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Food Recall Monitor

Insurance industry food for thought on food contamination and product recalls

COZEN O’CONNOR TO ATTEND SNACK FOOD ASSOCIATION’S LEGISLATIVE SUMMIT

Posted in "All Natural", Class Action, Food and Drug Administration, Food Drug and Cosmetic Act, Food Manufacturer, Nutrition Labeling and Education Act, Uncategorized


Cozen O’Connor has been at the forefront of defending consumer class action lawsuits involving food and beverage labeling for years.  On April 9th and 10th we will be taking the fight from the courtroom to Capitol Hill at the Snack Food Association’s (SFA) Legislative Summit in Washington, D.C.  Please join us in supporting SFA’s position on the labeling of products containing GMO’s.

Putting the IP in IPAs

Posted in Brand Protection, Craft Beer, Food Manufacturer, Intellectual Property, Trademark

As the Super Bowl approaches, you may be thinking about beer: either deciding what to drink during the big game or wondering if a beer commercial will once again be the best ad.  Beer companies are frequently noted for their creativity in naming and marketing their suds.  This creativity has to be protected, however, and recent intellectual property disputes of all kinds have been brewing.

Exit 6

Exit 6 brewery set social media abuzz with their very public marketing dispute with Starbucks.  The small St. Louis brewery had been serving a blended drink consisting of a splash of Founders Breakfast Stout in a glass of Exit 6’s own Vanilla crème ale.  Exit 6 deemed the creation a “Frappicino,” after customers compared the combination to a Starbucks Frappuccino, the coffee giant’s trademarked blended coffee beverage.  The brewery’s owner, Jeff Britton, explained the spelling difference was merely because they were “poor spelers.” 

Starbucks did not see the humor in the drink’s name.  After discovering customers drinking “Frappicinos” on the beer-centric app Untappd, the chain sent Britton a cease and desist letter.  It claimed the name would cause dilution of the Starbucks brand and confusion among beer and coffee drinkers. 

Britton responded with a $6 royalty check, based on the three beers that were logged on Untappd.  He posted a sarcastic apology on Exit 6’s Facebook account, referring to his concoction as “the F word” throughout the letter:

[W]e meant no deception, confusion, or mistaking in the naming of the beer F Word.  We never thought that our beer drinking customers would have thought the alcoholic beverage coming out of the tap would have actually been coffee from one of the many, many, many stores located a few blocks away.  I guess that with there being a Starbucks on every corner in every block in every city that some people may think they could get a Starbucks at a local bar.  So that was our mistake.

Exit 6’s creative response earned national media attention, fermenting free publicity from the would-be marketing dispute.

“Hold My Beer and Watch This”

Exit 6 was not the only brewer to end an IP conflict quickly.  Anheuser Busch, America’s first national beer brand, recently settled a legal dispute arising from the online ad campaign, “Hold my beer and watch this.”  The campaign featured a series of videos where characters ask someone to hold their beer before doing something amazing or unusual, like a grandmother faking her own death

The video stunts did not impress Montana-based Big Sky Brewing Company, which claimed that it featured that exact phrase on the can of its IPAs since 2004, and that it trademarked its use in 2009.  Following a cease and desist letter, Big Sky filed suit for trademark infringement in December of last year, seeking to permanently enjoin Anheuser Busch from using the phrase, as well as disgorgement of profits.  Anheuser Busch contended that the phrase was too common to be protected by trademark.  However, the InBev-owned brewery took down the contested videos from its YouTube page, and Big Sky dropped its suit, ending the month-long litigation.

The case was Big Sky Brewing Co. v. Anheuser-Busch LLC, No. 9: 13-cv-00307-DWM (D. Mon. 2013).

Other Disputes

These beverage producers were able to quickly resolve these conflicts.  Other trademark disputes can be protracted, as with Anheuser Busch’s more than century-long dispute with a Czech brewery over the Budweiser name.  Parties can also avoid litigation with compromise, as Avery Brewing and Russian River Brewing did.  The two alehouses each created a Belgian-style ale named Salvation.  Instead of duking it out in court or forcing one to drop the name, the two decided to combine the beers and formed a “Collaboration, Not Litigation” ale with the best qualities of each.

