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

Posted on June 21, 2013 by Brenden Coller — No Comments ↓

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.

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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

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

Posted on April 29, 2013 by Leigh Ann Benson — No Comments ↓

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).

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

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

Posted on March 22, 2013 by admin — No Comments ↓

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:

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;
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;
Excel was held liable to E&B for contractual indemnity pursuant to the hold harmless agreement between them;
Excel is not required to indemnify E&B for settlement payments made by its insurer; and
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.

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

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

Posted on March 19, 2013 by Richard Fama — No Comments ↓

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.

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

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

Posted on March 14, 2013 by Richard Fama — No Comments ↓

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.

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

The Not So Surprising PCA Indictment

Posted on February 22, 2013 by Richard Fama — No Comments ↓

Federal authorities have brought felony charges against former Peanut Corporation of America officials for their role with the fatal 2009 Salmonella outbreak that sickened over 700 and killed 9. Although this prosecution may be the most significant of its kind to date, it is not the first and it comes as no surprise.

Nearly five (5) years ago, I co-authored an article regarding enforcement actions brought by FDA for violations of the Food, Drug and Cosmetic Act (FD&C). That article contained a discussion of whether the indictment of ChemNutra and its owners was a sign of a more aggressive enforcement strategy undertaken by FDA. As you may recall, based on the efforts of the FDA Office of Criminal Investigation, a federal grand jury indicted ChemNutra and its owners, Sally and Stephen Miller, for their role in importing tainted Chinese wheat gluten thought to be at the root of the U.S. pet food recall in March and April 2007. The indictment alleged violations of FD&C’s sections prohibiting “the introduction or delivery for introduction into interstate commerce of any food, drug, device, or cosmetic that is adulterated or misbranded.” Although the indictment claimed that the Millers knew that the wheat gluten was incorrectly labeled to reflect that it had been subject to inspection upon leaving China, neither was charged with intentionally delivering the adulterated product, nor even with knowing that it was adulterated. The conclusion of my article was that while the indictment of ChemNutra and the Millers may have been surprising because it did not involve allegations of an intentional or knowing violation, it fit squarely within the rubric of cases usually chosen by FDA for prosecution.

Less than a year after that article was published, I authored another article analyzing the likelihood of the criminal prosecution of Peanut Corporation of America (PCA) and its officials for their role in a deadly salmonella outbreak in January 2009. In that article, I concluded that based upon prior FDA-instituted prosecutions, the nature of PCA’s alleged conduct, and the extent of the harm allegedly caused by such conduct, an indictment of PCA was highly likely. Yesterday, over four (4) years after my article was published, federal prosecutors announced a 76-count indictment against former PCA officials, including its owner, Stewart Parnell.

Lawyers for Mr. Parnell claim that PCA never intentionally shipped or caused to be shipped any tainted food products capable of harming PCA’s customers. However, federal prosecutors allege that Mr. Parnell and other PCA officials concealed the presence of salmonella in PCA products for years by including falsified certificates of analysis to show that the products were uncontaminated despite the existence of microbiological test results demonstrating the contrary. Notwithstanding the egregious and intentional conduct alleged by prosecutors and Mr. Parnell’s apparent denials, the ChemNutra indictment reminds us that intent is not a necessary prerequisite for prosecution under the FD&C, although enhanced penalties for violations committed “with the intent to defraud or mislead” do indeed exist.

While it is beyond debate that Mr. Parnell and the other PCA officials against whom the indictment has been brought deserve the full protections afforded them by the U.S. Constitution, if the alleged conduct is proven true, significant punishment is warranted. Such conduct not only has the potential to cause tragic personal and economic consequences, but also serves to undermine consumer confidence in our food supply and casts a shadow on the overwhelming majority of food producers who tirelessly work to deliver safe and nutritious food to our cupboards, day in and day out.

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Posted in Contamination, Drug and Cosmetic Act, Food, Food and Drug Administration, Food Manufacturer, Food Recall, Food Safety, Fraud, Salmonella

Minnesota’s “Impairment of Function and Value” Test Determines Whether Recalled Food Constitutes Property Damage

Posted on February 5, 2013 by Leigh Ann Benson — No Comments ↓

We often associate food recalls with harmful and contaminated products but manufacturers actually issue recalls for a variety of reasons. Companies sometimes issue recalls because of suspected, but not confirmed, contamination or other quality control issues. Other times, they issue recalls because a regulatory agency disapproves of certain ingredients. When recalls occur without confirmed contamination, food companies and their insurers often debate whether the recalled item suffers “property damage” as defined by the policy.

