Antitrust Law Daily Wrap Up, ADVERTISING—E.D.N.Y.: Frito-Lay may be held liable for “all-natural” labeling, (Sep 3, 2013)

By Jody Coultas, J.D.

The federal district court in Brooklyn, New York, has declined to dismiss state consumer protection law class action claims filed against Frito-Lay North America, Inc. and PepsiCo by purchasers that were allegedly deceived by Frito-Lay products labeled as “all-natural” that contained genetically-modified organisms (In re Frito-Lay North American Inc. All Natural Litigation, August 29, 2013, Mauskopf, R.)

Tostitos, SunChips, and Fritos Bean Dip products included labels stating that the products were made with all-natural ingredients. The purchasers alleged that the products contained unnatural, genetically-modified corn. Genetically-modified organisms (GMOs) are organisms in which the genetic material has been altered in a way that does not occur naturally. The purchasers sought to represent nationwide classes seeking declaratory and injunctive relief and monetary damages; a multi-state class of residents of New York, California, and Florida; or separate state-based classes for violations of the state consumer protection laws against Frito-Lay and parent company PepsiCo.

PepsiCo could not be held liable for the actions of Frito-Lay in this case, according to the court. PepsiCo argued that it should be dismissed because the allegations failed to show that PepsiCo should be held liable for the acts of its subsidiary. There was no evidence that PepsiCo had any role in the decision to label the products “All Natural.” Also, there was no evidence that PepsiCo marketed, advertised, or distributed the products at issue. PepsiCo was merely acting as a parent company, who exercised a considerable degree of control over Frito-Lay.

The purchasers could not proceed against PepsiCo on an alter ego theory of liability, according to the court. In order to pierce the corporate veil and hold PepsiCo liable for the acts of its subsidiary, the purchasers needed to show that PepsiCo wholly ignored the separate status of Frito-Lay and so dominated and controlled its affairs that the separate existence was a sham. The allegations were insufficient to show that PepsiCo and Frito-Lay were inextricably intertwined or what injustice or unfairness was presented by PepsiCo’s misuse of the corporate form.

The primary jurisdiction doctrine did not apply to the case, according to the court. The doctrine applies when the expert and specialized knowledge of a federal agency should be ascertained before judicial consideration of the legal claim. The Food and Drug Administration (FDA) has not promulgated any formal rule or policy explaining when a food may be labeled “natural,” and a formal definition of the term would not dispose of the state law claims.

Because the purchasers had Article III standing, the court allowed the class action claims based on the products that the purchasers did not buy to continue. To satisfy the Article III standing requirement, the purchasers must demonstrate (1) a personal injury in fact (2) that the challenged conduct of Frito-Lay caused and (3) which a favorable decision will likely redress. There was no issue as to whether the purchasers had standing to assert claims based on their purchase of certain Tostitos, SunChips, and Bean Dip products. The purchasers were injured as a result of those purchases because they paid higher prices than they would have otherwise paid, or not paid at all, for a product that they contended was not, in fact, all natural. The issue of standing on behalf of class members that bought other products was a question for a class certification hearing.

The New York General Business Law claims that were brought by and on behalf of non-New York purchasers were dismissed by the court. The purchasers argued that the issue of whether they can maintain claims under the GBL was a question for a class certification motion, not a motion to dismiss. However, the restriction of GBL claims to New York plaintiffs was substantive rather than procedural.

Frito-Lay was not protected by either the statutory or the common law safe harbor provisions, according to the court. It was unclear whether the FDA’s voluntary guidance on “natural” labeling was “federal law” within the meaning of the New York or Florida safe harbor provision. Also, there was nothing in the guidance that specifically permitted Frito-Lay to label its products “all-natural” when they contain GMOs. California’s common law safe harbor states that courts may not use the Unfair Competition Law to condemn the actions the Legislature permits. However, Frito-Lay failed to show that the California Legislature allowed or even regulated “all-natural” labeling.

Finally, the claims met the heightened pleading standard of Federal Rule of Civil Procedure 9(b), according to the court. To meet the Rule 9(b) standard, a plaintiff must not only give the who, what, and when with regard to an alleged false or misleading statement, but also give particulars as to the respect in which the plaintiff contended the statements were fraudulent. The purchasers alleged that PepsiCo and Frito-Lay falsely stated that the products were “All Natural,” but in fact, were not, because they contained GMOs, when the purchases took place. Further, they alleged reliance on the product packaging.

The case is No. 12-MD-2413 (RRM)(RLM).

Attorneys: Reginald Von Terrell (The Terrell Law Group) for Dennis Patrick. Andrew Santo Tulumello (Gibson Dunn & Crutcher LLP) for Frito-Lay North America, Inc.

Companies: Frito-Lay North America, Inc.; PepsiCo.

Cases: Advertising StateUnfairTradePractices NewYorkNews