February 20, 2018

Food and Beverage Law Update: February 2018

Holland & Knight Alert
Nathan A. Adams IV | Loren Lee Forrest Jr.

Deceptive Trade Practices

Meat Exporter Had No Duty Under FCA to Pay for Beef Inspection

By Nathan A. Adams IV

In United States ex rel. Barrick v. Parker-Migliorini Int'l, LLC, 878 F. 3d 1224 (10th Cir. 2017), the court affirmed dismissal of the qui tam relator's lawsuit against his former employer, a meat exporter, alleging it avoided paying an obligation owed to the government in violation of the False Claims Act (FCA) when it illegally smuggled beef into Japan and China. The U.S. Department of Agriculture (USDA) charges an hourly rate for the process of inspecting and certifying meat for export to a country if the country has higher standards than the U.S. In order to smuggle beef into Japan and China, the defendant gave sham destinations for countries that have import standards equal to or less than the U.S. As a result, the USDA provided a free inspection rather than a heightened inspection of the beef. If the defendant had accurately reported the destination countries, the government should have been paid for the inspections that would have occurred were the exports lawful. The court ruled that the defendant had no "established duty" to pay the government for inspection of beef it allegedly smuggled into China or Japan. This is significant because "there is no liability for obligations to pay that are merely potential or contingent." The defendant never would have paid the inspection fees because it never wanted the meat inspected. The court observed that "the whole point was that the meat would not have passed inspection under the applicable standards. And the beef headed to China could not have been inspected, since China banned all U.S. beef. So there would never have been an obligation to pay inspection fees."

Prohibiting Retailers from Imposing Surcharges for Credit Card Payment Ruled Unlawful

By Nathan A. Adams IV

In Italian Colors Restaurant v. Becerra, 8787 F. 3d 1165 (9th Cir. 2018), the court affirmed the district court's grant of summary judgment in favor of the plaintiffs on their challenge to the constitutionality of California Civil Code Section 1748.1(a), which prohibits retailers from imposing a surcharge on customers who make payments with credit cards but permits discounts for payment by cash or other means. The state argued that the regulation is necessary to advance its interest in preventing consumer deception. The court ruled that the provision does not actually advance this interest, as it prevents retailers from communicating with their customers about the cost of credit card usage and why credit card customers are charged more than cash users. In addition, the statute exempts the state, municipalities, and electrical, gas or water companies. The court also ruled that the state has more narrowly tailored means of preventing consumer deception, such as by banning deceptive or misleading surcharges. As a result, the court determined that the law violates intermediate scrutiny and the commercial speech doctrine of the First Amendment. But the court modified the district court's declaratory and injunctive relief to apply only to the plaintiffs, and only with respect to the specific pricing practice that plaintiffs seek to employ; namely, posting a single price and charging an extra fee on customers who use credit cards.

Wage and Hour

Plaintiffs Not Entitled to Phone Numbers and Tip Pool Beneficiaries Not a Proper Class

By Michael Starr

In Stevens v. Farmers Restaurant Group, 2018 WL 647638 (D.D.C. Jan. 31, 2018), the district court's grant of conditional certification in a wage-hour opt-in class contains important lessons for restaurants and other hospitality employers. The case shows that small but significant gains can be achieved early in a lawsuit if issues are properly presented to the court. Based on a "modest" showing of a common policy, the court allowed the plaintiff servers to proceed on a collective basis with respect to their attempt to disallow the tip credit for "close-out" work, which included rolling silver, resetting tables and also sweeping, cleaning and preparing the restaurant to open for the next day.

Tip Pools. The court refused to certify conditionally an opt-in class that included bartenders with whom the servers claimed, among other things, their tips were pooled and improperly shared because the bartenders had not contributed tips to the allegedly invalid tip pool. That result follows naturally from the fact that even if there is an invalid tip pool, the only persons with a claim of harm are those who contributed to the pool, not those who only received money from it.

Email Notice: In addition, the court rejected the plaintiffs' request for telephone numbers of potential class members, as that would intrude on the privacy of class members and subject them to unsolicited phone calls and text messages. The court required the restaurants just to provide mail and email addresses of the potential class members.

Paycheck Notice: The court also rejected the proposal that the defendants include the class notice in paychecks, accepting the argument that this would imply the restaurant defendants' endorsement of the notice and put managers in the uncomfortable position of possibly being asked by employees to explain the lawsuit.

