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Defendants have had a nice run recently in winning pleading-stage dismissal of “reasonable consumer” false advertising cases.  That run came to an end yesterday, however, when the Second Circuit Court of Appeals in New York reversed the dismissal of claims regarding Kellogg’s “Cheez-It” crackers.  The front of the “Cheez-It” package prominently describes the crackers as “Whole Grain,” but as a quick look at the Nutrition Facts panel on the side label would confirm, the crackers’ main ingredient is enriched white flour, not whole grain.

New York, California, and numerous other states apply a “reasonable consumer” test to false advertising claims.  The test is meant to be objective, with courts asking whether an advertisement would mislead an objectively reasonable consumer, not whether the actual plaintiff was or was not misled.  Federal courts regularly, and rightly, dismiss false advertising claims at the pleading stage where, as one court put it in a “slack fill” case involving an over-the-counter pain reliever, “the[] failure to read an unambiguous tablet count does not pass the proverbial laugh test.”

Courts have been much less likely to see the humor, though, in cases where a food package includes statements that plaintiffs contend are affirmatively misleading.  In yesterday’s case of Mantikas v. Kellogg Co., the Second Circuit agreed with the plaintiffs, at least at the pleading stage.  In the Court’s view, “the large, bold-faced claims of ‘WHOLE GRAIN’” on the front of the package could be construed as “misleading because they falsely imply that the grain content is entirely or at least predominantly whole grain.”  Quoting an oft-cited Ninth Circuit case, the Court wrote that the Nutrition Facts panel did not “cure[] the deceptive quality of the ‘WHOLE GRAIN’ claims because “reasonable consumers should not be expected to look beyond misleading representations on the front of the box to discover the truth from the ingredient list in small print on the side of the box.”

The main good news in this bad outcome for the defendant is that the Second Circuit reiterated another core principle in cases like this:  When ruling on an advertising claim, courts must “consider the challenged advertisements as a whole, including disclaimers and qualifying language.”  Plaintiffs, in other words, cannot just include snippets of a package in their complaint and hope to avoid judicial scrutiny of the entire package at the pleading stage.

A second good sign is that the Second Circuit distinguished—and thus impliedly blessed—other district court decisions dismissing similar claims on “reasonable consumer” grounds.  In one case the Court examined, for example, the plaintiffs claimed to have believed that crackers advertised as “made with real vegetables” contained a larger amount of vegetables than they actually did.  The district court in that other case thought reasonable consumers know “the fact of life that a cracker is not composed of primarily fresh vegetables.”  In the Cheez-It case, by contrast, reasonable consumers “understand that crackers are typically made predominantly of grain” and “look to the bold assertions on the packaging to discern what type of grain.”  The case survived, therefore, only because the alleged affirmative misrepresentation went to a central and material fact about the food product’s nature.

Because of these limitations, the Second Circuit’s decision should not be viewed as anything other than the reaffirmation of an established principle:  Food product manufacturers cannot expect to win dismissal of a false advertising case at the pleading stage by claiming that an accurate ingredient label cures an affirmatively misleading material statement on the front of a package.  If, by contrast, a plaintiff’s purported read of an advertisement is objectively unreasonable, courts still can and should examine the entire package and dismiss claims that fail the “laugh test.”

California Governor Jerry Brown recently signed into law Assembly Bill 2632, which amended California’s slack fill law to create several new exemptions, hopefully providing some relief from the plague of slack fill lawsuits that has hit the food and beverage industry, among others, particularly hard in recent years.  For those who are unfamiliar, slack fill is non-functional empty space in product packaging.  The argument that plaintiffs have been using is that this non-functional space renders the products misleading to consumers, causing them to think that they are getting more of the product than they actually are.  Although there have been many lawsuits filed, they have met with little success.  Nevertheless, they persist, as we’ve written about here.