Consider, for instance, the recent decision in Netherlands Ins. Co. v. Main St. Ingredients, LLC, 2013 U.S. Dist. LEXIS 2685 (D. Minn. Jan. 8, 2013). In 2007, Main Street Ingredients (“MSI”) purchased instant milk from Plainview Milk Products Cooperative (“Plainview”) and resold it to Malt-O-Meal (“MOM”) for incorporation into MOM’s instant oatmeal. The FDA detected unsanitary conditions and salmonella at Plainview’s manufacturing facility in 2009, prompting Plainview’s recall of products dating back to 2007. This forced MOM to recall its instant oatmeal even though no contamination or salmonella were ever detected in the milk supplied by MSI. MOM sued MSI seeking damages related to its oatmeal recall including recovery for destroyed inventory, credits and fees to customers, and recall freight.

MSI tendered the complaint to its liability insurer, Netherlands, which agreed to defend subject to a reservation of rights. After the underlying claim settled for $1.4 million, Netherlands filed a declaratory judgment action against MSI.

On cross-motions for summary judgment, the court ruled in favor of MSI, finding that MOM’s complaint alleged covered property damage because the inability to lawfully distribute products due to an FDA regulation constitutes an “impairment of function and value.” The court also ruled that the “your product,” “product recall,” and “impaired property” exclusions did not apply.

The Inability to Distribute Adulterated Oatmeal Constitutes Property Damage

The Minnesota district court determined that MOM’s inability to lawfully distribute its instant oatmeal constituted “property damage” under MSI’s policy. In so doing, the court relied on Minnesota precedent in General Mills, Inc. v. Gold Medal Ins. Co., 622 N.W.2d 147, 152 (Minn. Ct. App. 2001) (as applied in the CGL context in United Sugars Corp. v. St. Paul Fire & Marine Ins. Co., No. A06-1933, 2007 WL 1816412 (Minn. Ct. App. June 26, 2007)). Quoting the state appellate court’s interpretation of a first party policy, the Netherlands court held that the inability “to lawfully distribute . . . products because of FDA regulations” constitutes “an impairment of function and value sufficient to support a finding of physical damage.”

The court rejected Netherlands’ argument that no property damage existed because the instant milk never actually tested positive for salmonella in the underlying action. Netherlands based their unsuccessful argument on Source Food Technology, Inc. v. United States Fidelity & Guaranty Co., 465 F.3d 834 (8th Cir. 2006). In Source Food, the Eighth Circuit Court held that the insured’s inability to import its beef due to a U.S.D.A. embargo on Canadian beef did not amount to “direct physical loss,” and therefore related damages fell outside of business interruption coverage. The Netherlands court distinguished its facts from those in Source Food. It reasoned that the policy language in Source Food more restrictively required “direct physical loss” instead of “physical injury,” and that the insured in Source Food conceded the beef was not contaminated whereas here the oatmeal included instant milk manufactured in unsanitary conditions.

Netherlands Must Pay for Consequential Damages

Importantly, the court also ruled that Netherlands had to pay for consequential damages resulting from the recall. The court required Netherlands to indemnify MSI for the third party property damage to the instant oatmeal as well as damages MSI must pay because of the property damage—i.e., MOM’s recall costs. In so ruling, the court stated that the CGL policy needed to contain specific language in order to exclude consequential damages from a covered occurrence.

“Your Product,” “Product Recall,” and “Impaired Property” Exclusions Do Not Apply

The court rejected application of the “your product” exclusion because MSI sought indemnity for damage to MOM’s instant oatmeal rather than its own instant milk. Similarly, the court ruled that the product recall exclusion did not apply because MSI sought indemnity for damages that arose from the recall of MOM’s oatmeal rather the recall of its own product. Finally, the court held that the “impaired property” exclusion did not apply because the adulterated milk “could not possibly be removed . . . since the ingredients were inextricably blended together.”