The craft beer business is quickly growing in the United States, where the market for “small, independent, traditional” breweries expanded over fifteen percent from 2012-2013.  Increasingly, traditionally smaller craft breweries are selling their suds in multiple states.  With this influx of business and expanding interstate reach, breweries will inevitably repeat names, tag lines, and marketing efforts, if not always intentionally.  These cases underscore the importance of vigilant brand protection for manufacturers of all sizes.  Cozen O’Connor’s Intellectual Property Department will monitor and report on developments in these kinds of actions.

7th Circuit: Nothing “Loko” About Denying Defense Based on Liquor Liability Exclusion

Posted in Duty to Defend, Food and Drug Administration, Food Manufacturer, Food Safety, Insurance Coverage, Liability Policy, Liquor Liability Exclusion, Policy Exclusions, Public Health

In Netherlands Insurance Company v. Phusion Projects, the Seventh Circuit Court of Appeals ruled that the insurer of the makers of Four Loko has no duty to defend it in lawsuits alleging the alcoholic beverage caused serious injury and death.  The court affirmed the Northern District Court of Illinois’ determination that the liquor liability exclusion precludes defense coverage for suits alleging harm caused by intoxication.

Phusion Projects, Inc. and Phusion Projects, LLC (“Phusion”) manufacture and distribute Four Loko, a sweet malt liquor beverage.  Originally an alcoholic energy drink, its name came from its four active ingredients—alcohol, caffeine, taurine, and guarana.  However following a storm of controversy and legal embattlements culminating in an FDA warning letter, Phusion removed the energy ingredients from Four Loko. 

In 2010, five plaintiffs filed suit in separate court actions against Phusion.  Although they waged a variety of legal theories and claims, these suits alleged that consumption of Four Loko resulted in serious injury or death.  Phusion notified its insurer, seeking coverage under its CGL and commercial umbrella policies.  Its insurer filed for declaratory judgment that it had no duty to defend, asserting that the Liquor Liability Exclusion precluded coverage for the underlying claims because they involved injury caused by intoxication.  Phusion counterclaimed, and each side moved for summary judgment.

The underlying suits assert a variety of claims and legal theories, and all allege that Four Loko caused or contributed to serious injuries or deaths.  The parents of a Florida State sophomore alleged that their son shot and killed himself after drinking multiple cans of Four Loko and not being able to fall asleep for 30 hours.  The parents of a 15-year-old alleged that their son experienced a paranoid episode, ultimately resulting in a car striking and killing him after he ran in traffic.  In separate actions, two other plaintiffs allege that their underage friend drove recklessly after drinking four cans of Four Loko, causing one plaintiff to lose her hand, and another to be permanently disfigured.

The Liquor Liability Exclusion, identical in the CGL and commercial umbrella policies, excludes coverage for:

“Bodily injury” or “property damage” for which any insured may be held liable by reason of:
(1) Causing or contributing to the intoxication of any person;
(2) The furnishing of alcoholic beverages to a person under the legal drinking age or under the influence of alcohol; or
(3) Any statute, ordinance or regulation relating to the sale, gift, distribution, or use of alcoholic beverages.
This exclusion applies only if you are in the business of manufacturing, distributing, selling, serving, or furnishing alcoholic beverages.

The court rejected Phusion’s argument that the district court read the exclusion too broadly in ruling that it applied by its plain language.  Phusion contended that the phrase, “by reason of,” applied more narrowly than “arising out of,” and that it required a “direct, causal relationship” between Phusion’s products and the alleged harm.  The appellate court disagreed, reasoning that case law did not support Phusion’s position, and that the district court rightly determined the exclusion was clear and unambiguous. 

The court also rejected Phusion’s arguments that the insurer had a duty to defend because the underlying suits alleged additional wrongdoing, such as adding energy stimulants to its drinks.  In so doing, the court distinguished this case from dram shop cases where courts have found similar exclusions inapplicable because of the insured’s additional negligent acts after the point of consumption.  Instead, the court analogized to Northbrook,  an Illinois supreme court case holding that an automobile exclusion precluded defense coverage for lawsuits arising from a collision between a school bus and a train.  Northbrook held that allegations of inadequate planning, inadequate inspection, and a failure to warn simply rephrased the fact that the injuries arose from the operation of a motor vehicle and therefore the exclusion applied.

