false advertising consumer class actions on the rise

False Advertising Consumer Class Actions on the Rise

Legal Trends and Effective Litigation Strategies for Defendants and Plaintiffs

presents

Today's panel features:Hugh Latimer, Partner, Wiley Rein, Washington, D.C.

Lawrence I. Weinstein, Partner, Proskauer Rose, New YorkPatrick J. Sheehan, Partner, Whatley Drake & Kallas, Boston

Wednesday, September 30, 2009

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False Advertising Consumer Class Actions on the Rise Legal Trends and Effective Litigation Strategies for Defendants and Plaintiffs

Teleconference Program

September 30, 2009 Hugh Latimer [email protected]

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Recent Activity in False Advertising Class Action Lawsuits

1. Consumer Protection Class Actions Coming from Every Direction.

If one thing seems certain concerning consumer class actions, it is that they still are coming hot and heavy from every direction. According to a 2008 Federal Judicial Center Report, consumer protection class actions have increased in the federal courts by more than 150 percent from 2001 to 2007 and the end is not in sight. Examples abound. In May of this year, General Mills received a Warning Letter from the FDA asserting violations of the FDCA arising from the company’s labeling, particularly with regard to claims for reduction of cholesterol levels in its Cheerios cereal. While General Mills was still waiting to talk to the FDA, with whom the company “respectfully disagrees,” a consumer class action lawsuit was filed in the U.S. District Court for the Eastern District of California, repeatedly citing the FDA Warning Letter and purporting to represent a class of people in the state who purchased the cereal after the cholesterol claim was added to the label. No class certification decision has been rendered by the Court. In a similar health case a few months earlier, another California resident, together with the Center for Science in the Public Interest, filed a class action against Coca-Cola in the Northern District of California on behalf of all California residents similarly situated alleging that the company misrepresented the content and health benefits of the defendant’s “health beverage,” Glaceau Vitamin Water, in violation of California’s consumer protection laws. Here again, there has been no class certification decision. Enforcement actions by the Federal Trade Commission regularly have been followed by consumer class actions and these follow-on actions have not diminished in recent years. For example, a consumer class action recently was filed by an Arkansas resident on behalf of all Arkansas residents who had purchased Bayer’s One-A-Day WeightSmart vitamins, which allegedly increased metabolism during the aging process. Earlier, the FTC filed suit in 2007, responding to marketing materials released by Bayer, which asserted benefits to WeightSmart that, according to the FTC, lacked sufficient scientific substantiation. Another area in which follow-on consumer protection class actions are significant are those brought in the wake of State AG consumer protection actions, whether by a single AG or a large group. Seemingly, the only advertising dispute forum that is not an instigator of consumer class actions, at least so far, is the National Advertising Division of the Council of Better Business Bureaus, where most advertising disputes are between competing advertisers who seek cessation or continuation of the ad claims, but not money damages. There is no reason, however, why follow-on class actions could not be brought by consumers seeking damages from an advertiser whose ad claims have been determined by the NAD to be misleading. Class actions have become an increasingly important part of the legal landscape, even outside the consumer protection area. A foremost example is Google’s recent settlement with the Authors Guild and the Association of American Publishers attempting to resolve a copyright infringement class action brought in a New York federal court by members of those two groups. In advance of a “fairness hearing” in early October, Google has argued that readers will be the main beneficiaries, if and when the settlement goes into effect, when Google will begin to sell

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online access to between 5 million and 6 million books, which it has taken off library shelves, dug out of secondhand book shops, and borrowed from university deposits and digitized giving every citizen access to “books that today lie hidden on dusty shelves.” On the other hand, the proposed settlement has aroused significant opposition from numerous individual authors and their heirs, a number of publishing and author groups and Amazon, Microsoft, Yahoo and the German and French governments. The settlement also is under investigation by the U.S. Justice Department. According to opponents, in addition to giving Google a “monopolistic advantage,” a prime objection to the settlement is that Google has inverted copyright law by asking rights holders to opt out rather than opt in. This all comes to a head in early October when the Court will decide whether to approve or reject the deal or to modify it. 2. Rejection of Class Certification Appears to be Prevailing.

Paradoxically, despite the influx of new consumer protection class actions, defendants have been increasingly successful in persuading courts, both federal and state, to reject class certification in false advertising class actions.