Here’s a summary of the changes to California’s law:

    • Online Sales Exempted.       Perhaps the most significant change of the new law is that it exempts packaging sold in a mode of commerce that does not allow the consumer to view or handle the physical container or product. This would appear to exempt online sales, which is consistent with the rationale that a consumer could not be misled by packaging that he or she didn’t handle prior to purchase.
    • Only If It’s Substantial. The law was amended to add the clarification that “nonfunctional slack fill is the empty space in a package that is filled to substantially less than its capacity for reasons other than any one or more of the following:…” “Substantially” is not defined but seems likely to create an argument that some degree of non-functional space is acceptable provided that it is not substantial. Consistent with this, the new law also states that “slack fill shall not be used as grounds to allege a violation of this section based solely on its presence unless it is nonfunctional slack fill.”
  • Actual Size. The prior CA law required that the actual size of the product be depicted on the exterior packaging. The new law specifies that this depiction can be on any side of the packaging, excluding the bottom. “Actual size” must be noted in a clear and conspicuous disclosure.
  • Fill Line. The new law also allows for a line or graphic representing the “fill line” on either the actual product or the product container. The “fill line” must be clearly and conspicuously depicted. If the product is subject to settling, the fill line must represent the minimum amount of expected settling.

 

The changes also apply to California’s Sherman Food and Drug Act. Slack fill lawsuits against food and beverage companies declined between 2016 and 2017 as courts resisted indulging arguments such as an inability to understand basic item counts clearly labeled on a container’s front label.  We’ll see whether these changes collectively help drive numbers even lower.

The debate between two Third Circuit judges and a dissenting colleague in In re Johnson & Johnson Talcum Powder Products Marketing, Sales Practices and Liability Litigation, a case decided last Thursday, is the best distillation I have seen of a debate raging in federal and state courts throughout the country:  When, if ever, can a plaintiff who purchased and used a product without incident, and did not pay a price premium for it, sue for “consumer fraud”?

The plaintiff, Mona Estrada, purchased baby powder made from talc.  She alleged, and of course the defendant disputed, that baby powder made from talc can cause ovarian cancer.  But Estrada herself neither contracted cancer nor alleged that her use of the product put her at higher risk of contracting cancer.  Instead, she sued for “consumer fraud” under California law, contending that the defendant implicitly promised a safe product but did not live up to that promise.  (The case was transferred to the District of New Jersey as part of an MDL.)

Estrada alleged that she continues to buy baby powder, although she now chooses powder made from corn starch rather than talc.  She conceded that  when she bought the talc product, she did not pay a “price premium” for it.  She also conceded that that the defendant did not advertise its product as better than competing products.  Of equal importance to the majority, she conceded that she used the entire product she purchased and that it delivered all of the benefits the defendant explicitly promised.  On both grounds, this distinguished her claims from those in the California Supreme Court’s Kwikset Lock case, where plaintiffs alleged they paid a premium for locks falsely advertised as “Made in the USA.”

The Third Circuit panel thus characterized, and dismissed, Estrada’s allegations on the following terms: she “purchased and received Baby Powder that successfully did what the parties had bargained for and expected it to do; eliminate friction on the skin, absorb excess moisture, and maintain freshness.”  Absent a price premium or a promise of superiority, she simply had nothing about which to complain, and her “wish to be reimbursed for a functional product that she has already consumed without incident does not itself constitute an economic injury within the meaning of Article III.”

Defendants facing “no injury” consumer fraud class actions can stop here, celebrate the Third Circuit’s conclusion, and figure out the best way to bring it to their own courts’ attention.  Particularly where the absence of a pleaded economic injury can be characterized as a failure of statutory standing, which would preclude a claim from being litigation in federal court or state court, rather than just a failure of Article III standing, which might allow the plaintiff dismissed from federal court to replead claims in state court, the Third Circuit’s precedential decision may become a powerful defense weapon.

Where the debate will rage, however, is in cases where plaintiffs allege consumer fraud on the basis that a product “may” be “unsafe,” even if that alleged risk did not manifest in the plaintiff’s own case.

From the majority’s perspective, Estrada’s “own allegations require us to conclude that the powder she received was, in fact, safe as to her.”  She “chose not to allege any risk of developing ovarian cancer in the future,” and “[g]iven the absence of such an allegation, Estrada cannot now claim that she was ever at risk of developing ovarian cancer.”  The court therefore construed her claim as alleging “benefit of the bargain,” but the claim fell short because she failed to allege “that the economic benefit she received in purchasing the powder was worth less than the economic benefit for which she bargained.”