This court also looked to an Arizona federal court decision that ruled an identically-worded liquor liability exclusion barred defense coverage for a lawsuit alleging that the insured’s negligent hiring and supervision during a Red Bull “Flugtag” event caused a patron’s intoxication and subsequent car crash.  That court concluded that these secondary negligence claims were not divorced from the serving of alcohol, but rather were “inextricably intertwined.” 

Finally, this court disagreed with Phusion’s assertions that the underlying cases are “stimulant liability cases” and that adding stimulants to Four Loko constitutes a wrong outside of the Liquor Liabilty Exclusion.  The court disagreed, noting that “none of the claims against Phusion are distinct from Phusion’s act of furnishing alcohol. 

This court did not address the duty to indemnify as it was not ripe for consideration.

This decision indicates that liquor liability exclusions are enforceable when the underlying complaints fail to allege a cause wholly independent from intoxication, even when plaintiffs allege additional wrongdoing.  For manufacturers, buying insurance that covers your major risks is of obvious importance.

The case is Neth. Ins. Co. v. Phusion Projects, Inc., 2013 U.S. App. LEXIS 24908 (7th Cir. Ill. Dec. 16, 2013).

Michigan Appeals Court Rules Against Coverage for Uncontaminated but Seized Cheese

Posted in Acts or Decisions Exclusion, Commercial Property Insurance, Contamination, Food Manufacturer, Food Recall, Food Safety, Governmental Action Exclusion, Insurance Coverage, Listeria, Loss of Market Exclusion

A Michigan appellate court recently ruled that a commercial property insurer properly denied coverage for the cost of cheese seized by the government that could not be returned to market.  In this unpublished opinion, the three-judge panel upheld the trial court’s determination that the insurer properly relied on the first party policy’s Governmental Action and Loss of Market exclusions in denying coverage.

This dispute arises from a 2009 recall of Torres Hillsdale County cheese feared to be contaminated with listeria.  Prior to the recall, the Michigan Department of Agriculture discovered the presence of listeria and ordered Torres to halt cheese shipments until confirmed listeria-free.  Torres shipped some of the cheese regardless, necessitating a March recall that expanded into June of that year.

Torres sought coverage for uncontaminated cheese that expired due to the government’s seizure.  The insurer denied coverage, relying on three exclusions.  The Governmental Action exclusion barred coverage for loss caused by “[s]eizure or destruction of property by order of government authority.”  The Loss of Market exclusion barred coverage for losses resulting from “[d]elay, loss of use or loss of market.”  Finally, the Acts or Decisions exclusion barred coverage for losses resulting from “[a]cts or decisions, including the failure to act or decide, of any person, group, organization or governmental body.” 

Torres sued its insurer for breach of contract and violation of the Michigan Uniform Trade Practices Act, alleging that the exclusions were inapplicable and were “trumped” by a general condition stating that “[a]ny act or neglect of any person other than you beyond your direction or control will not affect this insurance.”

In upholding the trial court’s grant of summary judgment for the insurer, this appellate court determined that the expired cheese constituted “Covered Property” and seemed to assume that “direct physical loss” or “damage” occurred.  However the court also held that the policy precluded coverage by the clear language of the exclusions because the insured’s pleadings claimed that the government’s seizure solely caused Torres’ losses.

The court rejected the insured’s arguments that the general condition “trumped” the exclusions and instead reasoned that specific policy provisions generally override general policy provisions.  Therefore the exclusions applied.

This court did not expressly consider if the government’s seizure resulting in the cheese’s expiration constituted “direct physical loss” or “damage.”  Nor did it consider the applicability of a virus or bacteria exclusion—if any. 

While the Torres decision provides guidance as to how a court may treat coverage for non-contaminated products rendered worthless because of a recall, these issues are often determined jurisdictionally and depend heavily on the facts at hand, as well as the precise policy language implicated. 

