Wednesday, June 9, 2010

Eastern District Rejects FDA “Safe Harbor” Defense to Proposed Deceptive Advertising Class in Koenig v. Snapple Bev. Corp.

On May 7, 2010, Judge Frank C. Damrell, Jr., of the Eastern District of California, issued an order in Koenig v. Snapple Bev. Corp., 2010 U.S. Dist. LEXIS 55987, 26-28 (D. Cal. 2010), denying in substantial part defendant Snapple’s motion to dismiss false advertising claims arising out of promotional statements claiming that Snapple is “all natural.” As set forth in the Court’s Order, the plaintiffs action alleges that “Defendant does not mention that its drink products contain HFCS [i.e. High Fructose Corn Syrup], except in inconspicuous and hard-to-read type in the ‘Ingredients’ statement on the back or sides of its products.” See id., at 2-4. According to plaintiffs, “by using an ‘All Natural’ marketing strategy, Snapple implies that its products are superior to, better than, more valuable, and more nutritious than competing products.” See id.

Defendant moved to dismiss plaintiff’s action on various grounds, including that plaintiffs’ claims were barred by the safe harbor exception to the UCL because the challenged conduct was authorized by what defendant claims was a binding FDA policy – comprised of an informal FDA policy statement and opinion letter – regarding use of the term "natural." 

The Court disagreed, reasoning that although “federal agency action taken pursuant to statutorily granted authority short of formal, notice and comment rulemaking may … have ‘the force of federal law…’” [See id., at 14-15], Snapple could not cobble together an FDA policy statement and opinion letter regarding the use of the term “natural” to construct a safe harbor defense to claims under the UCL/FAL. According to the Court, the informal actions undertaken by the FDA were insufficient to rise to the level of being afforded the weight of Federal law authorizing the challenged conduct:
…[T]he FDA's policy regarding the use of the term "natural" does not have the force of law. Neither the FDA policy statement set forth in 1993 nor the July 2008 FDA letter regarding the use of the term "natural" were the result of a formal, deliberative process akin to notice and comment rulemaking or an adjudicative enforcement action. Indeed, the FDA acknowledged that "the ambiguity surrounding use of [the] term that results in misleading claims could be abated" if it was adequately defined, but declined to engage in the rulemaking process. That the FDA has subsequently enforced this policy on a handful of occasions does not change the nature of the FDA's formation of its policy regarding the term "natural."
Because the court concludes that the FDA's policy cannot be accorded the weight of federal law for purposes of the safe harbor rule, there is no law which expressly authorizes defendant's conduct. Accordingly, defendant's motion to dismiss plaintiffs' complaint on this basis is without merit.
See Koenig, 2010 U.S. Dist. LEXIS 55987, at 20-21.

In addition to the forgoing, the Court also rejected Snapple’s argument that plaintiffs failed to assert a viable restitutionary theory insofar as they and the class received the “benefit of the bargain” in their purchase of the Snapple product. The Court reasoned that while “[c]ourts have held that being induced to purchase a product one would not otherwise have purchased is not loss of money or property within the meaning of the statute as long as one still receives the benefit of the bargain” [see id., at 25-26], the plaintiffs’ allegations were distinguishable insofar as they alleged that defendant sold Snapple at an inflated price as a direct result of the alleged deceptive advertising:
In this case, in addition to asserting that they would have purchased alternative drink products, plaintiffs also allege that they paid more for defendant's drink products and would have been willing to pay less if they had not been misled by defendant's labeling. (Compl. PP 6, 7, 12, 34, 36, 38, 82, 94.) As such, plaintiffs have alleged that they did not receive the benefit of the bargain because they assert that the product they received was worth less than what they paid for it. See Koh, 2010 WL 94265 at *2 (holding that the plaintiff sufficiently alleged injury under the UCL, FAL, and CLRA, where he asserted that the product cost more than similar products without misleading labeling). They also allege that they were seeking a product without HFCS and thus, defendant's drink product was unsatisfactory. Cf. Hall, 158 Cal. App. 4th at 855. Moreover, plaintiffs allege that defendant benefitted from these purchases by selling more drink products, which plaintiffs found unsatisfactory, at a higher price. (Compl. PP 59, 82, 109.) Plaintiffs seek the difference in price between the product received and its value. (Compl., Relief Demanded, P E (seeking "[d]isgorgement of the excessive and ill-gotten monies obtained by Defendant Snapple as a result" of its labeling practices)); Cf. Germain, 2009 WL 1971336, at *7 (holding that the plaintiff failed to allege restitution injury where he sought the return of all monies, not the difference in price between the apparel received and its value). Accordingly, plaintiffs have sufficiently alleged that, due to defendant's labeling practices, they suffered a loss that benefitted defendants through more sales and a higher profits. See Shersher v. Superior Court, 154 Cal. App. 4th 1491, 1500 (2007) (holding that the plaintiff could recover restitution from a manufacturer even though the product was purchased from a third-party retailer); Hirsch v. Bank of Am., 107 Cal. App. 4th 708 (2003) (concluding that the plaintiff in a UCL action my obtain restitution from a defendant with whom the plaintiff did not deal directly where that defendant received the benefit); cf. id. (holding that the plaintiff failed to allege restitution injury where the money expended in processing and mailing forms did not benefit the defendants).
See Koenig, 2010 U.S. Dist. LEXIS 55987, at 26-28.

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