matter jurisdiction.