Conclusion

What constitutes “property damage” under a liability policy can be a complex determination because manufacturers sometimes recall and subsequently destroy their products even when contamination or actual damage is unconfirmed. The ruling in Netherlands reflects that court’s broad interpretation of the “property damage” definition and gives further credence to the “impaired function and value” test adopted in Minnesota. Minnesota’s particularly developed case law addressing this is instructive of how other jurisdictions may rule on these coverage issues.

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Posted in "Impaired Property" Exclusion, "Product Recall" Exclusion, "Your Product" Exclusion, Food and Drug Administration, Food Manufacturer, Food Recall, Food Safety, Insurance Coverage, Liability Policy, Policy Exclusions, Property Damage

“All Natural” Food Labeling Claims Trending in California

Posted on January 17, 2013 by Leigh Ann Benson — No Comments ↓

New Year’s resolutions may already be waning but consumers continue to purchase foods and beverages bearing the “All Natural” labels in an effort to eat healthier. The only food trend hotter than buying “Natural” foods and beverages is suing the manufacturers that produce them.

Despite the expanding “All Natural” market, the FDA does not substantively regulate “eco labeling” or define “natural.” FDA’s guidance provides only that “the agency has not objected to the use of the term if the food does not contain added color, artificial flavors, or synthetic substances.” Plaintiffs capitalize on this discrepancy, annually filing dozens of suits alleging that “Natural,” “100% Natural,” and “All Natural” labels mislead consumers because these products contain genetically modified organisms (GMOs), artificial or synthetic ingredients, or other objectionable ingredients. Courts have yet to define “natural” and instead typically decide more procedural issues, like standing, class certification, and preemption.

A number of recent decisions in the labeling claims highlight the reasons why California remains plaintiffs’ venue of choice for “Natural” claims. Specifically, plaintiffs prefer California due to its lenient pleading standards and consumer-friendly unfair competition laws.

A recent action against AriZona Beverages demonstrates the importance of venue. Plaintiffs lodged a putative consumer class action alleging that AriZona misrepresented its iced tea as “All Natural” because it contained high fructose corn syrup (HFCS) and citric acid. The named plaintiffs admitted in their depositions that they could not recall the details related to the product purchase including the name of the store, the exact price paid, or the precise statements on which they relied. Despite these deficiencies, the federal district court found that plaintiffs provided a sufficient evidentiary basis to establish injury-in-fact and reliance to survive defendant’s summary judgment motion on standing. Ries v. AriZona Beverages USA, LLC, 2012 U.S. Dist. LEXIS 169853 (N.D. Cal. Nov. 27, 2012).

The AriZona court declined to follow a New York federal district court that granted defendant-Snapple’s summary judgment motion in an almost identical “All Natural” action with similarly-flawed deposition testimony. In Weiner v. Snapple Bev. Corp., plaintiffs sued Snapple, alleging the beverage company misrepresented its HFCS- containing teas as “all natural.” The Snapple court noted that New York law requires plaintiffs to “proffer evidence sufficient to demonstrate damages with a degree of certainty” whereas plaintiffs here “provided nothing but conjecture as to the prices they paid for Snapple and the prices of comparable beverages available for sale at the time.” Weiner v. Snapple Bev. Corp., 2011 U.S. Dist. LEXIS 6094 (S.D.N.Y. Jan. 21, 2011). See also, Rapcinsky v. Skinnygirl Cocktails, L.L.C., 2013 U.S. Dist. LEXIS 5635 (S.D.N.Y. Jan. 9, 2013) (denying plaintiff’s motion for class certification where Massachusetts plaintiff sued under New York law and whose inconsistent deposition testimony demonstrated a lack of causation and reliance). Thus where the New York court closed the case, the California court allowed the plaintiffs to proceed.

The AriZona and Snapple plaintiffs alleged violations of unfair competition and false advertising laws, which vary by state. Assuming there are no procedural deficiencies, California courts often allow these allegations to survive a motion to dismiss when applying California law.