Judge Julio Fuentes, in dissent, said he would have held that “the safety of the product—as a general proposition, not specifically as to Estrada herself—was an essential component of the benefit of Estrada’s bargain.”  Judge Fuentes would have allowed Estrada to proceed to discovery, and if she could have established that the powder was indeed unsafe, “[t]he price increase…caused by the company’s alleged misrepresentation as to safety” may well have been “the total sum she paid for the product.”  In other words, she could have claimed a full refund, even though she purchased and used the product, it delivered its promised benefits, and it caused no harm.

Last week’s decision may not be the end of the road in this case.  The majority and dissent argued over whether the decision conflicts with two other Third Circuit precedents that found standing to exist, one involving event tickets and another involving prescription eye drops.  En banc review, therefore, is at least possible.  If the panel’s decision stands, however, its application in the lower courts, and its persuasiveness in federal and state courts elsewhere, will be fascinating to observe.

Lawyers who file “slack-fill” cases against food manufacturers found a friendly venue in Missouri.  Missouri has a broad consumer fraud law and multiple courts have denied motions to dismiss slack-fill claims pleaded under that statute.  But the real fight in class actions—where the money is, in a bank robber’s parlance—is over class certification, and on Tuesday, a Missouri judge denied certification in one of the closely-watched slack-fill cases against a candy maker.

In White v. Just Born, Inc., a Missouri case against the maker of Mike and Ike® candies, it was no great shock that the Court denied multi-state class certification.  Convincing a court to certify a multi-state class is a tough slog for plaintiffs in any state law-based case, especially so if the case has only one plaintiff, rather than a plaintiff from each of the states in question.  Even a single-state class can pose the threat of massive statutory damages, however, so the real victory in White was the Court’s refusal to certify even a Missouri-only class.

The plaintiff in White bought two boxes of the defendant’s candy at a dollar store.  He pleaded that he personally “attached importance” to the “size” of the candy boxes and thought he was buying “more Product than [he] actually received.”  Bully for him, the Court thought, but “the question of whether any [consumer fraud] violation injured each class member will require individualized inquiry” because “if an individual [already] knew how much slack-fill was in a candy box before he purchased it, he suffered no injury.”  It does not matter at the class certification stage that a “reasonable consumer” may have been deceived.  What matters instead is whether the practice actually caused injury to all putative class members in a common and centrally determinable manner. In a slack-fill case over a dollar’s worth of candy, it seems, it cannot. Continue Reading Slack Fill Plaintiffs May Win Battles But Lose the War

The “Show Me” state of Missouri has not been kind to candy makers in cases where consumers allege that packages contain non-functional “slack fill.”  Cases against the makers of Mike and Ike® candies, Raisinets®, and Reese’s® Pieces® all survived motions to dismiss within the last year or so, with judges finding that what “reasonable consumers” would and would not notice could not be determined without discovery. California has been fertile ground for these cases, too, with one candy maker just agreeing to a $2.5 million settlement of slack-fill claims. In New York, however, these claims have been much more likely to be greeted with the judicial equivalent of “give me a break,” and Judge Naomi Reice Buchwald in the Southern District of New York delivered a classic of the genre yesterday.

In the dock in yesterday’s case was the maker of Junior Mints®.  Plaintiffs claimed that different-size boxes of the tasty treats contain between 35-43 percent empty air.  In the plaintiffs’ opinion, “the size of the product boxes in Junior Mintscomparison to the volume of candy…makes it appear that consumers are buying more than what is actually being sold.”  Citing numerous New York cases, including one in which a plaintiff “attributes to consumers a level of stupidity that the Court cannot countenance and that is not actionable under “New York consumer fraud law, Judge Buchwald disagreed.