One of the prime decisions in this increasingly predominant trend was the Second Circuit ruling in McLaughlin v. American Tobacco Co., WL 878627 (C.A.2, Apr. 3, 2008), where the Court reversed an order of the lower court which had certified a nationwide class consisting of cigarette smokers allegedly deceived into believing that “light” cigarettes were healthier than “full-flavored” cigarettes. The Court held that individualized proof of reliance on the alleged misrepresentation is required, common questions will not predominate and class certification was rejected.

Equally authoritative was Judge Posner’s decision in Thorogood v. Sears, Roebuck and Company, U.S. Court of Appeals, Seventh Circuit No. 08-1590 (Oct. 28, 2008). There a class action was brought under the Tennessee Consumer Protection Act and the laws of 28 other states alleging that when Sears labeled its dryer as having a stainless steel drum, this implies that the drum is 100 percent stainless steel because otherwise it might rust and cause rust stains on the clothes dried in the dryer. Judge Posner responded to this allegation as follows: “Do the other 500,000 members of the class believe this? Does anyone believe this besides Mr. Thorogood? It is not as if Sears advertised the dryers as eliminating a problem of rust stains by having a stainless steel drum. There is no suggestion of that. It is not as if rust stains were a common concern of owners of clothes dryers. There is no suggestion of that either, and it certainly is not common knowledge.” In conclusion, the Seventh Circuit ruled that “[t]he evaluation of the class members’ claims will require individual hearings. Each class member who wants to pursue relief against Sears will have to testify to what he understands to be the meaning of a label or advertisement that identifies a clothes dryer as containing a stainless steel drum … The deal breaker is the absence of any reason to believe that there is a single understanding of the significance of labeling or advertising clothes dryers as containing a ‘stainless steel drum.’” The Court instructed the district court to decertify the class.

(a) Based on the Need for Individualized Proof of Reliance, Class Certification Denials Keep Increasing.

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In the Bayer case, referred to above, an Arkansas state class sought certification of all Arkansas residents who had purchased One-A-Day WeightSmart vitamins from Bayer during the applicable time period, based on the marketing claim that the pill enhanced metabolism. Rejecting plaintiff’s claim that Bayer’s use of “uniform marketing and advertising” by Bayer, which allegedly “contributed” to the purchase of Bayer’s product by all class members, thereby entitling plaintiff to class certification, the District Court ruled that “[p]laintiff must provide evidence that each class member saw the alleged false advertisements and subsequently purchased WeightSmart in order to prove that each class member is entitled to restitution.” Class certification was denied. Thompson v. Bayer Corporation, 2009 WL 2424352 (E.D.Ark., Aug. 6, 2009).

Even more recently, a New Jersey State appellate court affirmed the denial of class certification in a putative nationwide class action, where it was alleged that the maker of the dietary supplement Relacore deceptively marketed it for use in cutting fat and stress. The appellate court upheld the denial of certification on the ground that there are a number of individual factors that “would necessitate an evidentiary hearing for each class member” on the deceptive advertising claims. Lee v. Carter-Reed Company, A – 4598-07 (Aug. 19, 2009).

This decision is a far cry from the New Jersey Superior Court decision in International Union of Operating Engineers Local No. 68/Welfare Fund v. Merck & Co., No. ATL-L-3015-03 (Atlantic Co., N.J., Super. Ct. Law Div. July 29, 2005), where the Court certified a nationwide class, applying New Jersey law, and held that “plaintiff could prove that Merck’s alleged misrepresentations and/or omissions were a causal factor in all the third-party payors including Vioxx as a part of their medical benefits programs without a detailed analysis of each decision made by each member of the class.” Such holdings have become few and far between.

(b) Is There a Caveat?

Is there a caveat lurking that could establish that common questions predominate over individual issues of reliance, thereby persuading courts to grant class certification in consumer protection class actions? One possibility is presented by state consumer protection laws.

