Class Action Litigation

By Robert J. Herrington and Justin J. Prochnow

During the last eighteen to twenty four months, the beverage industry has seen an onslaught of litigation in a particularly scary form of litigation – class actions. These cases are particularly frightening for companies because enterprising plaintiffs’ lawyers are able to initiate a case, ostensibly for the good of numerous wronged consumers, with the sign-off of only a handful of people that are willing to lend their names to the lawsuit. Plaintiffs’ lawyers take these few plaintiffs, some of whom may have been recruited by the lawyers, and threaten to turn the case into a massive class action on behalf of thousands, and sometimes millions, of beverage consumers. And while the plaintiffs’ lawyer may position these cases as being brought on behalf of the public to right the wrongs perpetrated by “ne’er do well” companies, the real purpose of these lawsuits is clear. Money — or, more accurately, exorbitant attorneys’ fees to plaintiffs’ counsel.

At the end of the day, the number of class action lawsuits has risen because plaintiffs’ lawyers see them as a real opportunity to generate income with very little investments and almost no barriers to entry. Class action lawsuits are filed and litigated to put enough pressure on a defendantcompany, through bad PR, massive legal expenses, and the risk – no matter how small – of having to pay a huge judgment if some jury happens to agree with the plaintiffs, to force a settlement. As a significant part of these settlements, the plaintiffs’ lawyers seek massive attorneys’ fees, while, ironically, the consumers, those supposedly “damaged” by the offending company, often receive trivial sums.

Beverage companies of every shape and size have been targeted over the past few years in class action litigation. Lawsuits centered on false and misleading advertising claims have included, among other actions, allegations that “all natural” products actually weren’t, in fact, “all natural,” arguments that health claims were not adequately substantiated, and claims that beverage makers failed to disclose that the product was not as “good for you” as consumers might assume. Following are just a few of the more prevalent class action theories being asserted against companies in the beverage industry and the risk associated with them.

The Explosion of “All Natural” Litigation

A frequent component of class action lawsuits against beverage companies in recent years has been the allegation that a beverage labeled as “all natural” contains one or more synthetic or processed ingredients, thereby causing such a claim to be false or misleading. Class actions have been
filed against industry participants big and small over various ingredients that allegedly make a beverage product not “all natural.” Ingredients that have been the subject of class action claims include of sodium benzoate, alkalized cocoa, disodium dihydrogen pyrophosphate, high fructose corn syrup (“HFCS”), synthetic vitamins, and genetically modified components, including soy.  A variety of factors drive these types of cases, two of the biggest factors being the expansive nature of the consumer protection laws, particularly those in California, and the FDA’s failure to provide a clear definition of the term “natural.” Let’s start with a consideration of the consumer protection laws in California. California law allows plaintiffs to sue over any business practice merely by calling it “unlawful,” “unfair,” or “deceptive” business practice. The bar is set pretty low and makes it relatively easy for someone to sue. Plaintiffs’ trial lawyers can, and do, claim that almost anything is an unfair or deceptive practice, including labeling a product “all natural” when it contains some component that is arguably not “natural.”

The FDA’s failure to provide a formal definition of “natural,” by regulation or otherwise, and its relative sparse history of regulatory oversight of such claims, only adds to this problem and creates an environment ripe for more litigation and more class actions. Despite requests from other regulatory organizations and the federal courts, the FDA has repeatedly declined to provide clear guidance on the issue. Instead, the FDA continues to reference an informal policy regarding the definition of “natural,” derived from a 1993 Federal Register notice in which, ironically, the FDA announced that it was abandoning efforts to formally define “natural.” In the few warning letters that the FDA has issued over the use of “natural” on a food or beverage label (the FDA issued only three letters addressing “natural” claims in 2011), the FDA indicated that it views use of the term “natural” to be truthful and not misleading on a food label when “nothing artificial or synthetic … has been included in, or has been added to, a food that would not normally be expected to be in the food.”  Of course, without a formal definition, what any one person believes constitutes “natural” or “all natural” may vary widely and often ends up being judged differently, one ingredient and one lawsuit at a time.

Demand from consumers for “natural” products has steadily risen in recent years and the number of claims touting the “all natural” makeup of products has risen accordingly. With the increasing volume of products touting such claims on labels, the range of products making such claims has also widened without strict regulatory oversight. This combination of the relatively lax environment of regulatory scrutiny for “all natural” claims and the expansive nature of the consumer protection laws has helped create a perfect storm for class action litigation, which beverage makers will have to weather for years to come.

Health Claims Litigation

Another extremely hot area of litigation are cases in which beverage companies are alleged to be overstating or misstating the health benefits of a product or lacking sufficient scientific substantiation for claims. Substantiation of claims has traditionally been an area that has been exclusively addressed as a regulatory issue by the FDA and the Federal Trade Commission. But in the past year, consumer class action lawyers and competitors have taken it upon themselves to step into the shoes of the FDA and the FTC and sue companies for allegedly exaggerating health benefits or failing to substantiate claims.

