April 6, 2022

Food and Beverage Law Update: April 2022

Holland & Knight Update
Nathan A. Adams IV | Melissa Gold


"Product of the U.S.A." Label Not Subject to State Deceptive Trade Law

Nathan A. Adams IV

In Thornton v. Tyson Foods, Inc., No. 20-2124, 2022 WL 727628 (10th Cir. March 11, 2022), a consumer who purchased beef from retail stores filed a class action complaint against meat processors, alleging that their "Product of the U.S.A." labels deceived her and other consumers into paying higher prices for beef based on the mistaken belief that it originated from cattle born and raised in the United States. A multi-generational rancher in New Mexico filed a separate class action complaint alleging that he and other ranchers were paid less for their domestic cattle as a result of meat processors' conduct and, more specifically, as a result of placing the label on already-slaughtered beef that they import into the country. The cases were consolidated. The district court dismissed the complaints for violations of the unjust enrichment, breach of warranty, violation of the New Mexico Unfair Practices Act, violation of state antitrust law and false advertising. A split court of appeals affirmed the dismissal on the grounds that an express preemption provision of the Federal Meat Inspection Act preempted the deceptive labeling claims notwithstanding that a label was optional. That provision prohibits states from imposing any "labeling … requirements in addition to, or different than" the federal requirements. Under federal law, the meat processors' products were not misbranded; the labels were pre-approved by the Food Safety and Inspection Service (FSIS). The FSIS manual states that the label "applie[s] to products that, at a minimum, have been prepared in the United States" and does not "mean that the product is derived only from animals that were born, raised, slaughtered and prepared in the United States."

"Biologically Appropriate" and "Fresh Regional Ingredients" on Label Not Actionable

Nathan A. Adams IV

In Song v. Champion Petfoods USA, Inc., No. 20-3689, 2022 WL 677895 (8th Cir. March 8, 2022), consumers filed a putative class action lawsuit alleging that they were misled by claims made on packages of dog food that the food was "biologically appropriate" and included "fresh regional ingredients." The plaintiffs sued for violations of consumer protection statutes, fraudulent misrepresentation and fraudulent concealment. The court of appeals determined that the district court properly dismissed the plaintiffs' claims. Under Minnesota law, the first claim did not indicate to the ordinary reasonable consumer a complete absence of heavy metals, and the second did not misleadingly indicate that all of the ingredients were fresh and regional. The plaintiffs conceded that heavy metals occur naturally in meat and fish. Although not all ingredients were fresh and sourced regionally, some were, and the reasonable consumer would not assume all were.

Data Breach

Petition for Permission to Appeal Class Action Certification Against Restaurant Chain Denied

Melissa Gold

In re Sonic Corp., No. 20-0305, 2021 WL 6694843 (6th Cir. Aug. 24, 2021) concerns a data breach against Sonic Corp. and its affiliates and subsidiaries experienced between April 2017 and October 2017, allegedly compromising payment card data from millions of transactions at hundreds of its stores. In response to Sonic's data breach, at issue class actions were consolidated and transferred to the U.S. District Court, N.D. Ohio, Eastern Division.

On Nov. 13, 2020, the district court certified a class with the following criteria: 1) all banks, credit unions and financial institutions in the U.S., 2) that received notice, 3) that took action to reissue credit or debit cards or reimbursed a compromised account, and 4) that were involved in the Sonic data breach. In response, Sonic filed a petition for permission to appeal the order certifying a class action to recover economic damages incurred by various financial institutions and credit unions arising from their reissuance of cards and reimbursement of accounts following the data breach. In Sonic's petition for permission to appeal, it conceded that the first two class criteria are administratively feasible and that it can determine which financial institutions received notice of the breach, but contended that the remaining criteria require individualized assessment and self-identification by each plaintiff instead of reference to evidence within Sonic's control or that of a third party.

The U.S. Court of Appeals for the Sixth Circuit denied Sonic's petition for permission to appeal and granted the financial institutions' motion for leave to file a reply. First, the Sixth Circuit held it has never rejected self-identification as a means of determining membership when there are records verifying that determination. Second, information from the individual financial institutions, cross-referenced with third parties, can then establish that an institution had accounts impacted by the breach, and that they reissued potentially compromised cards or reimbursed customers for losses sustained on those accounts. Third, whether the financial institutions took action as a direct result of the Sonic data breach goes to the causation element for establishing negligence, and not whether the class is ascertainable. Finally, the court considered Sonic's annual revenue to decide that the cost of continuing the litigation should not present such a barrier that subsequent review is hampered.