 The case is Torres Hillsdale Country Cheese v. Auto-Owners Ins. Co., 2013 Mich. App. LEXIS 1547, 2013 WL 5450284 (Mich. Ct. App. Oct. 1, 2013).

Seeking Contribution for Coverage Costs Associated with Historic 2011 Listeria Outbreak

Posted in Contamination, Contribution, Duty to Defend, Duty to Idemnify, Food Recall, Food Safety, Insurance Coverage, Liability Policy, Listeria, Occurrence, Trigger of Coverage

Continental Western Insurance Company (“CWIC”) recently filed suit against Colony Insurance Company in Colorado federal court seeking declaratory relief and contribution for Colony’s alleged failure to share in defense and indemnity costs in connection with the deadly 2011 listeria outbreak.  Should the two insurers fully litigate this case, it may be instructive in determining when a food contamination incident triggers a CGL policy CWIC’s complaint is filed under docket no. 1:13-cv-1425.

Common-insured Pepper Equipment Corporation faces liability for selling allegedly inappropriate agricultural packaging equipment to Colorado-based Jensen Farms, which sold listeria-tainted cantaloupes.  Government reports suggest that the 2011 listeria outbreak was the “deadliest foodborne illness outbreak in over 25 years.”  The Centers for Disease Control and Prevention (“CDC”) reported that the cantaloupe infected 146 people in 28 states and resulted in 30 deaths. 

Claimants filed personal injury and wrongful death suits against Jensen and Pepper based on the outbreak.  Jensen filed for Chapter 11 bankruptcy, and both Pepper and CWIC agreed to participate in the bankruptcy claim resolution to secure settlements, releases and other resolutions.  CWIC alleges that it incurred $1.35 million in an effort to “obtain the most value to Pepper for the finite amount of indemnity money potentially available.”  CWIC alleges that at least some of the claims trigger Colony’s duties to defend or indemnify Pepper, and that Colony wrongfully refused to defend claims or participate in the claim resolution process and other outside proceedings, despite the notice, tender and demand for coverage.  CWIC seeks full reimbursement or contribution for Colony’s proportional share of the defense and indemnity costs.

While various factors will determine Colony’s exposure, the issue of trigger is particularly relevant.  CWIC’s policy provided coverage from September 14, 2010 to September 14, 2011, while Colony’s policy provided coverage for September 14, 2011 to September 14, 2012.  Pepper sold the equipment to Jensen in May of 2011, and Jensen distributed the contaminated cantaloupes between July 10, 2011 and September 10, 2011, according to the CDC report.  Cantaloupes have a shelf life of about two weeks, and the incubation period for the listeria bacteria can be greater than a month, meaning some customers first became sick as late as October 27, 2011.

While reports suggest that the underlying parties will reach a settlement of their litigation within the next six months, the coverage issues in dispute may linger well beyond this date, as the insurers  tackle the trigger of coverage, the scope of Colony’s duty to defend, multiple claimants seeking to recover limited insurance proceeds, and allocation, among other issues.  The Food Recall Monitor will continue to monitor the ongoing coverage litigation and provide updates as they occur.

Don’t Overstep Regulations: Third Circuit Rules that FDA Regulations Trump State Causes of Action in Trans-Fat Labeling Claim

Posted in "No Trans Fat", "Proven to Reduce Cholesterol", Class Action, False Advertising, Food, Food and Drug Administration, Food Drug and Cosmetic Act, Labeling Claims, Nutrition Labeling and Education Act, Preemption

The Third Circuit Court of Appeals recently ruled that FDA regulations preempted a consumer class action complaint alleging that trans-fat content and cholesterol-reduction claims on light spread butter and margarine substitutes misled customers. This decision adds to the growing list of courts throwing out such claims and buttresses manufacturers’ preemption defense during the early stages of litigation. Young v. Johnson & Johnson, 2013 U.S. App. LEXIS 9422 (3d Cir. May 9, 2013).