For instance, ConAgra recently failed in its motions to dismiss two separate deceptive labeling suits in California. In Jones v. ConAgra, plaintiffs alleged deceptive and misleading labeling information because ConAgra labeled PAM cooking spray, Hunt’s canned tomatoes, and Swiss Miss cocoa as “100% Natural” even though they allegedly contained petrochemicals, synthetic chemicals, and artificial ingredients. As in previous “All Natural” lawsuits, the court dismissed the federal and state warranty claims but conferred standing to allow the state deceptive business practices claims to move forward, assuming plaintiffs adequately plead that the labels would deceive a “reasonable customer.” Jones v. ConAgra Foods, Inc., 2012 U.S. Dist. LEXIS 178352 (N.D. Cal. Dec. 17, 2012). In a separate action alleging the presence of GMOs in ConAgra’s “100% Natural” Wesson cooking oil, plaintiffs sued the food maker under various states’ consumer protection and deceptive trade practices statutes. The district court permitted some claims but dismissed claims under the consumer protection statutes of New Jersey and Nebraska as well as the implied warranty statutes of New York, Ohio, Oregon, and Washington based on the plaintiffs’ failure to plead within the various requirements of those statutes. In re ConAgra Foods, Inc., 2012 U.S. Dist. LEXIS 179539 (C.D. Cal. Nov. 15, 2012).

In a victory for food manufacturers, Frito-Lay successfully consolidated seven “All Natural” class action claims across multiple jurisdictions into one claim in Eastern District of New York. This litigation followed on the heels of Frito Lay’s “All Natural” marketing blitz in late 2010. Plaintiffs sued the snack maker in multiple jurisdictions alleging liability for including GMOs in its “All Natural” Tostitos and Sun Chips varieties, as well as its “All Natural” Bean Dip. The Judicial Panel on Multidistrict Litigation rejected plaintiffs’ motions to have the “chip” and the “dip” claims separately consolidated. Instead the Panel consolidated the claims into one action since they turned on the same factual questions and reasoning. In re Frito-Lay N. Am., Inc., 2012 U.S. Dist. LEXIS 177690 (J.P.M.L. Dec. 12, 2012).

As these cases illustrate, the “All Natural” “food fights” often occur at the pre-trial stages of litigation. For those cases that survive early dispositive motions, the parties must then confront the additional uncertainties of what ingredients are “Natural,” how much of a synthetic ingredient a “Natural” product can legally contain, and ultimately, if a jury will determine that the labeling would mislead a “reasonable” consumer. Until lawmakers, the FDA, or common law precedent provide standards for “Natural” food labeling, how courts adjudicate threshold issues such as standing and class certification will continue to be a central issue in food labeling claims.

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Posted in "All Natural", California, Class Action, Class Certification, False Advertising, Food and Drug Administration, Food Manufacturer, Genetically Modified Organism, High Fructose Corn Syrup, Labeling Claims, Standing, Sugar Substitutes

It’s 2013 – Time to Shape Up!

Posted on January 9, 2013 by admin — No Comments ↓

As a new year begins, the Shape Up! coverage litigation draws to an end. On January 2, 2013, the United States Court of Appeals for the Fifth Circuit upheld the judgment of the United States District Court for the Northern District of Texas, holding that Chubb Custom Insurance Company (“Chubb”) had no duty to defend CSA Nutraceuticals GP LLC (“CSA”) in a $20 million class action because the complaints in the underlying suit did not seek recovery for “bodily injury.”

As discussed in our previous post on this lawsuit, the underlying suit involved claims filed by consumers against CSA and Dr. Phil, seeking recovery for false advertising and deceptive practices in connection with their dissatisfaction with the diet product Shape Up! Chubb denied coverage for the underlying claims on the basis that the plaintiffs did not sustain “bodily injury” as a result of purchasing a diet product that allegedly failed to assist them in achieving their desired weight loss. The district court agreed with Chubb, and held that the alleged injuries did not constitute “bodily injury” as defined by the policy.

On appeal, the Fifth Circuit explained:

“The complaints in the underlying suit clearly and unequivocally allege that customers were induced to purchase ineffective weight loss products by false and fraudulent misrepresentations. However, the complaints do not include a single factual allegation suggesting that any consumer has ever been physically harmed by the weight loss products.”

In affirming the lower court’s decision, the Fifth Circuit noted that the underlying plaintiffs’ bodies had not been injured in any way. In so holding, the court emphasized that in the absence of physical injury, solely economic losses will not satisfy the “bodily injury” requirement.