Failure to Appear Leads to Double Damages Award

By Loren L. Forrest Jr.

In Rios v. BBQ Chicken Don Alex Inc., et. al., 2018 WL264512, (E.D.N.Y. Jan. 1, 2018) in an uncontested action, the plaintiff, a waitress, alleged that the defendants' restaurants in Queens, New York, and one individual defendant violated the minimum wage, overtime and tip credit provisions of the Fair Labor Standards Act (FLSA) and the New York Labor Law (NYLL). The plaintiff also alleged that the defendants violated the NYLL's spread-of-hours premium provision and New York's required wage-notice and wage-statement requirements. All of the defendants failed to appear or otherwise respond to the plaintiff's complaint. Consequently, plaintiff prevailed on nearly all of her claims, as the court found that she was paid only $3 per hour, was not notified that her employer was taking the tip credit, was not paid overtime, and was not given the required New York wage notice and wage statements. The court found that the individual defendant was liable because he had the power to hire and fire employees, supervised and controlled employees, and determined the rate and method of employees' compensation. The employer prevailed only on the plaintiff's spread-of-hours claim as the plaintiff's work schedule itself failed to make out a claim for violation of the NYLL's spread of hours. For the employer's violation of the FLSA and NYLL, occurring over a period of about 22 months, the plaintiff sought a judgment of about $100,000 and received an award of about $92,000 against her employers and supervisor, jointly and severally. Notably, the statutory liquidated damages were nearly half of the total amount awarded (more than $43,000). Employers should keep in mind that both New York and federal law require double damages as a right, which a court must award, once a violation is found.


Mandatory Arbitration Waived by Delay and Method of Soliciting Agreement

By Nathan A. Adams IV

In Degigio v. Crazy Horse Saloon and Restaurant, Inc., No. 17-1145, 2018 WL 456905 (4th Cir. Jan. 18, 2018), the court refused to compel arbitration of the plaintiff's FLSA and South Carolina Payment of Wages Act lawsuit, despite binding arbitration provisions in lease agreements between a club and its dancers entered into three years after the litigation began. The club argued that its motion to compel arbitration was delayed because of parties who had not yet joined the suit. The court disagreed and determined that the club continued to pursue a merits-based litigation strategy by filing motions for summary judgment and opposing class certification and served discovery on the opt-ins even after they had joined the class. "In other words, Crazy Horse did not seek to use arbitration as an efficient alternative to litigation; it instead used arbitration as an insurance policy in an attempt to give itself a second opportunity to evade liability." The court was concerned that ruling for the club would give defendants a perverse incentive to wait as long as possible to compel arbitration, reward the furtive manner in which the agreements to arbitrate were presented to plaintiffs not under the court supervision ordinarily required with respect to contacts between the parties and their respective counsel in like circumstances, and also sanction the arbitration agreements themselves, although they painted a false picture of the plaintiffs' legal posture. They misleadingly suggested that the dancers would be able to keep their tips and flexible work schedule only if they were classified as independent contractors and not employees.


Claim That Net Carb Count on Label Is Misleading Not Pre-empted

By Nathan A. Adams IV

In Fernandez v. Atkins Nutritionals, Inc., No. 3:17-cv-01628, 2018 WL 280028 (S.D. Cal. Jan. 3, 2018), the plaintiff claims that the defendant misleadingly labels its snack products with regard to their "net" carbohydrate content. In particular, the plaintiff alleges that Atkin's method of calculating net carbs conflicts with medical science and Dr. Atkins' own writings to the effect that only fiber should be deducted from the calculation of net carbohydrates, whereas sugar alcohols such as maltitol are also deducted. The court determined that federal law does not pre-empt the plaintiff's state law claims to the extent that her claims are based on the defendant's failure to state on its labeling how it calculates net carbs but does pre-empt the plaintiff's attempt to utilize state law to prescribe a particular method of calculating net carbs. The court ruled that its net carbs claims are nutrient content claims governed by the Nutrition, Labeling and Education Act. As such, they are permitted only if they are not false or misleading and adequately explain the formula for calculating net carbs. Taking the facts alleged in the complaint as true, the court would not dismiss the plaintiff's claim. The court also declined to dismiss the case under the primary jurisdiction doctrine on the grounds that the issue presented does not require resolution of an issue of first impression, nor is it a particularly complicated issue that Congress has committed to a regulatory agency. Last, the court declined to dismiss the lawsuit under Rule 9(b) as failing to meet the heightened pleading standard because the plaintiff adequately identified the label claim at issue, where the statement was made, why it was fraudulent and how it affected the plaintiff. However, the court did dismiss the plaintiff's claim of breach of the implied warranty of merchantability under California law because the allegations in the complaint do not identify any "promise or affirmation" to which the defendant's products did not conform. In addition, the court dismissed the plaintiff's Magnuson-Moss Warranty Act claim because the plaintiff failed to identify a written warranty or any breach of an implied warranty under California law.