Plaintiff in this case sued Johnson & Johnson, manufacturer of Benecol Regular Spread and Benecol Light Spread butter/margarine substitutes (“Benecol”), for false and misleading claims made on the products’ labeling. The labeling contained two statements at issue here: that Benecol contained no trans-fat and that it was proven to reduce cholesterol. Plaintiff alleged that the “0g of trans fat” and “NO TRANS FAT” claims were false and misleading because the butter/margarine substitute contained small amounts of trans fat, and that the “Proven to Reduce Cholesterol” claim was false and misleading because the substitute contained some trans-fat and because the substitute itself was not proven to reduce cholesterol.

The Third Circuit Court of Appeals upheld the District Court of New Jersey’s dismissal of plaintiff’s complaint because, among other reasons, plaintiff’s claims were preempted by the Food, Drug and Cosmetic Act (“FDCA”), as amended by the Nutrition Labeling and Education Act (“NLEA”). The court explained that the “NLEA expressly preempts any state-imposed requirement for nutrition labeling of food, or with respect to nutritional or health-related claims, ‘that is not identical to the requirement’ set forth in the relevant provisions of the Act.” Using this standard, the court examined each of the purported misrepresentations on Benecol’s labels and determined that plaintiff’s challenges brought under New Jersey and New York consumer statutes sought to impose standards different than those set forth in the FDA regulations.

Regarding Benecol’s “no trans-fat” claim, the court noted that the FDA regulations do not expressly allow a product to advertise itself as having “no trans-fat” when it contains an “insignificant amount.” However, the FDA does permit a product label to state that a product has “no fat” or “no saturated fat” if the amount is less than 0.5 grams per serving. Additionally, FDA regulations allow a label to express the amount of trans-fat as zero if a serving contains less than 0.5 grams. Thus, because Benecol contained less than 0.5 grams of trans-fat, its claim that there was “no trans-fat” was not misleading even though it was “not expressly contemplated by the regulations.” The “no trans-fat” claim was authorized under the NLEA, and therefore plaintiff’s claim seeking to challenge that statement under state law was expressly preempted.

FDA regulations also permitted Benecol to claim that it lowered cholesterol. The Third Circuit referred to FDA regulations that permit this claim to be made when a product contains a threshold amount of plant stanol esters, which Benecol did. Again, the Third Circuit found that because the FDA regulations authorized this claim, plaintiff’s state law claims sought to “impose standards that are not identical to those set forth in the regulations,” and were therefore expressly preempted.

This decision dealt a significant blow to plaintiffs bringing claims under various state consumer statutes. The Third Circuit is clear: when FDA regulations authorize a food label claim, they will preempt challenges under state consumer statutes. The Third Circuit is yet another court in recent years which has found that FDA regulations preempted a plaintiff’s challenge of food labels. It is important that companies ensure that their food labels comply with the NLEA and other FDA regulations so that claims, such as the ones in Young, are dismissed from the outset, before prolonged litigation commences.

Framing of Damages Determines Duty to Defend in Recent New York Case

Posted in Duty to Defend, Food Manufacturer, Insurance Coverage, Liability Policy, Occurrence, Property Damage

A New York appellate court recently upheld a supreme court ruling that an insurer had a duty to defend a manufacturer’s faulty workmanship where it resulted in third party property damage.  I.J. White Corp. v. Columbia Cas. Co., 2013 NY Slip Op 2500 (N.Y. App. Div. 1st Dep’t Apr. 16, 2013).  In determining the insurer’s duty to defend, the court found an “occurrence” caused property damage to cakes resulting from the insured’s faulty freezer.  Although this opinion likely carries little precedential value, it is instructive because it demonstrates the importance of framing the issue of damages where the insured seeks a defense for a cause of action based largely in a contract breach. 

In the underlying case, the insured manufacturer, I.J. White, sold a spiral freezer system to cake producer and distributor, Hill Country Bakery, LLC.  Hill Country integrated this system into their $21 million facility in order to quickly freeze freshly baked cakes moving through a conveyer belt before cutting them for distribution.  But the system allegedly failed to sufficiently freeze the cakes quickly enough, resulting in product loss when Hill Country attempted to cut them.  Hill Country sued I.J. White for breach of contract, seeking damages for the contract price, costs incurred to increase the freezer’s performance to contract specifications, and increased labor costs resulting from the freezer’s slow freezing time. 

