Supplement manufacturers need game plan to defend against class-action lawsuits

A 2012 New York Times article highlighted a burgeoning opportunity for lawyers who made a name for themselves suing tobacco companies: food labeling litigation.

In recent years, the federal courts have been buried with putative class-action lawsuits that have been filed against manufacturers and marketers of conventional foods, beverages and natural products.

Robert Herrington, a defense lawyer in Los Angeles who wrote a book (“Verdict for Defense") on class-action and mass-action liability, recalls an American Bar Association presentation that cited hundreds of food and beverage cases pending in the “Food Court"—otherwise known as the Northern District of California.

“Unlike FTC or FDA, which does have some checks and balances before a suit can be filed, basically nothing is stopping the plaintiff’s attorney from filing a lawsuit," said Ivan Wasserman, a Manatt, Phelps & Phillips LLP lawyer in Washington, who advises clients on the labeling and marketing of foods, dietary supplements and other FDA-regulated products. “They can certainly file them for good cause or not for good cause."

Labeling review

It’s not inevitable that every startup and prominent manufacturer in the natural products space must defend itself against a class-action labeling lawsuit or pay millions in defense costs and attorneys’ fees. Herrington, co-chair of Greenberg Traurig LLP’s Products Liability & Mass Torts Practice, identified several strategies to mitigate exposure to class-action complaints.

In an interview with Natural Products INSIDER, Herrington recommended that a manufacturer retain an attorney or other expert to review labels before marketing products, and also identify areas where the risks of litigation are great, such as foods that purport to be “all natural."

“How do you avoid class-action exposure? The way you avoid it is by making sure your products, your labeling and your advertising comply with FDA and the other regulations, and your claims are well substantiated," said Angel Garganta, a partner in Venable LLP’s Commercial Litigation Practice Group.

Arbitration agreements

Food lawyers also reference arbitration agreements that are intended to waive consumers’ rights to bring a class-action lawsuit. In a 2011 case, AT&T Mobility LLC v. Concepcion, the U.S. Supreme Court affirmed the enforceability of an AT&T cellular phone contract that provided for arbitration, but barred class-wide arbitration. The majority rejected a rule announced in a California Supreme Court opinion, which held such arbitration clauses are unconscionable, and found that the Federal Arbitration Act preempted the California rule. A 2013 Supreme Court case provided additional support for arbitration agreements and waiver of class arbitration.

The AT&T case has been helpful to companies seeking to uphold arbitration agreements and bar a class-action lawsuit. “In case after case, courts are now refusing to void arbitral class action waivers in consumer and employment cases," wrote Jean Sternlight, a professor of law at UNLV (University of Nevada, Las Vegas) Boyd School of Law, in a 2012 article for Oregon Law Review called “Tsunami: AT&T Mobility LLC v. Concepcion Impedes Access to Justice."

Sternlight said the courts in consumer fraud actions and other cases have found the complaints must be handled through individual arbitration rather than a class-action lawsuit.

Labeling changes, insurance

An arbitration agreement is not the only strategy to cut off the class-action lawsuit or limit the size of potential damages in such a case. Herrington recommended periodic changes to labels and advertisements. The move is intended to limit the size of the class of consumers certified by a federal judge.

“If you don’t have that similarity of experience, the court isn’t going to certify the case as a class action," Herrington said.

Finally, Herrington advised that companies explore insurance coverage to cover the prospective costs of litigation, and also strike indemnification agreements with their suppliers. Smaller companies, including marketers in the natural products industry, may need to join a cooperative or find some other alternative to insurance coverage because it is expensive, he said.

Early settlement

There are ways to fend off a class-action lawsuit, even after plaintiffs’ counsel has expressed an intent to file a complaint. In California, plaintiffs’ lawyers must serve a demand letter on the defendants before filing a complaint under a state statute that is often asserted in class-action complaints: the Consumers Legal Remedies Act, which prohibits unfair methods of competition and unfair or deceptive acts or practices.

“Class-action lawsuits come in phases. One of the things that tends to be the case is that you often will get a pre-litigation demand letter from the plaintiff’s counsel, saying ‘we think you have done this, that and the other thing to misrepresent your products or make false claims,’" said Garganta, a veteran litigator in San Francisco who has defended food and dietary supplement firms. “The demand letter is sometimes an opportunity to demonstrate the plaintiffs’ lawyers don’t have their facts right and avoid the lawsuit that way."

