The Rise And Possible Fall Of Class Actions In False Advertising Litigation

Section 43(a) of the Lanham Act (the “Act”) limits standing to sue for false advertising to competitors and others who claim to have suffered competitive injury as a result of the defendant’s advertising. Consumers do not have standing under the Act.[1] Damages are seldom recovered since it is difficult to isolate the effect the challenged advertisement has on market share. Because attorneys representing the plaintiff and the defendant are typically paid on an hourly basis – and the primary relief sought is injunctive – most Lanham Act cases are fast paced and there is an incentive for both plaintiff and defense counsel to resolve the matter as expeditiously and cost-effectively as possible. Even so, the substantial discovery associated with a Lanham Act case as well as the prospect of a preliminary injunction hearing make them expensive. As a result, many prospective plaintiffs elect to challenge a competitor’s advertisement before the National Advertising Division (“NAD”), a self-regulatory body within the advertising industry, where there is no discovery and neither damages nor attorney fee awards are available.

The upshot of all of this is that traditionally the litigation risk associated with advertising consumer goods, while not insubstantial, was somewhat minimized. Most suits were initiated by competitors who were paying their own lawyers on an hourly basis and typically did not file suit with the hopes of recovering substantial monetary damages, but rather to stop the offending ads.

I. Economic Factors And Stepped Up Enforcement By The FTC And FDA Lead To An Increase In False Advertising Class Actions Filings

The poor economy, heightened pleading and liability standards for securities class actions and the Supreme Court’s landmark decision in AT&T Mobility LLC v. Concepcion[2] have all led to a decrease in filings of new putative class actions in the securities and financial products industries. At the same time, the FTC and FDA have stepped up enforcement against advertisers of consumer goods, leading many class action lawyers to seize on false advertising suits as the “next big thing.”

The FTC has entered into consent orders and recovered substantial monetary awards as consumer redress in actions it has filed against advertisers.[3] Plaintiffs' lawyers have filed a number of state law consumer protection and false advertising class actions on the heels of these agency actions. Kellogg, Dannon, Coca-Cola, Nestlé and Reebok have all seen class actions filed after the FTC filed complaints about their marketing of different products. To make matters worse, plaintiffs' lawyers now appear to be reviewing National Advertising Division case reports for possible lawsuits.[4]

II. Plaintiffs Have Largely Been Unsuccessful Litigating False Advertising Class Actions

Despite the influx of putative class actions, defendants have largely been successful in avoiding class certification and/or getting the suits dismissed at the summary judgment stage.

A. Courts Have Frequently Rejected Class Certification On Typicality And Predominance Grounds

In Fine v. ConAgra Foods, Inc.[5] the plaintiffs sued ConAgra claiming that the company misled consumers when it advertised its Orville Redenbacher popcorn as “no diacetyl added.” The Central District Court of California denied class certification for a number of reasons, including that the plaintiff had not asserted that all of the class members relied on defendants’ alleged misrepresentations when they purchased the popcorn and plaintiff could not establish typicality for the same reason.

In Weiner v. Snapple Beverage Co.,[6] the Southern District of New York denied class certification after finding that the plaintiffs had failed to demonstrate predominance because they had not established that class-wide proof could be used to establish that purchasers of Snapple beverages had suffered injury as a result of the “All Natural” labeling. The court further found that the plaintiffs’ claims were too individualized for common issues to predominate.

In 2009, the New Jersey Appellate Division affirmed the denial of class certification in a putative nationwide class action where the plaintiff alleged that the maker of the dietary supplement Relacore deceptively marketed it for use in cutting fat and stress, noting that there were a number of individual factors that “would necessitate an evidentiary hearing for each class member” on the deceptive advertising claims.[7]

B. Courts Have Declined To Apply The Prior Substantiation Doctrine To Claims Brought By Private Plaintiffs

Courts have also held that the FTC and FDA – not private plaintiffs – have jurisdiction to prosecute claims that the advertiser lacked adequate substantiation for the claim that they were making. Courts have dismissed, or awarded summary judgment to, defendants in a number of cases where the plaintiffs attempted to piggyback off FTC complaints and FDA warning letters, alleging that the defendants lacked a reasonable basis for the claims that they were making.

