Food and Beverage Law Update: October 2020
Is There Insurance Coverage for Business Interruption Losses Related to COVID-19?
Thomas H. Bentz Jr.
More than six months into the pandemic, there is still no easy or definitive answer to the question many retailers are asking about whether there is coverage for their business interruption losses related to COVID-19. Insureds have filed more than 1,000 business interruption claims against insurance carriers to date. Federal suits are pending in at least 37 states. This is more than three times as many insurance coverage suits than were filed after Hurricane Katrina.
Most suits allege that the insureds suffered "physical damage" as a result of the actual or suspected presence of COVID-19 in or near their stores. Some also allege that local and/or statewide mandated shutdowns have triggered the "civil authority" coverage in their policies. To date, courts have ruled in about a dozen cases. Nearly all have been decided in favor of the insurance carriers. An exception is Studio 417, Inc. v. Cincinnati Ins. Co., No. 20-cv-03127, 2020 WL 4692385 (W.D. Mo. Aug. 12, 2020), where the court denied the defendant's motion to dismiss and allowed restaurants and hair salons to proceed to discovery. The court found that COVID-19 is a "physical substance" that lived on and was active on inert physical surfaces, emitted into air and could attach to property making it unsafe and unusable due to the "direct physical loss to the premises and property." According to the court, even though the shutdown order at issue allowed takeout and delivery orders from the restaurants, the fact that inside dining was prohibited was enough potentially to trigger coverage.
In contrast, most cases are similar to Rose's 1, LLC et al. v. Erie Ins. Exch., No. 2020 CA 002424B, 2020 WL 5881870 (D.C. Super. Aug. 6, 2020), where restaurant owners sued for losses following a shutdown order. The court granted summary judgment for the insurer because the property policy did not provide business interruption coverage where the order did not result from direct physical damage to the restaurants, and the policyholders provided no evidence that COVID-19 was present in their insured properties. There were several more similar rulings in cases such as Gavrilides Mgmt. Co. v. Mich. Ins. Co., No. 20-258-CB, 2020 WL 4561979 (Mich. Cir. Ct. July 21, 2020). According to the court, a government shutdown order did not satisfy the "physical loss" requirement in the policy, which is "something with material existence, something that is tangible, something … that alters the physical integrity of the property." Moreover, in 10E, LLC v. Travelers Indem. Co., No. 2:20-cv-04418, 2020 WL 5359653 (C.D. Cal. Sept. 2, 2020), the court rejected the plaintiff's assertion that a ban on in-person dining was "physical damage" and dismissed the complaint. The court ruled that physical loss or damage occurs only when property undergoes a "distinct, demonstrable, physical alteration."
None of these cases has progressed beyond the motion to dismiss or motion for summary judgment stage and no final decisions on coverage have been issued by a court. Meanwhile, many jurisdictions are considering legislation that may change how courts may rule on coverage and may legally require coverage in some situations. If any of this legislation passes, it may change or alter the potential for coverage in future cases.
So, with all of this uncertainty, what should insureds do? They should review their insurance coverage with their brokers and insurance coverage counsels, document their losses and preserve their contractual rights with the assistance of counsel. Documented losses should include all details related to any suspected or confirmed COVID-19 cases or contamination on or near the insured location and related remediation efforts; governmental or landlord orders closing or limiting premises; loss of access to or increased operating costs to obtain necessities and non-recurring business expenses necessitated by the crisis. Businesses should preserve all financial records, including documentation of loss of business income.