Or this may be a defendant’s best chance to negotiate an inexpensive class-action settlement. If that strategy is unsuccessful, a supplement manufacturer can count on its legal team to attempt to defeat certification of the class. Without class certification, the case is essentially worthless to plaintiffs’ counsel because the measure of damages is often the difference between what the consumer purchased and the value received. The potential damages only become significant when thousands or millions of consumers are certified as a class.

“The reality is your risk has gone up exponentially," Garganta said, referring to certification of a class. “In my experience, the defendants rarely want to gamble on trying a false advertising consumer products class action."

Defeating class certification

It’s no wonder litigators eat up reams of paper arguing over class certification. Garganta cited a number of recent legal decisions that have been helpful to class-action defense lawyers. For example, in Mazza v. American Honda Motor Co., class members purchased or leased their automobiles in 44 different states. In a Jan. 12, 2012 decision, the U.S. Court of Appeals for the Ninth Circuit vacated an order that certified the class. Applying a three-pronged test governing California’s choice of law rules, the Ninth Circuit cited some meaningful differences in the state consumer protection laws and observed that the states had an interest in applying their own laws. Finally, the court found application of California law to the entire class would impair the interests of other states.

“It has definitely become harder to certify a nationwide class," Garganta said.

In recent years, courts also have denied class certification based on a finding that the class is not ascertainable. Consider Astiana v. Ben & Jerry’s Homemade Inc. The named plaintiff sought to represent a class of consumers who purchased Ben & Jerry’s ice cream, frozen yogurt and popsicles that contained alkalized cocoa and were labeled “all natural." Phyllis Hamilton, U.S. District Judge in the Northern District of California, found in a Jan. 7, 2014 ruling that the class was not ascertainable. Plaintiff provided no evidence identifying the ice cream that contained the alkalized cocoa, according to the judge.

“More importantly," Hamilton wrote, “plaintiff has not shown that a means exists for identifying the alkali in every class member’s ice cream purchases."

Garganta also cited a ruling in the Third Circuit that has been followed by a number of district courts in other circuits. In Carrera v. Bayer Corp., the plaintiff claimed Bayer falsely represented that its diet supplement, One-A-Day WeightSmart, improved metabolism by including a green tea extract. Bayer sold the product in retail stores such as CVS.

The issue in the case was whether the class was ascertainable. In an Aug. 21, 2013 ruling, Circuit Judge Anthony Scirica noted consumers were unlikely to have kept their receipts or packaging; and Bayer had no customer list. The plaintiff argued the class could be identified through retailer records of online sales and purchases made with store loyalty or reward cards, and through members’ affidavits. Bayer countered that customers’ memories would be unreliable.

The Third Circuit found the class was not ascertainable, but gave the plaintiff a chance to submit a screening model that would show how the class members’ affidavits would be reliable.

“If class members are impossible to identify without extensive and individualized fact-finding or ‘mini-trials,’ then a class action is inappropriate," Scirica wrote, quoting a previous decision in the Third Circuit.

Scirica added, “Depending on the facts of a case, retailer records may be a perfectly acceptable method of proving class membership. But there is no evidence that a single purchaser of WeightSmart could be identified using records of customer membership cards or records of online sales."

Courts don’t unanimously follow the reasoning in the Third Circuit. U.S. District Judge Lucy Koh made that clear in Brazil v. Dole Packaged Foods LLC. Dole argued the class could not be identified because there were no company records of customer purchases.

Koh wasn’t persuaded. In the May 30, 2014 decision, she noted the Ninth Circuit doesn’t follow the Third Circuit and distinguished the case from the Ben & Jerry’s ruling by her colleague Hamilton.

“Unlike in Ben & Jerry's, here all purchasers of the identified Dole products are included in the class definition, and all identified Dole products bore the same alleged misstatements,’ she wrote.

Garganta said some judges have reasoned that following the Third Circuit’s approach to class certification would result in an end to class-action lawsuits.

The divergent rulings by the federal circuit courts underscore the prudence of a multi-pronged strategy to limit exposure to class-action lawsuits. The strategy starts with ensuring that advertising and labeling materials on natural products are compliant with federal regulations.

“Try to make that investment early on," Herrington said.

Check out Natural Products Insider's Regulatory topics page for more on the laws that regulate the industry.