Judge Buchwald began her analysis with a fairly typical slack-fill analysis.  She held that the plaintiffs’ allegations about the empty space supposedly being “non-functional” were purely conclusory.  “Plaintiffs have not demonstrated, with factual assertions, that the slack-fill…is unnecessary to protect the Junior Mints, …is not the result of unavoidable product settling,” etc.  The plaintiffs also struck out when they attempted to compare the slack fill percentage of Junior Mints® and Milk Duds®.  Each product, Judge Buchwald held, must be judged according to its own physical characteristics, and mint and caramel just ain’t the same.

Plaintiffs conceivably could have bolstered their allegations to fix those shortcomings, but Judge Buchwald did not stop there.  She went on to hold that no “reasonable consumer” could have been deceived, because the Junior Mint® boxes “provide more than adequate information for a consumer to determine the amount of product contained therein.”  The weight of the candy is “prominently displayed on the front” of each box.  Then, equally importantly, each box listed the number of servings in each box and sufficient information in the “nutrition facts” to allow them to see the number of candies per serving.  Judge Buchwald thus likened the Junior Mints® case to one that another New York judge dismissed against the makers of a popular pain reliever.  “Slack fill” could not have deceived a reasonable consumer in that case because the number of pills was printed prominently on the bottle, too.

And then, the following injection of common sense:

“[C]onsumers are not operating on a tabula rasa with respect to their expectations of product fill.  To the contrary,…’no reasonable consumer expects the weight or overall size of the packaging to reflect directly the quantity of product contained therein.’….The law simply does not provide the level of coddling plaintiffs seek, [and] the Court declines to enshrine into the law an embarrassing level of mathematical illiteracy.  A reasonable consumer is capable of multiplying 3.5 by 12 (42), 4 by 12 (48), and 10 by 12 (120), the number of Junior Mints in the [three] boxes, respectively.”  Case dismissed, microphone dropped.

Early this year, a Ninth Circuit panel upended a major nationwide class action settlement because it found that the District Court had not sufficiently considered material differences among the 50 states’ relevant laws.  I called that decision—now likely headed for en banc review–“Regrettable But Forgettable” because the district court should be able to correct the error the Ninth Circuit identified.  The district court had not conducted any predominance analysis at all, which always is required, even for settlement classes.  Had it done so, it very likely could have found that for settlement purposes, with no questions for a jury to try, variations in state law would not have been material.

Yesterday, the Second Circuit reminded us that for litigation classes, variations in state laws absolutely can and should tank class certification.  Langan v. Johnson & Johnson Consumer Cos., No. 17-1605 (2d Cir. July 24, 2018) is a “natural” case, challenging that label on two several baby-oriented bath products.  The plaintiff allegedly purchased some in Connecticut and contended that 20 other states have similar consumer fraud laws.  The district court certified a 21-state class, after which J&J successfully petitioned the Second Circuit, under Rule 23(f), to hear an interlocutory appeal. 

J&J tried to argue that the plaintiff lacked Article III (constitutional “case or controversy”) standing to sue on behalf of purchasers in other states, but the Second Circuit rejected that contention.  “[A]s long as the named plaintiffs have standing to sue the named defendants, any concern about whether it is proper for a class to include out-of-state, nonparty class members with claims subject to different state laws is a question of predominance under Rule 23(b)(3), not a question of ‘adjudicatory competence’ under Article III.”  The court recognized some tension in case law over this question, but thought that Supreme Court guidance counseled treating “modest variations between class members’ claims as substantive questions, not jurisdictional ones.” Continue Reading Second Circuit Bounces Multistate “Natural” Class. Now, Keep An Eye On the Ninth Circuit

Today, the New Jersey Supreme Court issued a much-anticipated decision construing New Jersey’s Truth-in-Consumer Contract, Warranty, and Notice Act (“TCCWNA”). The decision affirmed that one who has not suffered actual harm from an allegedly unlawful provision in a contract or notice is not “aggrieved” and therefore cannot sue under the TCCWNA.  Importantly, the Court held that the harm need not necessarily be monetary, but it does have to exist.  This unanimous decision should bring an end to the recent wave of speculative class action lawsuits asserting TCCWNA claims based, for example, on standard provisions in online Terms of Service.