For example, in Kasky v. Nike, 27 Cal.4th 939 (May 2, 2002), the California Supreme Court held that California’s Unfair Competition Law (UCL) permitted not only public prosecutors, but also “any person acting for the interests of … the general public” can bring an action for relief under the statute. To bring such a “private attorney general” action “it is necessary only to show that members of the public are likely to be deceived.” Relief included not only injunctive relief, but restitution “compelling a UCL defendant to return money obtained through an unfair business practice to those persons in interest from whom the property was taken.” On its face, this language would appear to support a class of “private attorneys general,” who would be entitled to money damages based on any “property” obtained from them through an unfair business practice. After the U.S. Supreme Court granted Certiorari, the Solicitor General, in support of Nike, argued that the First Amendment is violated when a private party is able to obtain judicial relief for a company’s allegedly false statements about its products even though the party did not rely on those statements or suffer any injury whatsoever.

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The Supreme Court returned the case to the California Supreme Court without decision and the case was settled shortly thereafter. In the meantime, California’s electorate narrowed the scope of the UCL in 2004 by passing Proposition 64, changing the language of the statute to read that a person could bring suit “only if the person has suffered injury in fact and has lost money or property as a result of the unfair competition.” While this has ended California’s sanctioning of “private attorneys general” seeking damages on a class-wide basis, other states may follow the original Kasky v. Nike holding by certifying consumer classes without individualized proof of reliance on the alleged misrepresentation. This would seem to be increasingly unlikely as more and more courts hold that individualized proof of reliance is required and deny class certification.

(c) Despite the Increase in Class Certification Denials, New Consumer Class Actions Keep Coming. Why?

Perhaps the answer lies in what occurred on September 18, 2009. On that date, the Dannon Company settled a nationwide class action by agreeing to change its labeling and marketing materials and creating a $35 million fund to reimburse qualified consumers. The original case, filed in California in January 2008, followed by similar class actions in Ohio, Florida and Arkansas, charged Dannon with allegedly falsifying the health benefits of its Activia, Activia Life, and DanActive yogurts. Apparently, the settlement was reached without the class certification issue being raised.

The enticing prospect that a settlement could take place may help to explain why consumer protection class actions keep coming even while more and more courts are rejecting them based on the absence of predominant common questions.

3. What Law Applies in a Multi-State Class Action?

After certifying a multi-state class action, a number of courts have been faced with the question of which state law to apply. In the now-repudiated Merck case in New Jersey, supra., the state court determined to apply New Jersey law, where Merck was headquartered, even though the court acknowledged that a number of states preclude class actions by private citizens and other states require individual proof of reliance on the allege misrepresentation. Judge Posner was troubled by this issue in Thorogood, supra. “Our plaintiff wants to litigate in a single federal district court half a million claims wrested from the control of the courts of the 29 jurisdictions in which those claims arose and the laws of which govern the claimants’ entitlement to and scope of relief. The instructions to the jury on the law it is to apply will be an amalgam of the consumer protection laws of the 29 jurisdictions, and procedural rules by which particular jurisdictions expand or contract relief will be ignored. The Tennessee Consumer Protection Act, for example does not authorize class actions.” In the end, no determination was necessary on this issue.

That appears to be the bottom line with respect to this issue. As courts increasingly decline to certify consumer protection class actions, the question of what law applies need not be reached, with all the attendant procedural and due process problems.

Strategies For Defending False Advertising Challenges

Lawrence I. WeinsteinCo-Chair, False Advertising and Trademark Litigation

Practice GroupProskauer Rose

New York, [email protected]

15902381, Copyright © 20091

Defending False Advertising Challenges

The Advertiser’s Quandary: Who will Challenge An Advertising Claim and in What Forum(s)?— Lanham Act Suits— Consumer Class Actions— NAD Challenges— FTC Investigation/Lawsuit— State AG/Miscellaneous Other Regulators

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Of course, an advertiser does notwant to lose an NAD challenge

But, consequences are relatively modest:— No injunctions— No damages— Little risk of adverse

publicity— Modest cost

Risk 1: NAD Challenge

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However, result of adverse NAD challenge is the removal or modification of an advertisement campaign

This can be a significant consequence if a product launch or marketing program is based on that advertising campaign

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Enforcement actions can cause significant adverse consequences:— Injunction— Fines— Bad publicity

But: Chances of enforcement action are still relatively low, especially where the ad is not egregious and public health and safety not at risk

Risk 2: Administrative Agency Enforcement Action

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Significant potential bad consequences: — Injunction— Damages/fee awards— Bad publicity

But:— Standing limited to

business injury and “glass houses” rule at play

— Huge legal costs tend to deter suits

— Damages hard to prove— Historically, media not very

interested

Risk 3: Lanham Act Litigation

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Special Risks/Burdens of Consumer Class Action Suits:

Exponentially larger damages and attorneys' fees

Identical suits in multiple jurisdictions: loss of control and increases expenses

Plaintiffs not impeded by higher hourly rates

Much greater risk of adverse publicity


Peterson v. BASF:The Nightmare Scenario

The Class:

Farmers who purchased BASF Poast herbicide.