For example, very recently, on July 16, 2012, the United States District Court for the District of New Jersey granted summary judgment in favor of Nestlé in Scheuerman, et al. v. Nestlé Healthcare Nutrition, Inc., No. 2:10-cv-03684 (D.N.J.), a putative class action challenging Nestlé’s advertising and marketing campaign for its BOOST® Kid Essentials Drink (BKE) product. The plaintiff alleged that Nestlé made express and implied claims that BKE provided a number of health benefits, including immunity protection, a strengthened immune system, reduced absences from daycare or school due to illness, reduced duration of diarrhea, and protection against cold and flu viruses. Plaintiff also claimed that Nestlé advertised that those challenged health benefits were “clinically" shown.

The district court held that the plaintiffs could not prevail on their theory of liability – that Nestlé lacked substantiation for the challenged advertising at the time the claims were made (the “prior substantiation doctrine”). Instead, plaintiffs would be required to come forward with evidence demonstrating that the challenged claims were affirmatively false, not merely that they were not supported by competent and reliable scientific evidence. The refusal to allow plaintiffs to import the prior substantiation doctrine into private class actions is a strong defense in false advertising class actions, particularly those that are attempting to bootstrap off FTC enforcement proceedings.

The Eastern District of California reached the same result in Fraker v. Bayer Corp., a 2009 putative class where the plaintiff filed her complaint against Bayer less than two years after the FTC simultaneously filed and settled a lawsuit against Bayer alleging violations of the Federal Trade Commission Act (the “FTC Act”). The plaintiff claimed that the Bayer Corporation lacked substantiation for its “One-A-Day Weight-Smart” vitamin supplement advertising claims. The district court dismissed the complaint, holding that the failure to possess a reasonable basis consisting of prior substantiation is not in and of itself a cognizable claim under California law. The court further described the plaintiff’s complaint as an “attempt to shoehorn an allegation of violation of the FTC Act … into a private cause of action,” and that the FTC, not a private plaintiff, retains exclusive jurisdiction over ensuring that advertising claims are substantiated.[8]

Finally, in Pelkey v. McNeil Consumer Healthcare,[9] the Southern District of Florida rejected a plaintiff’s attempt to turn an FDA warning letter into a Florida Deceptive and Unfair Trade Practices Act (the “FDUTPA”) violation. The FDA issued McNeil Consumer Healthcare a warning letter advising the company that its “Listerine Total Care Anticavity Mouthwash” (“Total Care”) advertising was misleading and violated the Food Drug & Cosmetic Act (“FDCA”). A week later, the plaintiff filed a putative class action alleging that McNeil falsely and deceptively advertised its mouthwash in violation of the FDUTPA.[10] The district court dismissed plaintiff’s complaint, agreeing with McNeil that the plaintiff “cannot base her claims on an allegation that Total Care is misbranded under the FDCA as this is a federal statute for which no private right of action exists” and held that the “FDCA does not create a private right of action.”

III. Notwithstanding The Hostile Litigation Climate, Class Counsel Has Frequently Been Able To Extract Favorable Settlements

Despite the limited success plaintiffs' lawyers have had actually litigating these cases, the pace of new suits has not slowed. Attorneys can find plaintiffs easily and the cases are inexpensive to prepare and file, but they can be extremely expensive to defend. While plaintiffs' lawyers have not recovered large verdicts through litigation, many cases are quietly settled.

For example, in 2009, the Dannon Company settled a nationwide class action by agreeing to change its labeling and marketing materials and creating a $35 million fund to reimburse qualified consumers. The original case was filed in California in January 2008 and was followed by similar class actions in Ohio, Florida and Arkansas charging Dannon with making false representations regarding the health benefits of its Activia, Activia Lite and DanActive yogurts.

To resolve claims that Enfamil LIPIL infant formula was falsely advertised as the only formula that contained certain beneficial ingredients, Mead Johnson agreed to provide $8 to $12 million worth of cash refunds and pay more than $3.5 million to class action counsel.

Facing significant legal costs in defending these suits as well as the risk of a substantial damages award, many companies are electing to do what these companies did and settle these suits early on, rather than waiting to see if they can successfully avoid class certification or prevail on summary judgment.[11]

IV. What Can Advertisers Do To Protect Themselves?

Any advertisement touting performance, health or nutritional benefits should receive additional scrutiny to ensure that they do not exaggerate the truth. While avoiding all litigation may not be possible, setting up an appropriate vetting process for those advertisements that create the most exposure is the most important preventative measure that companies can take. All advertisers should have their advertising and promotional material, including their websites, audited. Procedures should be in place for reviewing all ad claims and for determining what kind and amount of substantiation is needed to support a particular claim.