The TCCWNA, as discussed in prior posts here and here, imposes a steep $100-per-violation penalty whenever a “contract” or “notice” contains a term that violates “clearly established” New Jersey or federal law.  If a contract or notice says that some of its terms may not apply in “some states,” without specifically identifying provisions that are unlawful and thus inapplicable in New Jersey, the same $100 penalty attaches.  In a landmark decision last October, the New Jersey Supreme Court curtailed the circumstances in which TCCWNA claims can be pursued on behalf of a class by holding that the statute’s requirement that a consumer must be “aggrieved” requires proof that every putative class member at least was “presented with” the offending notice (in that case a restaurant menu).  The court also put real teeth in the requirement that the “right” a notice supposedly violates must be “clearly established.”

The October decision did not address other important TCCWNA issues, including whether one can be an “aggrieved consumer” without having suffered any actual harm. Just after oral argument in the October-decided case, however the Supreme Court accepted a certified question from the Third Circuit Court of Appeals as to whether one without damages can sue under the TCCWNA.

In Spade v. Select Comfort Corp., the plaintiffs purchased an allegedly faulty adjustable bed and received a refund after the defendant could not fix it.  The plaintiffs nevertheless sued the seller under the TCCWNA, contending that its contract failed to conform to New Jersey regulations for selling household furniture regarding delivery timing.  A district judge dismissed those claims, finding the consumers were not “aggrieved” because they received their refund and because their claim against the seller had nothing to do with delivery timing.

In Wenger v. Bob’s Discount Furniture LLC, the plaintiffs ordered goods from the defendant and received them without complaint, but still sued under the TCCWNA based on allegedly unlawful aspects of the customer agreement, including font size, the company’s refund policy, and several of the contract’s other provisions.  The same district judge dismissed those claims, too, on essentially the same basis, and both cases found their way to the Third Circuit.

On November 23, 2016, the Third Circuit asked the New Jersey Supreme Court to decide whether (1) a consumer who receives a non-conforming contract, but who has not suffered any adverse consequences, is “aggrieved” and therefore can sue under the TCCWNA; and (2) a contract provision that violates the state’s Furniture Delivery Regulations satisfies the “clearly established right” provision of the TCCWNA. That is what led to today’s decision.

The Supreme Court answered the first question by holding that contracts containing provisions at odds with regulations do violate the TCCWNA.  That aspect of today’s ruling cannot be ignored.  Among other things, it means that the New Jersey Attorney General’s Office absolutely can pursue businesses for TCCWNA violations if they include such unlawful provisions.

The Court very clearly and strongly held, however, that consumers cannot sue unless they are “aggrieved.” The plaintiffs tried to define “aggrieved” to mean anyone who is offered or enters into a contract containing an offending term, but the Court held that such an expansive interpretation would effectively write the word “aggrieved” out of the statute.  The term “aggrieved consumer,” the Court held, must “denote[] a consumer who has suffered some form of harm as a result of the defendant’s conduct.”

Although there is much for the business community to celebrate in today’s decision, attention must be paid to the last section of the Court’s opinion, beginning with “[w]e do not, however, view [cognizable] harm to be limited to injury compensable by monetary damages.” TCCWNA, the Court held, “contemplates that a consumer may be entitled to a remedy notwithstanding the absence of proof of monetary damages.”  This might include, for example, someone who received a late delivery and was dissuaded from seeking a refund because an unlawful provision told her she could not do so.  Allegations like this would seem to be highly individualized, however, and therefore not proper subjects for class actions.

Wenger and Spade now return to the Third Circuit, which presumably will uphold the district court’s dismissals.  A cascade of dismissals of other suits then should follow.

When class actions have a low settlement value relative to the size of the class, it is normal for defendants to pay out money to non-profit groups that advocate for issues relevant to the case rather than directly to class members. Last July, in “Give the Money to One Percenters, Not to Non-Profits,” I reported that 11 state Attorneys General had decided to buck this ongoing trend, asking the Third Circuit to reject a class action settlement in which Google would have paid $3 million to non-profit groups advocating for privacy rights.  The Third Circuit has not ruled on that appeal, but with a new brief to the U.S. Supreme Court, the number of state AGs advocating for this change now has grown to a bipartisan group of 20.