The Facts: BASF made two herbicides:

Poast Plus: marketed for certain “minor” crops (soybeans, peanuts, cotton, corn); and

Poast: marketed for so-called “major” crops (fruit, vegetables, sugar beets).

Poast was MUCH more expensive…

Peterson v. BASF Corp., 711 N.W.2d 470 (Minn. 2006)


Peterson v. BASF (cont’d):

…but the two products were identical!

Class sued BASF under NJ Law for falsely advertising that farmers should use the more expensive Poast for major crops

The result:

Jury verdict in favor of class:— Damages = $45,000,000— Attorneys fees = $7,000,000

Affirmed on Appeal


Recent False Advertising Class Action Defendants: AT&T Mobility

Coca Cola

Dannon

E*Trade

L’Oreal

Mercedes Benz

Microsoft

PepsiCo

Pfizer

Procter & Gamble

Sprint

Starbucks

Walmart

Wells Fargo

Wendy’s

Gerber


What to do?

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Defense of False Advertising Challenges

The Best Defense: Avoiding Lawsuits Through Internal Review of All Proposed Product Advertisements

And I do mean ALL!

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Prevention Best Practices

Train Inside Counsel and Involve Them From the Start of All Ad Development— Legal Nuances of Advertising Law are Complicated— Inside Counsel is Better Able Than Marketing Execs or Ad

Agencies to Balance Marketing Needs and Liability Risks

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Also Use Outside Advertising Counsel: “You Can Pay Us Now or Pay Us Later”

Benefits of Outside Counsel

— Specialization/Experience— Greater Insulation from Internal Political Pressures

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My Observations— Advertising Litigation Is Very, Very Expensive

— Much of it is Avoidable, in that Advertising Litigations Often Arise from Advertisements that were not Vetted by Expert Counsel

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Best Practices if There is a Lawsuit

— In Class Actions, Seek Early Stage Dismissal Followed, if Necessary, By Attempt to Prevent Certification

— Deal Effectively With Media


Aquafina: A Case Study

A Good Outcomeand How it Happened


It started with a label…


Aquafina: In the Courtroom

The History:

In response to questions regarding the source of its water, PepsiCo publicly stated that the designation “P.W.S.” on the Aquafina label stood for “Public Water Source” and agreed to change its label to reflect this

The announcement drew a large amount of negative media attention

Weeks after the announcement consumers filed a false advertising class action suit in New York

Shortly after the first suit was filed, others sprung up in California, Illinois, Tennessee and Texas

In re: PepsiCo, Inc., Bottled Water Mktng & Sales Practices Litig, 08-MD-1903 (S.D.N.Y Dec. 5, 2008)


Aquafina: In the Courtroom

The Putative Class:

Purchasers of Aquafina

The Facts:

Front of Aquafina label contained graphic resembling a sun rising over a mountain

Plaintiffs alleged Aquafina falsely represented the source of the water because the label created the impression that the water came from a mountain source

In addition, the back of the label contained the statement “BOTTLED AT THE SOURCE P.W.S.” — Plaintiffs alleged Aquafina had a duty to disclose that P.W.S. =

Public Water Source


Aquafina:In the Courtroom (cont’d)

The Legal Strategy:

Consolidated the actions under the Federal MDL process

Moved to dismiss on the grounds that the claims were preempted by the express preemption provision of the Food, Drug and Cosmetic Act, 21 U.S.C. §343-1(a)(1)

The Result:

The court granted Aquafina’s motion to dismiss


Meanwhile…


Aquafina: In the Court of Public Opinion Consumer class actions sometimes arise from negative

media attention:

“That bottled water you’re drinking may not be as pure as you think.”

“…environmentalists are telling bottled water drinkers to try tap water instead. But it turns out, drinkers of the nation's most popular brand ‘Aquafina’, have been doing it all along!”

“There is a specific technique that the people at Aquafina use. I believe you turn the hose counterclockwise.”