Executive Order Upheld Imposing Testing Protocols in Agriculture
Nathan A. Adams IV
In Castillo v. Whitmer, No. 20-1815, 2020 WL 5249576 (6th Cir. Sept. 2, 2020), agricultural business owners and employees challenged an emergency order imposing COVID-19 testing protocols on employers and housing providers in agricultural settings imposed by the Michigan Department of Health and Human Services beginning on Aug. 24, 2020. The plaintiffs claimed that the tests violate the Equal Protection Clause and sought a preliminary injunction to expedite the appeal. The court affirmed denial of the preliminary injunction on the grounds the plaintiffs are unlikely to succeed on the merits of their appeal. The plaintiffs cited a publication entitled "COVID-19 Response & Mitigation Strategies for Racial & Ethnic Populations & Marginalized Communities" as proof that racial identity was top of mind for the defendants when drafting the order. The plaintiffs also pointed to earlier executive actions and statistics that referenced the disproportionate impact of COVID-19 on minorities. The plaintiffs also argued that the order was both under- and over-inclusive; for example, by requiring testing of employees of meat, poultry and egg processing facilities but not in other agricultural settings and requiring testing at a greenhouse facility in the absence of evidence of any COVID-19 outbreak. The court rejected this as sufficient to trigger strict scrutiny of the orders. An equal protection violation requires not only disparate impact, but also discriminatory purpose that the court ruled the plaintiffs failed to show. Under rational basis review, the plaintiffs had to negate every conceivable basis for it to prevail, which the court ruled they failed to do. The court also ruled that the plaintiffs failed to prove that the order would cause them irreparable harm and considered the harms of not enforcing the order greater due to the potential spread of the virus.
Executive Order Banning On-Site Consumption of Food and Drink at Bars Upheld
Nathan A. Adams IV
In 4 Aces Enter., LLC v. Edwards, No. 20-2150, 2020 WL 4747660 (E.D. La. Aug. 17, 2020), the court ruled against bar owners who sought an injunction against the governor and the state fire marshal, challenging the enforcement of the governor's proclamations that banned the on-site consumption of food or drinks at bars in an effort to slow the spread of COVID-19. The bar owners pled state and federal substantive and procedural due process, equal protection and takings violations. The court first decided whether the proclamations infringe the bar owners' constitutional rights. The court agreed that as a matter of substantive due process, the bar owners have a constitutionally protected property interest in the profits of their businesses. Without deciding the matter, the court also agreed that the bar owners enjoyed the right to meaningful post-deprivation process as a matter of procedural due process. Last, the court agreed that the bar owners identified an equal protection right that the proclamations infringed; for example, by exempting restaurants with bars from the ban and treating them differentially. The court turned next to the question whether the proclamations have "some real or substantial relation to the public health crisis and are not beyond all question, a plain, palpable invasion of rights secured by the fundamental law." Calling it a close question, the court ruled against the plaintiffs in reliance on certain expert testimony; for example, that bars pose a greater risk of COVID-19 transmission than do restaurants and that 20.9 percent of exposure cases could be traced to bars.
National Labor Relations Act (NLRA)
NLRB Order Enforced Incorporating a "Notice-Reading Remedy"
Nathan A. Adams IV
In AdvancePierre Foods, Inc. v. N.L.R.B., 966 F. 3d 813 (D.C. Cir. 2020), the United Food and Commercial Workers Union Local 75 conducted a five-month organizing campaign at AdvancePierre Foods, a food processing plant that manufactures processed foods for restaurant chains and retail businesses and for sale in convenience stores. The National Labor Relations Board (NLRB) found that AdvancePierre committed 17 unfair labor practices (ULPs), including when management notified employees how to withdraw a signed union authorization card. AdvancePierre distributed step-by-step instructions and a flyer with this disclaimer: "Please understand that other than giving you this information, AdvancePierre … is not permitted by law to assist you in any other way in getting your card returned." The administrative law judge (ALJ) viewed this flyer as information, not solicitation, and, thus, not an unfair labor practice. The ALJ also denied the NLRB's request for a "notice-reading remedy" requiring AdvancePierre to "read-aloud" the unfair labor practices on the grounds that the violations did not rise to the level at which traditional remedies are insufficient to redress their effects. On review, the NLRB reversed. AdvancePierre did not frontally challenge NLRB precedent to the effect that an employer's otherwise protected speech can constitute unlawful coercion if it occurs within a perilous atmosphere created by contemporaneous ULPs. All that was left for review was whether the NLRB's application of that precedent was arbitrary or capricious. The court ruled otherwise that substantial evidence supported the NLRB's view that contemporaneous serious ULPs related to the card-signing process and the organizing effort created an atmosphere where employees would tend to feel peril if they refrained from revoking their support for the union. The NLRB also imposed the notice-reading remedy. Because AdvancePierre did not seek reconsideration before the NLRB and did not argue that a notice-reading remedy could not be imposed until the sufficiency of traditional remedies was considered, it failed to preserve that issue. Once again, the court was left questioning whether the NLRB abused its "extremely broad" discretion when ordering the remedy and found otherwise. The court enforced the NLRB order.