Business Interruption Coverage Not Available for Shutdown Orders

Nathan A. Adams IV

Restaurants seeking business interruption coverage for government shutdown orders continue to lose in court. For example, SA Hospitality Group LLC, which owns a group of food service establishments, purchased standard all-risk commercial property insurance for itself and for the other plaintiffs and sought business interruption coverage for the period in which it was unable to use its facilities due to government orders that limited in-person dining services due to COVID-19. In SA Hospitality Gp., LLC v. Hartford Fire Ins. Co., No. 21-1523-cv, 2022 WL 815683 (2d Cir. March 18, 2022), the court affirmed the plaintiffs' lawsuit. The plaintiffs' insurance policy included business interruption coverage as follows: "We will pay ... for the actual loss of Business Income you sustain and the actual, necessary and reasonable Extra Expense you incur due to the necessary interruption of your business during the Period of Restoration due to direct physical loss or direct physical damage to property caused by or resulting from a Covered Cause of Loss… ." The district court decided that the plaintiff had not alleged a direct physical loss of or damage to property. The plaintiff argued on appeal that the governmental orders prevented it from using its property for its intended purpose, which amounted to a "direct physical loss of" the property. The appellate court ruled that this argument was foreclosed by a recent case in the Second Circuit and that no exception to the binding authority of that case applied. The appellate court also declined to certify the issue to the New York Court of Appeals.

In Hillbro, LLC v. Oregon Mutual Ins. Co., No. 3:21-cv-00382-HZ, 2021 WL 4071864 (D. Or. Sept. 7, 2021), the plaintiff operated a restaurant and bar insured by defendant. Due to closure orders issued by the state of Washington, plaintiff had to close, suspend and/or curtail its business exclusively to serve takeout food for off-premises consumption leading to financial losses. The district court dismissed the plaintiff restaurant's putative class action lawsuit for breach of the plaintiff's insurance policy, which states, "We will pay for direct physical loss of or damage to Covered Property at the premises described in the Declarations caused by or resulting from any Covered Cause of Loss," defined as "[r]isks of direct physical loss" unless otherwise limited or excluded under other provisions of the Property coverage." Interpreting these provisions in light of dictionary definitions of terms such as "physical," the court decided that "for a Covered Cause of Loss to have occurred, Plaintiff must demonstrate that COVID-19 or Governor [Jay] Inslee's executive orders caused harm to or destroyed its business property or dispossessed plaintiff of its business property."

The Civil Authority coverage portion of the policy states, "We will pay for the actual loss of Business Income you sustain and necessary Extra Expense caused by action of civil authority that prohibits access to the described premises due to direct physical loss of or damage to property, other than at the described premises, caused by or resulting from any Covered Cause of Loss." The court determined that this provision "requires that an action of civil authority prohibited access to Plaintiff's restaurants due to the loss, destruction, dispossession of or injury to property other than Plaintiff's property for coverage to apply." Construing the plaintiff's allegations in the light most favorable to plaintiff, the court determined that "the losses plaintiff alleges are purely economic and not the result of any 'direct physical loss of or damage to property.' " Therefore, no coverage exists under the policy.

In GCDC LLC v. Sentinel Ins. Co., Ltd., Civil Act No. 20-1094, 2021 WL 4438908 (D.D.C. Sept. 28, 2021), the plaintiff was a restaurant that specializes in grilled cheese sandwiches. To comply with local governmental orders relating to COVID-19, the plaintiff had to modify its floorplan to keep diners spread far apart and later discontinued all indoor dining. The plaintiff filed a putative class action seeking, inter alia, a declaration that its income losses are covered by the defendant's insurance policy. The defendant's policy states, "We will not pay for loss or damage caused directly or indirectly by" the "[p]resence, growth, proliferation, spread or any activity of fungi,' wet rot, dry rot, bacteria or virus." The complaint referred to COVID-19 as a virus, alleged that the District of Columbia issued the orders to slow its spread and alleged that those orders led to the plaintiff's loss of income. "Under the policy, that's the ballgame. Coverage is barred." Even if the exclusion did not apply, the court added that the governmental orders were not "Covered Cause[] of Loss" or "risks of direct physical loss."