Aquafina: In the Court of Public Opinion

Other headlines:— “Aquafina just aqua-phony: Bottler to change label, list source

same as tap water.”— “Bottled water drinkers…you’ve been had.”— “Now PepsiCo to spell out – public water source.”— “(I feel like) I've been bamboozled and hoodwinked all this

time.”— “Bottled water bombshell.”— “The dirty little secret is out. Aquafina admitted you’re still

drinking tap water.”— “Aquafina has been outed.”— “Don’t let the scene fool you…it’s not bottled water from a

stream.”


Remember…

There are two sides to every story

Make sure your story gets heard!


The Plan


Aquafina Tells Its Story


For further inquiries:

Lawrence I. WeinsteinPartner

Proskauer Rose LLP1585 Broadway

New York, New York 10036212.969.3000

[email protected]

Questions?

WhatleyDrake&Kallas

PLAINTIFFS’ STRATEGIES IN FALSE PLAINTIFFS’ STRATEGIES IN FALSE ADVERTISING CLASS ACTIONS: ADVERTISING CLASS ACTIONS:

PREEMPTION, SUMMARY JUDGMENT PREEMPTION, SUMMARY JUDGMENT AND SETTLEMENTAND SETTLEMENT

Patrick J. Sheehan, Esq.Whatley Drake & Kallas, LLC

Boston, [email protected]

September 30, 2009

2WhatleyDrake&Kallas

RESPONDING TO FEDERAL RESPONDING TO FEDERAL PREEMPTION DEFENSESPREEMPTION DEFENSES

The current trend is against federal preemption of state law claims as indicated by: Recent judicial decisions by the U.S. Supreme

Court, other federal courts, and state courts Presidential Memo regarding preemption


Altria Group, Inc. v. GoodAltria Group, Inc. v. Good, 129 S. , 129 S. Ct. 538 (2008)Ct. 538 (2008)

Plaintiff smokers of so-called “light” cigarettes filed suit alleging that defendant tobacco companies’ “light” and “lowered tar and nicotine” advertising claims misrepresented that their cigarettes delivered less tar and nicotine, and were therefore less harmful than, regular brands, in violation of Maine Unfair Trade Practices Act (“MUTPA”).

Defendant tobacco companies moved for summary judgment on grounds that the Federal Cigarette Labeling and Advertising Act (the “Cigarette Labeling Act”) expressly preempted the plaintiffs’ state law claims and that the state law claims, if allowed to proceed, would present an obstacle to a long-standing policy of the Federal Trade Commission (“FTC”).


Altria Group, Inc. v. GoodAltria Group, Inc. v. Good (cont.)(cont.)

U.S. Supreme Court held that the Cigarette Labeling Act did not expressly preempt state law claims predicated on violation of a duty not to deceive and that the FTC decisions and other guidance with respect to statements of tar and nicotine content did not impliedly preempt the plaintiffs’ claims.


Altria Group, Inc. v. GoodAltria Group, Inc. v. Good (cont.)(cont.) The express preemption provision at issue provided that

“[n]o requirement or prohibition based on smoking and health shall be imposed under State law with respect to the advertising or promotion of any cigarettes the packages of which are labeled in conformity with the provisions of this chapter.” 15 U.S.C. § 1334.

The Supreme Court held that there was no express preemption of the plaintiffs’ claims, which alleged violation of the duty not to deceive as codified under the MUTPA, because that duty had “nothing to do with smoking and health.” 129 S. Ct. at 546.

The Supreme Court held that there was no implied preemption as the FTC had neither required statements of tar and nicotine yield nor authorized collateral representations such as “light” and “low tar” descriptors.


Wyeth v. LevineWyeth v. Levine, 129 S. Ct. 1187 , 129 S. Ct. 1187 (2009)(2009)

The plaintiff brought tort claims against Wyeth for failure to adequately warn of the dangers of intravenous administration of the anti-nausea drug Phenergan using the “IV push” method. In her case, the plaintiff was administered Phenergan using this method, the drug seeped into her arterial blood, causing gangrene and, ultimately, amputation of her right forearm.

Wyeth moved for summary judgment, arguing that the plaintiff’s failure-to-warn claims were impliedly preempted by federal law on the basis that: 1) it would have been impossible to comply with a state law duty to modify its labeling without violating federal law and 2) that that state law claims presented an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.