Wage and Hour
Courts Split on 80/20 Rule
Nathan A. Adams IV
Applying the 80/20 Rule
In Rorie v. WSP2, LLC, 2020 WL 5414574, 2020 WL 5414574 (W.D. Ark. Sept. 9, 2020), the court declined to apply the U.S. Department of Labor's opinion letter dated Nov. 18, 2018, overturning the so-called 80/20 rule set forth in its Field Operations Handbook from 1988 to the effect: "[W]here the facts indicate that … tipped employees spend a substantial amount of time (in excess of 20 percent) performing general preparation work or maintenance, no tip credit can be taken for the time spent in such duties." Although recognizing that the rule is no longer binding as withdrawn, the rule remains, according to the court, "a reasonable interpretation of the Dual Jobs regulation" in the absence of any other reasonable guidance or official regulation."
Applying 2018 Guidance
In Rafferty v. Denny's Inc., No. 1:19-CV-24706-DLG, 2020 WL 5939064 (S.D. Fla. Sept. 4, 2020), the court did the reverse, referring to the "impracticality of the 20% rule, noting that the parties would have to keep track of the employee's activities every day minute-by-minute." Under the new guidance, the court considers whether the employee is engaged in related non-tipped activities contemporaneously with their tipped work. The court granted summary judgment on this issue on this basis. The court did likewise with respect to the plaintiff's claim that the defendant failed to provide adequate tip credit notice. The defendant showed sign-off reports and time records containing the notice. The court also granted summary judgment on all time barred claims involving the plaintiff's employment.
Court Certifies Class Action for Tip Credit Notification
Nathan A. Adams IV
In Graham v. Famous Dave's of Am., Inc., No. DKC19-0486, 2020 WL 5653231 (D. Md. Sept. 23, 2020), the court granted a motion to certify conditionally a wage and hour collective action implicating stores in Maryland during the three prior years for failure to provide proper tip credit notification. The class representative alleged that he was required to perform closing work off the clock and opening work as a server and to take part in an illegal tip pool, including normally untipped workers such as "expediters." The court refused to certify his claim that 1) tipped and non-tipped employees alike were required to pool tips based on expediters occasionally sharing tips; 2) the defendant required tipped employees to cover walk outs/cash shortages; and 3) the company violated the 80/20 rule for lack of evidence that he or any other plaintiffs performed non-tipped work in excess of 20 percent of their duties. The court denied the plaintiff's motion for partial summary judgment, alleging that the defendant failed to properly inform its tipped employees nationwide about tip credits, utilized an improper tip pool and retained part of the employees' tips.
Labeling and Unfair Competition
Prescription Pet Food Labeling Lawsuit Moves Forward
Nathan A. Adams IV
In Moore v. Mars Petcare US, Inc., 966 F. 3d 1007 (9th Cir. 2020), the court reversed dismissal by the district court and found that a putative class action lawsuit alleging false advertising, unfair competition, consumer legal remedies and antitrust violations stated a claim against four pet food manufacturers, two veterinary clinic chains and a pet goods retailer. The putative class representatives purchased prescription pet food for their sick pets after consulting with their vets at additional cost as compared to non-prescription pet food. However, the ingredients of the prescription pet food overlapped significantly with the ingredients of non-prescription pet food, and the non-overlapping ingredients did not include drugs. Whereas the district court discounted the potential to mislead in part because vets play a role in the referral process, the court ruled that the reasonable consumer test requires looking at the general consuming public or targeted consumers. The court determined that the labeling and brand name of "prescription pet food" itself could be misleading, regardless of whether the back label ingredients list conflicts with the label claim. The court also ruled that fraud was pled with adequate specificity by virtue of describing the six kinds of prescription pet food that they purchased and how they overlap with ingredients in non-prescription pet foods. At the motion to dismiss stage, the court ruled that this allegation was enough: "As a result of the false and fraudulent prescription requirement, each plaintiff paid more for prescription pet food than each plaintiff would have paid in the absence of the requirement, or would never have purchased prescription pet food." The court remanded the case.
