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.
Learn About Who Is Setting Sustainability Standards and How to Make Good Sustainability Claims: Register for the 11/3 Sustainable Foods Webinar
If you haven’t already, register here for the second in a three-part webinar series on environmentally friendly sustainable food products, to be held at 9 am PT, Tuesday, November 3. This installment of the series will focus on sustainability standards, third-party certification and avoidance of “green-washing.”
The webinar will feature:
- FDA regulatory lawyer Ricardo Carvajal from Hyman, Phelps & McNamara;
- Roberta Anderson from Food Alliance, the nation’s leader in setting third-party sustainability standards for food production;
- Alison Dennis from Burgerville, a traditional quick-service restaurant on the cutting edge of sustainability; and
- Advertising lawyer Jere Webb from Stoel Rives.
The webinar is interactive, and those listening live will be able to submit questions. We will strive to answer all questions either during the broadcast or off-line directly with listeners.
If you missed the first installment, you can read about the take-aways and replay the webinar on demand here. The slide deck can be downloaded here.
Litigation and Insurance Coverage Risks from Swine Flu (H1N1)
For food companies (and other businesses), a dangerous and deadly flu pandemic (e.g., H1N1) can be a business disaster. Adding insult to injury is personal injury litigation and the accompanying insurance coverage nightmares that follow.
What Are the Personal Injury Litigation Risks?
For restaurants, airlines, cruiselines, supermarkets, hospitals, schools, and other institutions, risk comes from exposure if customers can link their illness with employee or staff illnesses. While proof of causation will be a hurdle for these plaintiffs, employers without clear and enforced pandemic policies (e.g., policies aimed at limited transmission and keeping sick workers home) are at risk. Large-scale deaths of healthy children and adults will raise the stakes enough to garner attention from plaintiffs’ lawyers and motivate lawsuits (whether merited or not).
While workers’ compensation statutes generally shield employers from suits by their employees (both alive and deceased), the same bar may not apply to contract employees or customers. Both may have the right to sue if they can link exposure to illness.
Will Personal Injury Claims Be Covered by CGL Coverage?
Generally, third-party claims for bodily injury against a company should be covered by Commercial General Liability (CGL) coverage. Yet coverages, exclusions, and endorsements should be read carefully. With greater frequency, insurers are including relevant (and harsh) language excluding claims related to infectious disease. For example, many policies, especially those issued to food companies, include exclusions for “organic pathogens,” which could be construed by insurers to include flu viruses.
Insureds should also evaluate whether limits and excess coverages are sufficient. Increasing limits of liability are relatively inexpensive and should be considered. It’s not difficult to imagine claims exceeding $100 million if multiple deaths of healthy individuals are involved.
Will Lost Business and/or Lost Profits Be Covered by Business Interruption Coverage?
Possibly. The lawyers at Anderson, Kill and Olick have written a nice piece on this and other swine flu coverage issues. Here’s their summary of business interruption coverage for swine flu:
Depending on the facts, it may be possible for a swine flu pandemic to give rise to business interruption coverage. Such coverage typically is purchased by businesses as part of their property insurance policies, in the form of a rider or endorsement or an optional additional coverage. Business interruption coverage is designed to protect businesses from losses that they may suffer unexpectedly due to unavoidable interruptions in their daily operations.
Business interruption coverage may apply in a variety of circumstances, such as a forced shut-down, or a substantial impairment in access to, a business’ physical plant or warehouses. Recent, infamous examples of events giving rise to such business interruptions are the events of September 11, 2001, and Hurricane Katrina in Florida.
In most property policies, business interruption coverage is only triggered when the site suffers property damage. Physical damage, however, can include contamination of equipment. Moreover, some policies, particularly those written for policyholders in the hospitality industry, do provide coverage for losses stemming from infectious disease without requiring physical damage to premises. Further, civil authority coverage, which is triggered when authorities shut off access to an area in which a business is located, can be triggered without physical damage to the policyholder’s premises.
On the brink of a season during which some predict a possible dangerous pandemic, now is an opportune time for any company to gather its insurance coverage team (lawyers, risk managers, and brokers) to review and mitigate exposures.
Sustainability and Consumer Confidence in Food Safety
For food sellers interested in promoting a “sustainable” brand and inspiring food safety confidence in their consumers, meet Food Alliance. Food Alliance “is a nonprofit organization that certifies farms, ranches and food handlers for sustainable agricultural and facility management practices.” It bills itself as “the most comprehensive certification program for sustainably produced food in North America.”
I’ve recently joined the Food Alliance Board of Directors (in fact, I’m headed to Portland today for a board meeting). My hope is to assist Food Alliance in becoming more widely accepted and mainstream. Credible third-party certification, such as Food Alliance provides, offers a transparent pathway to sustainability of our food supply and consumer confidence in food safety.