Wyeth v. Levine Wyeth v. Levine (cont.)(cont.)

Even though the FDA had approved the Phenergan labeling, the Supreme Court held that the plaintiff’s state law failure-to-warn claims were not preempted because: it was not impossible for Wyeth to comply with both

state and federal law by unilaterally strengthening the warnings on the labeling; and

the plaintiff’s state-law claims did not stand as an obstacle to the accomplishment of Congress’ purposes in the Federal Food, Drug and Cosmetic Act, 21 U.S.C. § 301, et seq. (the “FDCA”).


Wyeth v. Levine Wyeth v. Levine (cont.)(cont.) Significant to the Supreme Court’s holding that it was not impossible

to comply with both state and federal law was its finding that drug labeling was the responsibility of the manufacturer, not the FDA.

Critical to the Supreme Court’s ruling that the plaintiff’s state-law claims did not stand as an obstacle to the accomplishment of Congress’ purposes in the FDCA was its view of a preamble to a 2006 regulation, relied upon by Wyeth, indicating that FDA approval of labeling created both a regulatory floor and a ceiling and preempted conflicting or contrary state law. The Supreme Court found that the preamble did not merit deference as it did not reflect the FDA’s view at all relevant times and, in fact, represented adramatic change in position.

Justice Thomas, concurring in the judgment, called for an end toimplied preemption based on state laws standing “as an obstacle to the full purposes and objectives of federal law.”


Holk v. Snapple Beverage Corp.Holk v. Snapple Beverage Corp., , 575 F.3d 329 (3d Cir. 2009).575 F.3d 329 (3d Cir. 2009).

The plaintiff alleged that Snapple’s marketing and advertising of its products as “All Natural” was deceptive because the products contained high fructose corn syrup, an ingredient manufactured from processed cornstarch.

The plaintiff brought claims for: 1) violation of the New Jersey Consumer Fraud Act; 2) unjust enrichment and common law restitution; 3) breach of express warranty; and 4) breach of the implied warranty of merchantability.


Holk v. Snapple Beverage Corp.Holk v. Snapple Beverage Corp.(cont.)(cont.)

Snapple moved to dismiss the plaintiff’s claims as preempted on grounds that: Federal law occupied the field of beverage regulation

and the field of juice drinks regulation; and They were subject to “implied conflict preemption” as

they stood as an obstacle to federal law and would undermine FDA policy regarding use of the term “natural” and federal efforts to create uniform standards.

The Third Circuit held that the plaintiff’s state law claims were not preempted on either ground.



The Third Circuit held that field preemption did not apply because: The Nutrition Labeling And Education Act (1990)

declares that the Act should not be construed to preempt state law unless expressly preempted under 21 U.S.C. § 343-1 of the FDCA;

NLEA’s express preemption provision recognizes the existence of state law regulation of beverages and juices;

The FDA has stated that it does not intend to occupy the field of food and beverage labeling; and

The comprehensiveness of federal regulation in the area, by itself, does not support field preemption.



The Third Circuit declined to find implied conflict preemption on the basis that neither the FDA’s informal policy with regard to the use of the term “natural” nor an FDA letter indicating that some forms of high fructose corn syrup may be classified as “natural” lacked the force of law required to preempt state law.


In re Farm Raised Salmon CasesIn re Farm Raised Salmon Cases, , 42 Cal. 442 Cal. 4thth 1077 (Cal. 2008).1077 (Cal. 2008).

The plaintiffs alleged that grocery stores sold farm raised salmon artificially colored for the purpose of making it look like wild salmon without disclosing to consumers the use of color additives.

The plaintiffs brought claims for: 1) violation of the CA Unfair Competition Law, Cal. Bus. & Prof. Code § 17200, et seq. (including claims for unlawful acts and practices in violation of the Sherman Food, Drug & Cosmetic Law, Health & Saf. Code § 109875, et seq.); 2) the CA Consumers Legal Remedies Act, Cal. Civ. Code § 1750, et seq.; 3) the CA False Advertising Law, Cal. Bus. & Prof. Code § 17500, et seq.; and 4) negligent misrepresentation.


In re Farm Raised Salmon Cases In re Farm Raised Salmon Cases (cont.)(cont.)

The defendants moved to dismiss on the basis that the FDCA preempted the state law claims.