California Sherman Law Regulations of Labeling Not Pre-empted

By Nathan A. Adams IV

In In re Trader Joe's Tuna Litigation, No. 2:16-cv-01371, 2017 WL 4442918 (C.D. Cal. Oct. 3, 2017), plaintiffs sued under California's Sherman Law and New York's General Business Laws after they concluded that Trader Joe's tuna cans are allegedly underfilled and underweight. The court determined that the plaintiffs' claims are not impliedly pre-empted by the Federal Food, Drug and Cosmetic Act because the California Sherman Law regulations prohibiting the misbranding of food run parallel to, but independent of, its requirements. The court ruled otherwise as it relates to New York law. The court declined to apply the primary jurisdiction or equitable abstention doctrine and wait for the U.S. Food and Drug Administration (FDA) to act because of the FDA's delay and because the plaintiffs' claims do not involve consideration of complex economic policy. The defendant next argued that the plaintiff's claims should be dismissed because they fail to allege that a reasonable consumer would be deceived, but the court ruled this is not the standard under the "unlawful prong" of the California law, as compared to the "fraudulent and unfair prongs"; rather, the plaintiff sufficiently pleaded 1) a predicate violation and 2) accompanying economic injury caused by that violation. For the fraudulent and unfair prongs, the court determined that, inter alia, a reasonable consumer would expect that the tuna she purchases complies with labeling requirements that are meant to inform consumers of the amount of tuna and water or oil in the can. The plaintiffs failed to provide reasonable pre-suit notice of their breach of express warranty claims and their negligent misrepresentation claim was barred by the economic loss rule, but their unjust enrichment and breach of implied warranty of merchantability claims survived.

Claims That "All Natural" Label Was Misleading Due to GMOs Dismissed

By Nathan A. Adams IV

In Podpeskar v. Dannon Co., Inc., No. 16-cv-8478, 2017 WL 6001845 (S.D. N.Y. Dec. 3, 2017), the plaintiff sued alleging that she was deceived by defendant's yogurt labels, which proclaimed its products to be "all natural," whereas she claimed a reasonable consumer would not deem the products as such if he or she knew that they contained ingredients "derived" either from cows that are fed crops made from genetically modified organisms (GMO) or cows raised using hormones and certain milk production methods. The court dismissed her complaint. Current federal law does not require that the end product of animals fed with GMO feed be labeled "GMO." The court determined that there is "no legal support for the idea that a cow that eats GMO feed or is subject to hormones or various animal husbandry practices produces 'unnatural' products; furthermore, Dannon does not specifically represent that its products are either GMO-free or not given hormones or antibiotics." The plaintiff made no allegation that any ingredient used in the yogurt was unnatural, as opposed to her claim that several steps back in the food chain there may have been something unnatural ingested by a cow.

In Lee v. Conagra Brands, Inc., No. 1:17-cv-11042, 2017 WL 6397758 (D.Mass. Oct. 25, 2017), the plaintiff sued alleging that she was duped into purchasing Wesson brand vegetable oil because it is labeled "100% natural," when it is extracted from corn, soybean and rapeseed grown from genetically modified stock. The court dismissed the case filed under the Massachusetts Consumer Protection Statute because the plaintiff failed to allege that Wesson oil contains added color, synthetic substances or flavors, or contains anything that would not normally be expected to be in vegetable oil. Furthermore, the court determined that the defendant is not required to disclose on the label the use of genetically modified or bioengineered plants in making Wesson oil. As the label conforms to FDA labeling policy, the court ruled it could not be unfair or deceptive.