Similar rulings dependent upon a pathogen exclusion were entered in Creative Bus. Inc. v. Covington Specialty Ins. Co., No. 2:20-cv-02452-JTF-ATE, 2021 WL 4191466 (W.D. Tenn. Sept. 9, 2021) (mandated closure and capacity limitations on the insured's restaurant due to COVID-19 did not constitute "direct physical loss of or damage to" the insured property, as required for business income coverage under the policy, but even if the coronavirus were present at the insured premises, the policy's pathogen exclusion precluded coverage) and Caterer's in the Park, LLC v. Ohio Sec. Ins. Co., No. 20-6867, 2021 WL 4994463 (D. N.J. Oct. 26, 2021) (virus exclusion excludes the plaintiff's alleged losses from coverage).

In Nari Suda LLC v. Or. Mut. Ins. Co., No. 3:20-cv-01476-HZ, 2021 WL 4067684 (D. Or. Sept. 6, 2021), restaurants filed putative class action claims for breach of contract, breach of implied covenant of good faith and fair dealing, declaratory relief and violation of California's unfair competition law against their insurer due to its denial of their claims under business owners' policies seeking coverage for financial losses resulting from state and local government closure orders issued in response to COVID-19. The policy provided for payment for the actual loss of business income sustained due to the necessary suspension of their operations if the suspension was "caused by direct physical loss of or damage to property at the described premises." However, the policy contained an exclusion related to the enforcement of an ordinance or law. The court ruled that the "absence of facts demonstrating any physical loss or damage to their business property is fatal to Plaintiffs' claim." The court ruled that the plaintiffs' losses are purely economic. "Direct physical loss of or damage to property" does not include a loss of use or impairment of functionality of undamaged property for its intended purpose. Because the plaintiff failed to demonstrate that coverage exists, the court declined to determine whether any exclusion from coverage applies.

Wage and Hour

Court Denies Effort to Enjoin New 80/20 Rule

Nathan A. Adams IV

In Restaurant Law Ctr. v. U.S. Dep't of Labor, No. 1:21-cv-1106-RP, 2022 WL 526243 (W.D. Tex. Feb. 22, 2022), the plaintiffs unsuccessfully sought permanently to enjoin the newest version of the so-called 80/20 rule. As background, under the original 80/20 rule adopted in 1988, the U.S. Department of Labor (DOL) indicated that if an employee spent "in excess of 20 percent" of the employee's time on untipped work, that work was performed more than "occasionally," and thus "no tip credit may be taken." In November 2018, DOL announced that it was abolishing the limitation on duties related to the tip-producing occupation if they were performed "contemporaneously" or within a "reasonable time" before or after "direct-service duties." Lower courts widely disregarded the new guidance. The DOL issued a notice of proposed rulemaking on June 23, 2021. In response to comments from the restaurant industry and others, DOL issued a final rule on Oct. 29, 2021. The rule went into effect on Dec. 28, 2021.

The new 80/20 rule clarifies that the tip credit is available only for hours spent working in the tipped occupation. It codifies the 80/20 rule and adds a 30-minute limitation on non-tipped work allowable when taking the tip credit. It elaborates on who qualifies for the tip credit, stating that an employee is "engaged in a tipped occupation when the employee performs work that is part of the tipped occupation" and "may only take a tip credit for work performed by a tipped employee that is part of the employee's tipped occupation." It sets out the following three-part framework to classify tipped work as: 1) work that is part of the tipped occupation and produces tips; 2) work that is part of the tipped occupation and directly supports tip-producing work (subject to the 30-minute rule) though it is not directly tip-producing; and 3) other, non-tipped work that is not subject to the tip credit. The plaintiffs challenged the rule on the grounds that it creates a new definition of "tipped occupation" that lacks support in the Fair Labor Standards Act (FLSA).

The court denied injunctive relief because it determined that the plaintiffs failed to meet their burden to show that they will be irreparably harmed without the injunction. The plaintiffs "claim the main source of harm from the Rule is in the compliance costs it entails." But the court decided the plaintiffs' arguments and evidence of irreparable harm was speculative.

Court Certifies Delivery Driver Wage and Hour Class Action Lawsuit

Nathan A. Adams IV

In Hong v. Haiku @ WP, Inc., No. 19 Civ 5018 (NSR), 2022 WL 263575 (S.D. N.Y. Jan. 28, 2022), a former delivery driver for Haiku Asian Bistro filed a putative class action alleging wage and hour violations under the FLSA and New York Labor Law for violation of the minimum wage for the first 40 hours per week and less than 1.5 times the minimum wage for each hour over 40 hours per week.