Apparently recognizing the difficulty in making such arguments, the defendants did not argue express preemption or implied preemption based on Congress occupying the field or that compliance with state and federal law would be impossible; instead they argued that the claims were impliedly preempted because they stood as an obstacle to the accomplishment of the purposes of Congress in enacting the FDCA.

The California Supreme Court held that the FDCA did not preempt the state law claims.


In re Farm Raised Salmon Cases In re Farm Raised Salmon Cases (cont.)(cont.)

In holding that the plaintiffs’ state law claims were not preempted, the Court noted that: There is a strong presumption against federal preemption of

state law claims; Consumer protection laws and laws regulating the proper

marketing of food are within the states’ historic police powers; The FDCA requires disclosure of color additives in food; NLEA’s 1990 amendments to the FDCA permit states to establish

identical requirements; and The CA Sherman Law imposes requirements identical to those of

the FDCA and incorporates the food labeling regulations adopted by the FDA as state law.


Presidential Memo Regarding Presidential Memo Regarding PreemptionPreemption

Issued May 20, 2009 Notes that in recent years, executive

departments and agencies have sometimes announced that their regulations preempt state law without explicit preemption by the Congress or an otherwise sufficient legal basis.


Presidential Memo Regarding Presidential Memo Regarding Preemption (cont.)Preemption (cont.)

To ensure that executive departments and agencies include statements of preemption in regulations only when such statements have a sufficient legal basis:

1. Departments and agencies should not include statements of preemption in regulatory preambles except where such provisions are included in the codified regulation.2. Departments and agencies should not include preemption provisions except where justified under preemption principles.3. Departments and agencies should review regulations issued within the past 10 years that contain statements or provisions intended to preempt state law in order to determine whether such statements or provisions are justified under preemption principles and if not, take appropriate action, which might include amendment of the relevant regulation.


SUMMARY JUDGMENT: SUMMARY JUDGMENT: “ONE“ONE--WAY INTERVENTION”WAY INTERVENTION”

“One-way intervention” refers to a practice prevalent under former Rule 23 before its amendment in 1966 whereby class members would wait until merits decisions were issued to determine whether participation would be favorable to their interests.

Rule 23 was amended to address this problem and now requires class certification to be decided “[a]t an early practicable time” to ensure that class members are identified before trial on the merits and bound by subsequent decisions.

Plaintiffs are now generally prohibited from seeking merit-based rulings prior to, or concurrently with, class certification.

The rule is designed to prevent plaintiffs from suing a defendant repeatedly in different courts in search of a favorable forum to bring a class action.

Exceptions have been recognized where the defendant waives the right to object and where there is a compelling justification.


Leading Decisions On OneLeading Decisions On One--Way InterventionWay Intervention

American Pipe & Constr. Co. v. Utah, 414 U.S. 538 (1974) (recognizing that the 1966 amendment to Rule 23 prohibited one-way intervention).

Fireside Bank v. Superior Court, 40 Cal. 4th 1069 (2007) (recognizing prohibition on one-way intervention but acknowledging exceptions where the defendant waives the right to object or there is a compelling justification).


Federal Decisions Recognizing Exceptions Federal Decisions Recognizing Exceptions to Prohibition of Oneto Prohibition of One--Way InterventionWay Intervention

Wright v. Shock, 742 F.2d 541 (9th Cir. 1984).

Marx v. Centran Corp., 747 F.2d 1536 (6th Cir. 1984).

Postow v. OBA Federal Sav. & Loan Ass’n, 627 F.2d 1370 (D.C. Cir. 1980). - these cases all involved some type of waiver by the defendant


CRAFTING CLASS ACTION CRAFTING CLASS ACTION SETTLEMENTSSETTLEMENTS

“Coupon” or “certificate” settlements. Cy pres awards.


Coupon Settlements Coupon Settlements The Class Action Fairness Act, 28 U.S.C. §§

1332(d), 1453 and 1711-15 (“CAFA”), now governs class actions in federal court.

28 U.S.C. § 1712 governs coupon settlements and does not favor them.

Under § 1712, to the extent attorneys’ fees are based on an award of coupons, they must be based on the value of the coupons actually redeemed by class members.

However, § 1712 does not define “coupon.”


