Are you vulnerable to class action?

Photo © iStockphoto.com/KLH49

Class action lawsuits are becoming more clever and aggressive according to speakers this year’s Legal, Regulatory, and Compliance Forum on Dietary Supplements, hosted by the American Conference Institute, in collaboration with The Council for Responsible Nutrition. The plaintiff’s bar and consumer protection groups can target manufacturers through class action by exploiting gaps in regulation, seeking financial compensation. While class action can be justified in some cases, the system can be abused. According to a presentation by Claudia Lewis, a partner at Venable LLP and Livia Kiser, a partner at King & Spalding, the plaintiff’s bar and consumer protection groups leading class actions are often bankrolled by industry players to use against competitors. In some cases, this may be a form of industry self-regulation, but may also motivated by profit to gain a competitive advantage. Therefore, manufacturers need to be aware of the ways they may be vulnerable to class action.

Class actions often focus on false labeling claims. Examples of this are “natural” claims and unsubstantiated product claims. Because there is no official definition of the term “natural,” companies that use the term may be vulnerable if they use “natural” on their labels but have synthetic ingredients in their product. Once case has even been brought against Nordic Naturals because its brand name has the word “natural,” even though its products did not make “natural” claims. Suits citing unsubstantiated claims have varying degrees of success for the plaintiff’s bar.

Some courts state that private litigants cannot bring action against unsubstantiated claims without broader evidence that they do in fact lack substantiation. However, this is not always consistent. For example, in the recent “Joint Juice” case, a jury awarded $1.49 million in actual damages based on approximately 165,000 units sold during the relevant time period, or about $9 per beverage. According to a panel of lawyers that included Mark Brian Levine, associate general counsel, Reckitt Benckiser, Jasmine Wetherell, counsel, Perkins Cole, and Rohit A. Sabnis, Partner, Keller & Heckerman LLP, this case was unique because it attacked the product’s structure function claims around the joint health benefits of glucosamine and chondroitin sulfate. The product did not even make any disease claims. Therefore, even compliant products are vulnerable to class action.

While private litigants cannot enforce regulations such as the Food, Drug, and Cosmetics Act through class action, lately there has been a rise in cases that indirectly bring regulations into the equation. While typically not successful, some class actions have been attempted against CBD products and products with new dietary ingredients that have not been notified to FDA, claiming that they were falsely advertised as dietary supplements. Sometimes plaintiffs might target technical violations such as when a product manufacturer does not put the DSHEA disclaimer panel on the same panel as a structure-function claim. In the case of CBD or even “natural” claims, defendants have successfully made the argument that lawsuits cannot proceed until FDA has issued guidance, but success is not guaranteed.

Part of the reason results from class actions can vary is because of the subjective definition of a “reasonable consumer.” Essentially, plaintiffs need to demonstrate that a majority of the populace would be misled by a company’s “false advertising.” How well this is demonstrated by a plaintiff or how it may be interpreted by a jury will vary, which is why similar cases can have very different outcomes.

Manufacturers need to weigh the potential costs of settling with plaintiffs versus going to court. In some cases, one is better off settling. In fact, only about 20% of class actions end up getting filed, with many choosing to settle out-of-court. Sometimes, plaintiffs’ complaints can be flimsy, justifying a court case, but if unsuccessful, depending on the jurisdiction, damages can be steep. In the “Joint Juice” case, for example, after the verdict plaintiffs moved for an award of about $140 million in statutory damages. The plaintiffs brought these claims under the state of New York’s General Business Law (GBL) §§ 349 and 350, which generally prohibit false or deceptive advertising. For each violation of §349, there is a statutory damage of $50 and for each violation of §350, plaintiffs there is a statutory damage of $500. So, for each unit sold in the state of New York, statutory damages add up to $140 million (166,249 x $550). A hearing on the statutory damages has yet to be held, but if awarded, would set a significant precedent.