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Posted in Class Action, False Advertising, Insurance Coverage, Nutritional Supplements

Sunland Salmonella Saga Provides a Window to FDA Enforcement

Posted on January 3, 2013 by Joseph A. Arnold — No Comments ↓

A new year is here, and the food industry remains in a sort of regulatory limbo. Between the FDA’s delay in releasing regulations under the implementation deadlines set forth in the Food Safety Modernization Act (FSMA) and inadequate funding from the government, industry commentators are left to speculate how much the FDA can and will accomplish in the coming year. However, the recent nationwide Salmonella Bredeney outbreak traced back to peanut butter made by peanut grower Sunland, Inc., shows that the FDA is starting to flex its regulatory muscle. The FDA’s handling of the situation also provides a framework for how it might resolve FDA violations with offending companies.

Back in September 2012, the FDA and other agencies traced reports of a Salmonella Bredeney outbreak to Trader Joes’ Valencia Creamy Salted Peanut Butter. The FDA and CDC eventually traced the contamination to Sunland, which makes the Trader Joe’s peanut butter. Within days, Sunland issued a recall of 240 different products made in its nut butter production facility between March 2010 and September 24, 2012. Sunland controls an astounding 90% of the nation’s organic peanut harvest. The CDC reported 42 sick across 20 states.

The FDA conducted a full investigation of the Sunland peanut plant in September and October 2012 and observed numerous safety violations and a history of violations over a period of years. The FDA’s review of Sunland’s records showed that eleven product lots of nut butter were contaminated with salmonella between June 2009 and September 2012. Moreover, between March 2010 and September 2012, at least a portion of eight of those product lots were distributed to consumers. During the FDA’s most recent inspection in connection with the current salmonella outbreak, the FDA found salmonella in twenty environmental samples and thirteen nut butter samples.

On November 26, 2012, the FDA suspended Sunland’s food facility, representing the FDA’s first use of its suspension authority under FSMA. (In previous posts, we highlighted some of the key features of FSMA, including mandatory recall authority and loosened standards for product seizures.) The provision related to suspension of registration states:

If the FDA determines that food manufactured, processed, packed, received or held by a facility registered under Section 415 has a reasonable probability of causing serious adverse health consequences or death to humans or animals, the FDA may, by order, suspend the registration of a facility (1) that created, caused or was otherwise responsible for such reasonable probability; or (2) that knew of or had reason to know of such reasonable probability, and packed, received or held such food.

While the suspension order is in effect, no person can import or export food into the United States from Sunland’s facility or otherwise introduce food from its facility into interstate or intrastate commerce in the United States. Sunland announced on its website that it would take whatever corrective actions that were deemed necessary to resume operations, but it was also expected to avail itself of its statutory right to an informal hearing to challenge the FDA’s action.

However, on December 21, 2012, a New Mexico federal district court judge signed a consent decree pursuant to which the FDA and Sunland resolved their differences. The FDA agreed to vacate the suspension order and reinstate Sunland’s registration. In return, Sunland cannot process or distribute food from its peanut plants until it complies with certain safety requirements in the consent decree and obtains the FDA’s written authorization. According to the FDA press release:

The consent decree requires that Sunland retain an independent sanitation expert to develop a sanitation control program that the company must then implement. The requirements also include compliance with the cGMP regulations. In addition, for the peanut butter plant, the company must conduct environmental monitoring and testing to ensure that disease-causing organisms are not present in the facility or in its finished foods and must have comprehensive inspections conducted by an independent sanitation expert.

The FDA’s handling of the Sunland salmonella outbreak, including the requirements set forth in the consent decree, should signal the FDA’s expectations with regard to future outbreaks. As far as what this means for insurance purposes, it will largely depend on the type of policies in place and the nature of the damages sought, both by way of first party and third party claims. In the third party setting, an issue to watch is how FDA findings may be used in a coverage determination. In the first party setting, the suspension of a food company’s registration can lead to crippling business interruption and raises the timeless issue as to whether government orders give rise to first party claims in the absence of property damage.

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Posted in Food Safety, Food Safety Modernization Act, Insurance Coverage