I.J. White sought defense and indemnity costs from Columbia Casualty under its CGL policy.  Columbia Casualty disclaimed coverage, contending that the defective freezer did not constitute an accident giving rise to an “occurrence” under the policy, and because the underlying suit did not allege “property damage.”

The supreme court disagreed and this appellate court upheld that determination.  The I.J.White court noted that although CGL policies do not insure against faulty workmanship in the product itself, damage to third party property such as the freshly baked cakes is “precisely the kind [of damage] that plaintiff’s CGL policy contemplated, and therefore, the complaint properly alleges an ‘occurrence’ within the meaning of the policy.”  The court also held that the policy covers Hill Country’s loss of use of the facility because it defines “property damage” as a “[l]oss of use of tangible property that is not physically injured,” though it did not address this issue in great detail.

Most courts considering whether faulty workmanship constitutes an “occurrence” have found that it does where it results in property damage to something other than the insured’s work product.  Indeed, the court’s framing of this damages issue seemed determinative of the finding of an “occurrence,” and explains the difference between the majority and dissenting opinions.  Whereas the majority presumed the defective freezer destroyed Hill Country’s cakes, the dissenting judges posited that the defective freezer simply delayed the freezing of the cakes since it performed slower than contractually promised but that no property damage resulted.  The dissenting judges concluded that no “occurrence” existed because the complaint “sound[ed] in breach of contract, breach of implied and express warranty, and fraudulent inducement,” and that it sought damages only related to the contract breach rather than for a destroyed product.

The court did not address the “your work” or the “impaired property” exclusions, which often factor into coverage determinations in cases with similar facts and issues.

While policy holders may point to I.J. White Corp. v. Columbia Cas. Co. to argue for an expansive view of what constitutes an “occurrence,” New York courts considering these issues will likely look instead to George A. Fuller Co. v. U.S. Fid. & Guar. Co., 613 N.Y.S.2d 152, 155 (N.Y. App. Div. 1994) (considered by the court here) (holding that damage resulting from a contractor’s failure to properly supervise the installation of various parts of the building did not constitute an occurrence because the policy does not insure faulty workmanship to the work product itself) and Transp. Ins. Co. v. Aark Constr. Group, 526 F. Supp. 2d 350 (E.D.N.Y. 2007) (holding that repair costs and loss of use to a building resulting from construction failures did not constitute an “occurrence” given that only the property owner’s economic interests were affected). 

The Horses Are Off (the Shelves)! Odds Are that the Ensuing Litigation Will Be An Endurance Race

Posted in Crisis Management, E. Coli, False Advertising, Food Manufacturer, Food Recall, Fraud, Horse Meat, Insurance Coverage, Uncategorized

Regulators, food distributors, and, of course, lawyers are scrambling to determine the legal and reputational consequences of the still-growing horse meat scandal that recently hit Europe.  Amid the recalls, finger-pointing, and consumer outrage at the thought of eating horse meatballs labeled as beef, one thing remains certain: you will have time to bet on many Derby winners before this scandal is fully resolved.

The distribution networks are complex and a multitude of factual determinations will inform fault and what insurance coverage may mitigate the massive losses that are sure to pile up over the course of the next decade or so.  By comparison, in the US, it took twelve years of litigation to finally resolve one of the most infamous E. coli outbreaks in American history.

Last June, the Wisconsin Supreme Court held that a slaughterhouse which processed and sold contaminated meat to Sizzler Steak House franchises (“Sizzler”) must indemnify the restaurant chain and its management company for damages stemming from the highly-publicized incident in 2000, where hundreds of people became ill and a three-year-old girl died.  Estate of Kriefall v. Sizzler USA, et. al., Nos. 2009-AP-1212 and 2010-AP-491, 2012 WI 70.

Lessons learned in Sizzler provide an American perspective to Europe’s horse meat scandal.  Both incidents received major media coverage and may drag on for a decade or more.  Sizzler served the contaminated food but the slaughterhouse was responsible.  Likewise, the unknowing sellers of the mislabeled horsemeat may be able to seek indemnification from distributors that handled the meat earlier in the distribution chain, although ultimate responsibility remains unknown.