Courts approve these “cy pres” distributions to non-profits where they find it “infeasible” to distribute money directly to class members.  The Circuits are slightly split on what it means to be “feasible,” however, and in the new brief, the AGs chastise the Ninth Circuit for approving cy pres “whenever there is a large class.”  The AGs prefer “feasible” to be synonymous with “possible,” and whenever possible, they want money to be distributed, somehow, at least to a subset of affected class members.

In the new case, In re Google Referrer Header Privacy Litigation (captioned at the Supreme Court as Frank v. Gaos, with “Frank” being Ted Frank, head of the Competitive Enterprise Institute’s Center for Class Action Fairness), Google would pay out $8.5 million to settle claims that it inappropriately shared user searches with third party marketers.  The Ninth Circuit “quickly disposed of the argument that the district court erred by approving a cy pres-only settlement.”  Because “[o]bjectors do not contest the value of the settlement” or plead that they suffered any out-of-pocket injury from Google’s conduct, the only question was whether it was “feasible” to distribute $8.5 million to a class with 129 million estimated members who performed searches through Google. Continue Reading State AGs Still Really Don’t Like Cy Pres Class Action Settlements

This week, by a 2-1 vote, a Ninth Circuit panel reversed a district court’s approval of a massive class action settlement involving Hyundai’s and Kia’s allegedly inflated statements of fuel efficiency.  The majority’s long decision, over a vigorous dissent, amounted only to a “greatest hits” collection of Ninth Circuit class action and settlement skepticism.  Nothing in it was new, and importantly, the panel majority Court said explicitly that the district court could approve the settlement anew upon remand.   

Put another way:  Settlement proponents in Ninth Circuit cases are going to have to deal with this decision in In re: Hyundai and Kia Fuel Econ. Litig. for the foreseeable future, but the case really did not erect any hurdles to approval that weren’t already there.

Twenty years ago, when the asbestos bar proposed a multibillion-dollar, highly creative settlement of tens of thousands of asbestos cases, the Supreme Court bounced the settlement because the proposed class raised too many individual issues.  The Supreme Court’s holding in that case—Amchem Prods. Inc. v. Windsor—was that although federal judges need not consider the manageability of a class action trial when a settlement is proposed, a settlement class still has to satisfy Rule 23(b)(3)’s requirement that common questions “predominate” over questions that are purely individual to each class member.  That a settlement would resolve a matter on fair terms is not enough if the settlement glosses over too many individualized issues.  Continue Reading The Ninth Circuit’s Hyundai Decision Is Regrettable But Forgettable

Today, the New Jersey Supreme Court drove a stake into the many class actions alleging claims under New Jersey’s Truth-in-Consumer Contract, Warranty and Notice Act (“TCCWNA”).  That law provides for $100 in damages whenever an “aggrieved consumer” demonstrates that a contract or other document contains provisions that violate any “clearly established legal right.”  The Supreme Court’s new decision construed both of those statutory limitations in a manner that should preclude virtually all the pending class action cases. 

The decision in Dugan v. TGI Fridays, Inc. and Bozzi v. OSI Restaurant Partners concerned those restaurants’ alleged practice of not printing drink prices on their menus.  The plaintiffs alleged that keeping consumers in the dark about those prices until they received their checks allowed the restaurants to inflate drink prices by a dollar or two each.  They sued under New Jersey’s Consumer Fraud Act, and because they also contended that the menus were “notices” that violated a “clearly established right” to see prices, they sued under the TCCWNA.  An appellate court found that the claims could not proceed on a class basis because the plaintiffs’ issues were too individualized, and the Supreme Court today affirmed that holding. 

The Supreme Court began by rejecting the plaintiffs’ consumer fraud class action theories, holding that whether any person was “overcharged” and by how much could only be decided person-by-person.  The Court then engaged in an extensive discussion of the TCCWNA, laying waste to the theories under which so many plaintiffs recently have sued online and brick-and-mortar retailers for TCCWNA violations.  Continue Reading NJ Supreme Court Disapproves Class Certification In Landmark TCCWNA Case