National Association of Consumer Advocates National Association of Consumer Advocates (“NACA”) Guidance on Coupon Settlements(“NACA”) Guidance on Coupon Settlements

Should only be proposed in rare circumstances. Such instances include:

1) if primary goal of litigation is injunctive relief and the defendant agrees to it, or the coupons are good for small-ticket items class members are likely to purchase, or the certificates represent true discounts not otherwise available,2) where the coupons are freely transferable, 3) where the coupons are can be added to any already existing coupons or sales incentives,4) where the coupons are stackable, i.e., more than one can be used in a transaction; and 5) where there is a market-maker to insure a secondary transfer market.


NACA Guidance on Coupon NACA Guidance on Coupon Settlements (cont.)Settlements (cont.)

Coupon settlements should rarely, if ever, require identifiable class members to purchase major, large ticket items from the defendant as the sole significant relief.

Coupons should have some form of guaranteed cash value, even if the cash redemption value is less.

Coupon settlements should not be proposed to the court unless it is apparent the defendant is providing greater value to the class than would be available from an all-cash settlement.

Consideration should be given to providing coupons for multiple goods, not just the goods at issue in the case.


SETTLEMENT CONSIDERATIONS: SETTLEMENT CONSIDERATIONS: CY PRESCY PRES AWARDSAWARDS

A cy pres award takes funds from a settlement belonging to the class and distributes it instead to organizations for the benefit of the class.

Cy pres awards have been recognized as appropriate by both federal and state courts. See, e.g., In re Agent Orange Product Liability Litigation, 818 F.2d 179, 185 (2d Cir. 1987) ( a district court may set aside a portion of settlement proceeds for programs designed to assist the class in order to maximize the beneficial impact of the settlement fund); State of California v. Levi Strauss, 41 Cal. 3d 460 (1986) (cy pres awards are appropriate where there is a nexus between the proposed use of the funds and the class on whose behalf the litigation was brought, or where the proposed use furthers the purpose of the statutes upon which the litigation was based).


SETTLEMENT CONSIDERATIONS: SETTLEMENT CONSIDERATIONS: CY PRESCY PRES AWARDSAWARDS

Under CAFA, the court may require the a proposed settlement provide for the distribution of unclaimed coupons to charitable or governmental organizations, as agreed to by the parties. 28 U.S.C. 1712(e).

However, the redemption of any such proceeds may not be used to calculate attorney’s fees. Id.


NACA Guidance on NACA Guidance on Cy PresCy Pres AwardsAwards

It is the duty of class counsel to recommend cy pres recipients.

Class counsel should propose a distribution of the unclaimed portion of the award made available to class members that will either 1) protect the persons injured by the illegal conduct and therefore indirectly benefit the class or 2) promote the purposes of the statutes sought to be enforced in the litigation.


Recent Settlements Approved Recent Settlements Approved (cont.)(cont.)

Chavez v. Netflix, Inc., 162 Cal.App. 4th 43 (Cal. App. 2008) (involving alleged false advertising of Internet-based DVD-rental memberships).

Provided for one-level membership upgrade for one month, which allowed members to receive one additional DVD at a time at no charge, which equated to approximately four additional DVD rentals at no extra charge.

One objector claimed that the proposed settlement was unreasonable and unfair on the basis that it was a coupon settlement and that such settlements were inherently improper.



The court disagreed, noting that neither CAFA nor California law indicated that coupon settlements are per se improper.

Significantly, the court drew a distinction between pure coupon settlements in which class members would receive a coupon that would party defray the cost of a new purchase (which might result in a net benefit to the defendant), and the relief offered to the class, which provided for the opportunity to receive DVD rentals at no charge (where the potential for the defendant to benefit from the settlement was diminished).



Wilson v. Airborne, Inc., No. 07-770, 2008 WL 3854963 (C.D. Cal. Aug. 13, 2008) (involving alleged false advertising of cold prevention remedies): Provided for $23.5 million non-reversionary settlement fund. Class members who submitted claims could be reimbursed for

any Airborne product with proof of purchase. Class members without proof of purchase could be reimbursed

for the purchase price of up to six packages of Airborne. Unclaimed amounts were subject to cy pres distribution to non-

profit organizations approved by the Court. However, the Court rejected class counsel’s request for

attorneys’ fee award of 25% of the settlement fund and instead awarded lodestar and a multiplier of 2.0.

false advertising consumer class actions on the rise

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