E. Coli Contamination at Sizzler in 2000

In late July and early August of 2000, more than 150 people became ill from ingesting food contaminated with E. coli 0157:H7 at two Sizzler restaurants in Milwaukee.  Their illnesses ranged from diarrhea to vomiting to fever to stomach cramps, and sadly, in the case of three-year-old Brianna Kriefall, death.  The contamination was traced to tri-tip beef processed and distributed by Excel Corporation (“Excel”), a slaughterhouse owned by Cargill, Inc.  Although Excel admitted to selling contaminated meat, the food handling procedures of E&B Management Company, Waukesha (“E&B”), Sizzler’s parent and management company, allegedly failed to comply with established safety standards.  For example, the same utensils used to handle raw meat were allegedly also used for ready-to-eat foods.  As a result, it was claimed that Brianna Kriefall – who ate only watermelon at Sizzler – became ill with E. coli, went into organ failure, and died.

The Litigation

The sickened Sizzler patrons brought claims of negligence, strict liability, and breaches of implied warranties of merchantability and fitness against Excel, Sizzler and E&B.  Negotiations and pre-trial preparations lasted for a few years and eventually the defendants and their respective insurers settled with all of the plaintiffs.  Importantly, Excel funded the entire $10.5 million settlement for certain plaintiffs and Sizzler advanced a $1.5 million payment to the Kriefall family.

After settling the plaintiffs’ claims, Excel, Sizzler, E&B and their respective insurers went to trial to apportion liability among them.  The jury found that Excel was 80% liable, E&B was 20% liable and Sizzler was not liable.  The parties then sought to apply certain contractual and common law doctrines in the assignment of the ultimately responsibility for the settlement amounts among themselves, including liability and costs.

The Decision

In affirming the appellate court on multiple issues, the Wisconsin Supreme Court held:

  1. Sizzler is entitled to recover consequential damages for Excel’s breach of implied warranties in the meat supply contract despite a limitations of damages provision;
  2. Sizzler is entitled to indemnity from Excel for its $1.5 million advance payment because it involuntary and Sizzler was not held liable for the E. coli contamination;
  3. Excel was held liable to E&B for contractual indemnity pursuant to the hold harmless agreement between them;
  4. Excel is not required to indemnify E&B for settlement payments made by its insurer; and
  5. Notwithstanding the jury’s determination that Sizzler had no liability, Sizzler may not recover attorney’s fees from Excel.

In determining Excel breached an implied warranty in the meat supply contract, the Court held that the limitation of damages provision in the “Continuing Guaranty”—entered into when Excel initially sought Sizzler’s business—did not preclude Sizzler’s recovery of consequential damages.  The Court considered Excel’s breach of warranties, certain Uniform Commercial Code provisions, and various statutes.

The Court also found that Sizzler was entitled to equitable indemnification from Excel for its pre-settlement payment of $1.5 million to the Kriefall family.  Because Sizzler was later found to have no liability, its payment, if unreimbursed, would benefit Excel (the tortfeasor).  Excel was also liable to E&B for contractual indemnification under the parties’ hold harmless agreement, albeit accounting for E&B’s 20% liability.

The court did not require Excel to indemnify E&B for payments its insurer made on its behalf as part of the settlement with the non-Kriefall plaintiffs.  E&B unsuccessfully argued that the contractual indemnification right reverted to E&B when its insured waived its right of subrogation as part of the Hold Harmless Agreement.  It further argued to no avail that the collateral source rule operated to prevent Excel, as the “more responsible” tortfeasor, from receiving a windfall by not repaying this sum.  However, the Court rejected these arguments, and held that Excel is not required to indemnify E&B for its insurer’s payment since E&B had no equitable right for such indemnification despite the insurer’s waiver, and because the collateral source rule does not apply where another tortfeasor rather than the injured party is the benefactor.

Finally, even though Sizzler had a right to consequential damages and indemnification from Excel, the Court denied Sizzler recovery of attorney’s fees by ruling that the narrow exception to the American rule for “innocent parties” did not apply.  Specifically, the American Rule provides that parties are responsible for their own attorney’s fees unless otherwise mandated by statute or where the parties contract as such.  However in Wisconsin, a limited exception exists where an innocent party is forced to defend itself in a litigation based on the wrongful conduct against it by another party.  The Court did not apply this exception because Excel did not commit a wrongful act against Sizzler.