Haiku employed approximately three to five delivery persons, eight to nine sushi bar workers, five waiters, five cooks, three fry wok workers and two cashiers. The plaintiff claimed he had to work through his break two days per week, did not have a fixed time for lunch or dinner, $10 per week was deducted in cash tips, $20 to $25 per week was deducted as a meal credit and $24 per week was deducted for transportation. He received no weekly pay statement or notice of the deductions and was not informed of his hourly pay rate nor any tip deductions toward the minimum wage. The plaintiff used his own vehicle and was not reimbursed for gasoline or vehicle maintenance. He drove an average of 2 miles each way to deliver about 25 customer orders, totaling about 100 miles per workday. On average, two or three orders per day were outside the 4.5-mile delivery radius, and for making such deliveries, he earned an extra $3 in tips.

The court granted in part and denied in part the plaintiff's motion for class certification. The court granted the motion with respect to the conditional certification of delivery drivers and denied the motion with respect to other non-managerial employees about whom the plaintiff failed to meet even his modest burden of showing that these waiters/waitresses, sushi chefs, cashiers and kitchen workers are similarly situated to him. Because the plaintiff alleges that the violations of wage and hour law were willful, the court permitted notice to be distributed to all potential plaintiffs employed within three years of the date of the filing of the complaint and deferred consideration of the statute of limitations until after the opt-in period.

The court required the defendants to produce electronic and other contact information for these employees and specified what the notice must contain: 1) the purpose of the notice; 2) the nature of the lawsuit filed and the relief being sought; 3) the proposed class composition; 4) the legal effect of joining the lawsuit; 5) the fact that the court has not taken any position regarding the merits of the lawsuit; 6) how to join the lawsuit; 7) the purely voluntary nature of the decision and legal effect of not joining the lawsuit; 8) the prohibition against retaliation; 9) the relevant contact information for any inquiries; 10) warning that opt-in plaintiffs may be required to provide information, appear for deposition or testify in court; and 11) disclose the fee arrangement between plaintiff's counsel and any opt-in plaintiffs. The court set the opt-in period at 60 days, although plaintiffs requested 90 days.


Pre-Dispute Arbitration Clauses No Longer Enforceable Against Sexual Harassment Claims

Nathan A. Adams IV

The Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021 amended the Federal Arbitration Act (FAA) to enable employees to set aside pre-dispute arbitration agreements requiring them to arbitrate disputes involving nonconsensual and/or unwanted sexual acts or contact, advances, physical contact that is sexual in nature, sexual attention, sexual comments and propositions for sexual activity, conditioning employment benefits on sexual activity or retaliation for rejecting unwanted sexual attention. The amendment applies whether the claims at issue arise under federal, state, local or tribal law.

In the event of the same conduct, the employee may also set aside pre-dispute joint-action waivers that bar employees from participating in joint, class or collective actions concerning sexual assault or harassment claims brought in a judicial, arbitral, administrative or any other forum. The amendment also requires courts, rather than arbitrators, to determine both the applicability of HR 4445 to a given arbitration agreement and the validity and enforceability of any agreement to which the bill applies, regardless of whether the agreement at issue delegates such authority to an arbitrator. The amendment states that it does not apply retroactively to any claims that arose or accrued prior to its enactment. The amendment does not apply to conduct other than sexual assault and harassment. Accord Levy v. AT&T Servs., Inc., No. 21-11758, 2022 WL 844440 n.1 (D.N.J. March 22, 2022) (because plaintiff brings age discrimination claims, the amendment does not apply).

The U.S. House of Representatives passed HR 4445 by a vote of 335 to 97 on Feb. 7, 2022. The Senate passed the bill by voice vote without amendment on Feb. 10, 2022. President Joe Biden signed the amendment on March 3, 2022.


Drive-Thru-Only Policy Not an ADA Violation

Nathan A. Adams IV

In Szwanek v. Jack in the Box, Inc., No. 20-16942, 2021 WL 5104372 (9th Cir. Nov. 3, 2021), the court affirmed dismissal of the plaintiffs' putative class action lawsuit grounded on the claim that the defendant violated Title III of the Americans with Disabilities Act (ADA) and the Unruh Civil Rights Act by closing inside seating at night in two of its restaurants and serving food solely through drive-thru windows that are available only to customers in motor vehicles. The court determined that a facially neutral policy violates the ADA only if it burdens a plaintiff "in a manner different and greater than it burdens others." The court decided that the defendant's policy burdens the plaintiffs in the same manner as able-bodied individuals who wish to purchase food when indoor dining is not available and do not drive or have access to motor vehicles. The court added there are no ADA regulations on point and no indication that Congress meant to address this situation.

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, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.

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