Food Alliance takes a holistic approach that is broader and more dynamic than organic certification, which does nothing to address food contamination from pathogens such as Salmonella, E. coli, and Listeria (in fact, many experts believe that organically grown food may be more likely to be contaminated by these pathogens). By way of example, Food Alliance certification standards, among other things, address “soil and water quality,” “ensure the health and humane treatment of animals,” “conserve energy and water,” and “ensure quality control and food handling safety.”
For more on why a holistic, independent third-party certification correlates with food safety (and accompanying consumer confidence), I’d suggest reading this op-ed piece co-authored by Food Alliance Executive Director Scott Exo, which was written earlier this year in the wake of the PCA peanut recall.
Court Rules That Retailers Have No Duty to Investigate Suppliers Compliance with Organic Regulations
An important ruling was issued last week dismissing claims that milk produced by an organically certified dairy and labeled as organic was not really organic. Plaintiffs in the action asserted violations of various states’ laws because they claimed that they paid more for the milk because it was labeled as "organic.”
A federal judge in the Eastern District of Missouri granted a Rule 12(b)(6) motion to dismiss on a multitude of cases pending against the dairy, various retailers selling the dairy products and others (originally these suits were filed in various federal courts around the country but were consolidated for pretrial purposes by the United States Judicial Panel on Multi-District Litigation or MDL).
The judge ruled that claims against the dairy were preempted because a “conflict exists between federal and state law” (otherwise known as “conflict preemption”). As explained in the opinion, conflict preemption exists where “a party’s compliance with both federal and state law would be impossible or where state law would pose an obstacle to the accomplishment of congressional objectives.” Here, the court found that for “plaintiff’s claims to succeed, the Court would have to invalidate the regulatory scheme established under the OFPA [Organic Foods Production Act] and NOP [National Organic Program].” The court concluded that if plaintiffs were to prevail “producers would be liable even where fully certified and authorized to use these terms and seals.”
For the retailer defendants, the judge ruled that because plaintiffs’ claims against the dairy are preempted, “the retailer Defendants cannot be liable.” But the court went further and dealt explicitly with the plaintiffs’ claims that the retailers “should have investigated” the dairy’s activities to ensure compliance with the OFPA and NOP. The court rejected these arguments:
The Retailer Defendants did not have any duty to inspect [the dairy’s] facilities, or the facilities of any of their other organic producers. Imposing such a requirement “would place an undue burden on the distributor who is least likely to have access to such information.”
This should be good news for organic retailers. Hopefully, this decision will reduce their legal exposure to consumer labeling claims going forward.
Are Organic Foods Safer? Will Consumers Continue to Favor Organics?
Nobody disputes that consumers have a favorable view of organic certification in foods. Consumers generally believe that organic foods are healthier, and many believe they taste better. Yet, among food scientists, uncertainty prevails as to whether organics are safer, especially raw fruits and vegetables.
Absence of synthetic fertilizers is a primary distinction between organic and non-organic foods. And, from a safety standpoint, the absence of pesticides is the only provable claim that organic foods are healthier. But does the absence of one hazard imply the existence of another?
The prevailing pesticide substitute for organic foods is manure or composted manure. Dangerous pathogens such as E. coli O157 reside in manure. Some guidelines exist for composting manure. Unfortunately, as I learned recently in a presentation by Dr. Francisco Diez-Gonzalez at the University of Minnesota Food Science Department, these guidelines were written a decade ago, before science began to understand the prevalence of E. coli in the environment.
Science now understands that E. coli O157, for example, can persist for years in soil, let alone a more rich environment like manure. In some cases, it may be virtually impossible to rid of an environment of E. coli O157, short of treatment with non-organic substances such as tear gas or asphalt.
Outside of the 2006 spinach outbreak, there have been few food-borne illness outbreaks associated with organic fruits or vegetables. As organic farming continues to grow and detection of food-borne illness increases, the only question is how long it will be until another well-publicized outbreak. When it happens, will consumers continue to believe organic foods are safer? Will the industry be ready with evidence that proves the benefits of organic farming outweigh its risks?
Five New Year's Resolutions
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Unfortunately, 2009 does not promise to be any easier than 2008 in protecting your business against food liability claims. Many argue that threats will only increase in the new year. Here are five things you can do to reduce exposure in the coming year:
1. Review Insurance Coverage and Limits Carefully – Both the variety and size of claims are escalating fast. For example, just a couple of years ago consumer claims from non-O157 E. coli, melamine, diacetyl or organic labeling seemed far-fetched, but all are now a grave reality. Federal, state and local governments will continue improving detection techniques since the rash of large, national food-borne illness outbreaks in 2006-08. The Obama administration will likely make increased funding in this area a priority. The odds that your company will be targeted in a nationwide outbreak resulting in claims in the hundreds of millions of dollars are increasing. Because of the exposure, insurance companies now more than ever will be looking for ways to reduce their coverage.