The Impact

The Wisconsin Supreme Court’s decision in Kriefall v. Sizzler closed twelve years of litigation in one of America’s most notorious cases of food contamination.  It proved that a company responsible for distributing contaminated food could be held accountable for the resulting damage, even if it takes a decade.

The Sizzler litigation also provides an American perspective for what the legal landscape for the horse meat scandal could look like.  Companies throughout the meat distribution chain face significant costs for legal bills, recalling their products, repairing their reputations, and taking steps to safeguard against future scandal.  Insurance may not be triggered for many of these losses, especially because the horsemeat has so far been deemed safe.  However, the Sizzler litigation teaches us that determining where the meat originated, where the deception occurred, what policies may be triggered, and, ultimately, who will be held responsible may take a long time to resolve.

Supreme Court Rejects Class Action Plaintiff’s Stipulation of Damages to Avoid Federal Court

Posted in Class Action, Class Action Fairness Act, Class Certification

The United States Supreme Court handed class action defendants a major victory today in the case of Standard Fire Insurance Co. v. Knowles (Supreme Court opinion available here).

The Class Action Fairness Act of 2005 (CAFA) gives federal district courts original jurisdiction over class action lawsuits where, among other things, the amount in controversy exceeds $5,000,000. In order to determine whether a claim exceeds that amount, the claims of all individual members must be aggregated.

In Standard Fire Insurance Co., the representative plaintiff, Greg Knowles, “stipulated” to limit the damages sought in his class action Complaint to less than the $5,000,000 CAFA jurisdictional threshold in order to avoid federal court jurisdiction. Notwithstanding plaintiff’s stipulation, Standard Fire Insurance removed the case from the Miller County, Arkansas Circuit Court to the Western District of Arkansas, and the plaintiff moved to remand. The District Court then held that the Mr. Knowles’ stipulation was sufficient for him to prove that the amount in controversy fell below $5 million, even though he had never been authorized to represent the class members or to stipulate away their rights. Standard Fire Insurance then petitioned the Eighth Circuit for permission to appeal, but that petition was denied without explanation. After Standard Fire Insurance petitioned for rehearing en banc, the Eighth Circuit issued a new opinion on the CAFA issue. In Rowling v. Nestle Holdings, Inc., 666 F.3d 1069 (8th Cir. 2012), the Eighth Circuit affirmed an order of remand under CAFA based on a stipulation by the named plaintiff purporting to limit the damages of putative class members to less than $5,000,000. After issuing the opinion in Rowling, the Eighth Circuit again denied rehearing to Standard Fire Insurance without comment.

In today’s opinion, the Supreme Court held that stipulations made by representative plaintiffs in class action lawsuits that purport to limit damages to $5,000,000 or less do not defeat federal jurisdiction under CAFA because such stipulations are not binding on absent class members. The Supreme Court reasoned that notwithstanding a stipulation of a representative class member to limit damages to $5,000,000 or less, the aggregated damages of all class members (representative and absentee) could still exceed $5,000,000, thereby invoking CAFA jurisdiction. Notably, the Supreme Court also gave some indication that a representative plaintiff’s attempt to limit damages to less than $5,000,000 to avoid CAFA jurisdiction could be used by a defendant to argue against class certification on adequacy grounds.

The objectives of CAFA are to “assure fair and prompt recoveries for class members with legitimate claims,” to permit federal courts to “consider interstate cases of national importance under diversity jurisdiction,” and to “benefit society by encouraging innovation and lowering consumer prices.” The Supreme Court’s opinion eliminates one tool savvy plaintiffs’ lawyers have employed to circumvent those noble objectives.

NY Court’s Rejection of City’s Soda Restrictions May Chill Similar Health Mandates Says Rich Fama and Other Experts

Posted in Food Manufacturer, High Fructose Corn Syrup, Municipal, Public Health, Regulation

In wake of the New York state court’s ruling striking down the New York City Department of Health’s controversial large soda ban, Law360 has this article describing the possible regulatory implications.

The full opinion may be found here.