Any number of theories have surfaced in recent litigation. Allegations include claims challenging whether coconut water is “super-hydrating” and contains “mega-electrolytes,” to claims that acai berries or other food additives do not support immune function or weight-loss as promised, to class actions asserting that juice makers are misrepresenting that the products can support immune or brain function. Other beverage manufacturers have been sued over ads touting the “calorie-burning” impact of green tea. And still other litigation has included challenges to ads claiming a product is “healthy” when the product contains an ingredient or property (e.g., trans fats, HFCS, or high calories) that arguably make the product unhealthy.

At their core, these cases are attacking companies’ advertising and marketing campaigns and the substantiation for such campaigns. The FDA, which regulates labeling, and the FTC, which regulates advertising, both require that companies substantiate any material claims made about products with “competent and reliable” scientific evidence. There is no bright line test for what constitutes this “competent and reliable” standard and each claim is evaluated on a case-by-case basis as to whether the necessary support exists for making the claims. Products in highly scrutinized categories like weight-loss are likely to require higher levels of scientific support for claims than claims for other products.

Class actions challenging a beverage maker’s health-related claims often rely on these standards to force a company to prove that its advertising promises are true and have sufficient scientific support. One can only assume that plaintiffs’ lawyers have decided that the regulatory agencies have failed in their duty to properly monitor the substantiation of claims, because class actions for lack of substantiation have started appearing with more and more frequency. That, and of course, the promise of big attorneys’ fees that can potentially be gained from a successful class action. Although it is unclear whether private plaintiffs can rely on the FDA and FTC’s substantiation standard, the standards used by trial judges are not materially different, and the litigation can be protracted and expensive.

False Advertising Litigation

False advertising claims are formidable claims in class action litigation. More and more beverage makers have been sued based on allegations that their ads or labeling are false or misleading in some way. Class actions have been brought that challenge the name or label of a product on thetheory that it implies or suggests that the product includes a large quantity of some seemingly beneficial ingredient (e.g., DHA, acai berries, pomegranate juice, Vitamin C, etc.), when the product actually contains only a small amount of the substance that is insufficient to confer the benefits suggested.

An example of this type of litigation is the case in which a juice maker’s label included pictures of a number of different fruits, even though the product contained only one type of fruit juice, and it was from concentrate. Consumer class action lawyers sued the product maker, claiming that thelabel was misleading to a reasonable consumer. The company defended on the ground that the label properly listed all of the actual ingredients, including the fact that only one juice was included. The courts largely rejected the argument, concluding that a plaintiff could sue over potentially misleading claims made on the principal display panel, notwithstanding that the list of ingredients on the side panel complied with the applicable regulations.The bottom line is that beverage makers should not assume that their labels and ads are immune from the spectre of class action litigation simply because the label complies with all regulatory requirements and discloses the ingredients. The consumer protection laws are broader and more expansive, and consumer class action lawyers often challenge labels that technically comply with the regulations.

Nondisclosure of Health Impacts

The alleged failure to disclose the health impacts of a product is another growing area of class action litigation against companies in the beverage industry. Cases have arisen based on statements, either express or implied, in a company’s marketing materials suggesting that the product is healthy when, plaintiffs argue, there are other facets of the product that suggest it may not be healthy. Ad copy stating that a product is part of a “balanced” diet or is an “alternative” to a product with perceived negative health benefits are examples of implicit claims that a product is healthy. Plaintiffs in recent lawsuits have argued that, given the affirmative suggestion that the product is “good for you,” the beverage maker had an obligation to prominently disclose features of the product that may not be so “good for you,” such as a high-calorie count, high sodium content, or even the use of artificial sweeteners.

Other lawsuits make even bolder claims, asserting that a company has a duty to disclose negative health impacts of a product in the absence of any suggestion that the product is healthy. Examples include litigation against the makers of products combining alcohol and caffeine, on the heels of regulatory action from the FDA and the FTC, as well as the litigation against food manufacturers for failing to disclosed the alleged health impacts of eating high-calorie, high-sugar foods.

Such litigation can be particularly frustrating to executives, marketers, and other personnel of companies in the beverage industry who may believe they have no duty to tout the potential negative impacts of buying their products. But such litigation is out there, has received some traction in courts, and, like the other forms of class action litigation, is incredibly expensive to defend.

Risk Management and Protection

So, are class action lawsuits sounding the death knell of the entire beverage industry? Certainly not. Many beverage companies are diligent and take the proper steps to ensure that they are in full compliance with applicable labeling and advertising laws and regulations because, of course, the best protection is prevention. For those companies that don’t routinely have their labels and marketing materials reviewed by experienced regulatory consultants and lawyers, the threat of a class action is real and potentially substantial. The recent settlements and awards paid by beverage companies should scare those companies that have not been diligent in assuring regulatory compliance with their labeling and advertising. Every company should have a plan in place to be implemented immediately in the event that they are sued, including the identification of experienced legal counsel to address these issues head on. Well-prepared companies will be best suited to avoid, or, if necessary, deal with the rising threat of class action litigation for labeling and advertising claims.