Systemic Practice Claim Due to Overweighting of 36 Packages Dismissed
Nathan A. Adams IV
In John v. Whole Foods Market Gp., Inc., No. 19-2528-cv, 2020 WL 4983431 (2d Cir. Aug. 25, 2020), the court ruled that the putative class representative failed to adduce evidence that he suffered an injury in fact in connection with his lawsuit under the New York deceptive business practices statute concerning the defendant's alleged overstatement of the weight of prepackaged products. The plaintiff purchased prepackaged chocolate cupcakes and cheeses from two stores in New York City. He does not claim that he weighed them. Instead, he pointed to the results of an investigation by the New York City Department of Consumer Affairs that found 36 underweight cupcake packages at three stores in New York City. The plaintiff argued that the defendant used uniform receipts and procedures, so on this basis it must be inferred that all cupcake packages were underweight. The court disagreed there was enough evidence to support a system-wide error. The plaintiff also pointed to the results of an informal study by the defendant that showed measurements of moisture loss between 3 percent to 7 percent in cheeses at weekly intervals. But the court determined that the evidence failed to show that the cheeses remained on the shelf beyond one week. Consequently, the court agreed with the district court that there was no genuine dispute of fact that would permit a jury reasonably to conclude that the defendant's procedures were subject to systematic error.
Added Sugar Not Enough to Support Class Action Healthy Labeling Claim
Nathan A. Adams IV
In Clark v. Perfect Bar, LLC, 816 Fed.Appx. 141 (9th Cir. 2020), the court affirmed dismissal of a putative class action product-labeling lawsuit alleging that the packaging of Perfect Bar misled class members to believe that the bars were healthy when in fact added sugar rendered the bars unhealthy. The labeling claimed "20+ Superfoods," "17G Protein" and "the original refrigerated protein bar." The packaging referred to the creator as a "health food pioneer." The court determined that the mislabeling claim was preempted by the Nutritional Labeling and Education Act, the Food, Drug and Cosmetics Act and accompanying regulations. The court ruled, "To the extent Appellants' claims advance the notion that Perfect Bar made an improper health claim due to added sugar levels in the bar, those claims are not viable." The Nutrition Labeling and Education Act (NLEA) and its regulations are silent on whether sugar levels preclude a product from making health claims.
FDA Proposes New Food Traceability Rule
Sara M. Klock
The U.S. Food and Drug Administration (FDA) recently announced a "traceability recordkeeping" proposed rule, which would require entities along the entire food supply chain to establish and maintain records containing information on critical tracking events in the supply chain for designated foods, such as growing, shipping, receiving, creating and transforming the foods. Under the Food Safety Modernization Act (FSMA), FDA is required to address foodborne illness outbreaks through a recordkeeping requirement; and the goal of the proposed rule is to "improve" the agency's ability to "rapidly identify and trace foods that may be causing illness." If implemented, the proposed rule would allow "FDA [to] follow the movement of listed food products and ingredients both backward and forward throughout the supply chain." FDA's proposed rule identifies a tentative list of foods, such as cheese, nut butter, leafy greens and fresh-cut fruits and vegetables that would be subject to the traceability recordkeeping requirements. In practice, the proposed rule would require establishing and maintaining records containing and linking a traceability lot code, and sharing this information with the next party in the supply chain. The agency will accept comments until Jan. 21, 2021.
Other FDA Guidance
Nathan A. Adams IV
The FDA and the Occupational Safety and Health Administration (OSHA) have issued an Employee Health and Food Safety Checklist for Human and Animal Food Operations During the COVID-19 Pandemic.
To help minimize supply chain disruptions on product availability due to the pandemic, the FDA has issued a guidance document to provide additional temporary flexibility in food labeling requirements to manufacturers and vending machine operators.
DISCLAIMER: Please note that the situation surrounding COVID-19 is evolving and that the subject matter discussed in these publications may change on a daily basis. Please contact your responsible Holland & Knight lawyer or the author of this alert for timely advice.
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.