Pictures Despite Words May Deceive on Beverage Labels

By Nathan A. Adams IV

In Silva v. Unique Beverage Co., LLC, No. 3:17-cv-00391, 2017 WL 4896097 (D. Or. Oct. 30, 2017), the plaintiff sued the defendant under Oregon's Unlawful Trade Practices Act after she purchased a "Cascade Ice" beverage product depicting large colorful coconuts, along with the word "Coconut" on the label, below which was stated, "NATURALLY FLAVORED SPARKLING WATER," but containing no actual coconut ingredient or flavor. The defendant argued that no reasonable juror would have been deceived when the labeling of the entire bottle was taken into account, including statements that it "Contains No Coconut" and has "Zero Calories" as well as an ingredient list without coconut. The court disagreed and allowed two theories of damages to proceed: a diminished value and purchase price refund theory, but not an "objective market value loss" theory. The defendant argued that she could not prove diminished value because at 68 cents per can, it was substantially less than the price for coconut beverages, but the court ruled that these facts were outside the four corners of the pleading. The court determined that the plaintiff needs to allege facts showing "some loss," rather than any specific amount of loss, to survive a motion to dismiss. The purchase price refund theory is based on the alleged failure to receive what the defendant's alleged misrepresentation led the plaintiff to believe she was buying.


Criminalizing Entry to an Agricultural Facility Violates Constitution, But Prohibiting Record-Taking or Employment to Cause Economic Harm Does Not

By Nathan A. Adams IV

In Animal Legal Defense Fund v. Wasden, 878 F. 3d 1184 (9th Cir. 2018), the court ruled that an Idaho statute criminalizing entry into an agricultural facility by misrepresentation and prohibiting a person from entering the facility and, without express consent from its owner, making audio or video recordings of the conduct of the facility's operations violates the First Amendment. The laws were a reaction to a secretly filmed exposé of the unflattering operation of an Idaho dairy farm revealing animal cruelty. The court determined that the limitation on false statements to gain access to property "seeks to control and suppress all false statements ... in almost limitless times and settings" and "without regard to whether the lie was made for the purpose of material gain." The court disagreed with the state's argument that entry to the property was sufficient "material gain." Furthermore, the state already prohibits trespass without regard to speech. The court was troubled by the sheer breadth of the limitation, potential for selective enforcement and evidence that it was motivated to protect the agricultural industry from critical speech. The court agreed to sever the word "misrepresentation" from the statute at the invitation of the state to save it. The court treated the limitation on recording as an impermissible content-based regulation of speech prohibiting public discussion of an entire topic. The court ruled that even if the state had a compelling interest in support of the law, the statute was not narrowly tailored, but under-inclusive in that it does not reach photographs and over-inclusive in that the state could have limited, instead of prohibited, the filming of agricultural operations. But the court ruled that an Idaho statute criminalizing obtaining records of the facility by misrepresentation and obtaining employment with the facility by misrepresentation with the intent to cause economic or other injury to agricultural operations, property or personnel does not violate the First Amendment or Equal Protection Clause. Unlike false statements to gain access to property, false statements to gain records "inflict[s] a property harm upon the owner, and may also bestow a material gain on the acquirer." The court determined that the state had a legitimate interest in preventing harm relating to an agricultural protection facility's most sensitive information. Likewise, the court ruled that when false claims effect a fraud or secure valuable consideration such as an offer of employment, "it is well established that the Government may restrict speech without affronting the First Amendment."

Regulation and Legislation

By Nathan A. Adams IV

On Jan. 26, 2018, farms that sold an average of more than $500,000 in produce during each of the past three years were required to comply with the FDA Food Safety Modernization Act (FSMA). Requirements include standards for worker training, health and hygiene, domesticated and wild animals, and equipment decontamination and cleaning. Sprout growers already have had to meet the requirements specific to them. Microbial standards and testing for agricultural water are on hold. Also pending are standards related to the risk of contamination from the use of raw manure as fertilizer. The department also has announced that it will exercise enforcement discretion as it relates to preventive controls requirements for operations that do not fit within the farm definition because they conduct certain activities not included within the definition (e.g., coloring raw agricultural commodities) or do not meet the ownership requirement to be a secondary activities farm (e.g., some packinghouses).

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.

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