2. Review and Revise Supply Chain Agreements – Aside from insurance, one of the most effective ways to reduce, spread and mitigate risk is to ensure that those in your supply chain provide adequate insurance and indemnity for problems related to their products. But just because your supply agreement happens to mention insurance and indemnity does not necessarily mean those clauses will help when you need them. The only way to ensure that they will be honored and enforced is to ensure that your legal team (experienced in litigating these clauses) drafts these carefully.
3. Reassess Suppliers – Your choice of suppliers may be key to avoiding or reducing risk. Even if you demand sufficient insurance and indemnity from a supplier, a supplier of sufficient size may not be able to access insurance or have assets available to satisfy indemnity obligations. As important as your food safety, HAACP and other programs may be, they are really only as strong as your suppliers’ programs. Careful audit and assessment of your suppliers’ food safety programs is important.
4. Increase Scrutiny Against Fraudulent Imports – Melamine, tainted rice and now “laundered honey” are all good examples of how fraud in the global food chain can dramatically affect unsuspecting U.S. food sellers. [add more advice here?]
5. Review, Update and Rehearse Crisis Management Plans – How your company is prepared to respond to a crisis is a good predictor of how your company will weather the crisis. With the stakes increasing, you need to be prepared to face the worst. Continual review, updating and rehearsal of your crisis management plan is key. Everybody on the crisis management team needs to understand his or her role and be ready for different scenarios.
Court to Rule on Consumers' Expectations For Organic Cosmetics
Dr. Bronner’s Magic Soaps (“Dr. Bronner’s”) received a favorable ruling recently in its suit against competitors that it believes are misleading consumers by labeling cosmetic products as “Organic”. Part of Dr. Bronner’s claim appears to be that “Organic” standards established by the U.S. Department of Agriculture (“USDA”) set the bar for consumer expectations of "Organic" cosmetic products. The USDA’s National Organic Program (“NOP”) standards, according to the USDA, do not apply to “cosmetics, body care, or personal care products”. Dr. Bronner’s argues in its complaint that “[p]ersonal care products labeled as in compliance with ‘Organic’ or ‘Made with Organic [up to three specified ingredients]’ under the NOP criteria reflect basic organic consumer expectations . . . .” (Brackets in original.)
Last week, a California Superior Court in San Francisco overruled the demurrer of Ecocert France (SAS) and Ecocert, Inc. A demurrer is essentially a request made to a court, asking it to dismiss a lawsuit on the grounds that no legal claim is asserted.
According to Dr. Bronner’s, the “Court turned aside the defendants’ arguments that Dr. Bronner’s, in its complaint filed with the Court, had not sufficiently spelled out how actual consumers, the company and competition in the organic personal care industry have been hurt by the defendants’ deceptive practices.” The court’s ruling does not necessarily mean that Dr. Bronner’s is likely to succeed, only that it has articulated colorable claims. The court did not rule on the merits of these claims.
This case should be watched closely by those in cosmetics and food industries. Dr. Bronner’s claims turn, at least in part, on its view of “consumer expectations.” Do consumers have expectations as to what “Organic” means? Does it mean something different for cosmetic products? These are just a few of the significant questions that may be addressed in the litigation.
"Organic Pathogens Exclusion"
Insurers are making efforts to exclude food-borne illness claims from coverage under comprehensive general liability (“CGL”) policies. The "Organic Pathogens Exclusion" is a good example.
While a claim for food-borne illness may normally be covered by a CGL policy, if you have an organic pathogens exclusion, your insurer will not provide a defense and will not cover your losses if your business is sued as a result of a food-borne illness.
Organic pathogens exclusions can take multiple forms. Some policies include an endorsement that excludes any “loss” for “any actual, alleged or threatened exposure to, existence of, presence of, ingestion of, inhalation of or contact with any biological agents.” “Biological agents” are usually defined to include things like bacteria, viruses or other pathogens (whether or not a microorganism).
Other policies simply include an endorsement providing that “this policy does not insure any loss, damage, claim, cost, expense, fine, penalty or other sum either directly or indirectly arising out of, relating to or caused by an “organic pathogen.” These policies generally define “organic pathogen” to mean “any organic irritant or contaminant, including but not limited to fungus, bacteria, virus, or other microorganism of any type, including but not limited to their byproducts such as spores or mycotoxin, or any hazardous substance as classified by the EPA.”
Any business involved in food production should take notice. Insurers are actively marketing policies with organic pathogen exclusions to food businesses whose greatest liability exposure may be food-borne illness. Careful and regular review of insurance policies and coverages is essential.
