Antitrust Law Daily Wrap Up, ADVERTISING—N.D. Cal.: California unfair competition claim proceeds against Wallaby Yogurt over “evaporated cane juice” labeling, (Oct 8, 2013)

By Tobias J. Gillett, J.D., LL.M.

Purchasers of Wallaby yogurts have stated a claim under the “unlawful” prong of California’s Unfair Competition Law (UCL) over Wallaby’s labeling of the yogurts with the term “evaporated cane juice” instead of the term “sugar,” the federal district court in San Francisco has ruled (Morgan v. Wallaby Yogurt Co., Inc., October 4, 2013, Orrick, W.). However, the court found that the purchasers failed to state claims under the “fraudulent” and “unfair” prongs of the UCL, California’s False Advertising Law (FAL), or California’s Consumers Legal Remedies Act (CLRA).

The purchasers alleged that Wallaby had “misbranded” at least 17 different kinds of yogurt by labeling them with the term “evaporated cane juice,” and that they had purchased at least the blueberry, strawberry, raspberry, and vanilla flavors of Wallaby’s yogurt.

Specifically, the purchasers asserted that Wallaby employed the term “evaporated cane juice” (ECJ) on its labels, websites, and advertising to refer to the sweetener in the yogurts when the sweetener was merely “sugar” or “dried cane syrup.” The purchasers cited a Food and Drug Administration guidance letter to manufacturers advising them not to use “evaporated cane juice” as an ingredient on product labels because it was “false and misleading” and failed to comply with FDA regulations requiring the listing of ingredients by their common and usual names. Moreover, the FDA’s standard of identity for yogurt prohibited the inclusion of any “nutritive carbohydrate sweetener” not expressly allowed. Although sugar was permitted, “evaporated cane juice” was not listed as an allowed sweetener in the standard of identity.

The purchasers brought putative class action claims under the UCL, the FAL, and the CLRA, as well as for unjust enrichment. Wallaby moved to dismiss.

Standing. The court found that the plaintiffs had established standing for their claims by alleging that they purchased the allegedly mislabeled yogurts, and that they “would not have bought the products had they known the truth about them.” The court rejected Wallaby’s argument that the purchasers lacked standing because they did not “dispute that the products they purchased and consumed would have been exactly the same even if the labels had been different.” The court noted that the plaintiffs’ claim was that they had been misled, not that the products would have been different, and that Wallaby’s argument led “to the untenable conclusion that consumers have no legal recourse for intentionally misidentified products.”

Primary jurisdiction. The court declined to exercise its discretion to dismiss the case under the primary jurisdiction doctrine. Although food labeling was an area of “special competence” for the FDA, Wallaby did not provide any reason that the court would be unable to determine whether a label was misleading. Moreover, other courts from the same jurisdiction had found, in connection with nearly identical cases, that “evaporated cane juice” claims should not be dismissed or stayed on primary jurisdiction grounds. The FDA had issued informal guidance regarding whether “evaporated cane juice” labeling was consistent with the FDA’s requirements, and therefore the court was “not persuaded that the court will be required to resolve an issue of first impression without the benefit of the FDA’s opinion.”

Preemption. The purchasers’ claims were not preempted by the federal Nutrition Labeling and Education Act (NLEA), which amended the Food, Drug, and Cosmetic Act (FDCA), according to the court. The NLEA did not expressly preempt the purchasers’ claim under the “unlawful” prong of the UCL because California’s Sherman Law, on which the purchasers based their claim, expressly incorporated the FDCA, and therefore the Sherman Law did not exceed the requirements of the FDCA. The purchasers’ claims were also not impliedly preempted because the NLEA’s preemption provisions included an express savings clause stating that the NLEA “shall not be construed to preempt any provision of state law, unless such provision is expressly preempted.” Finally, the purchasers’ claims were not barred by conflict preemption because the state law mirrored the federal law, and thus a private party “would not find it impossible to comply with both.” The purchasers ‘ claims would also not conflict with Congress’s purposes and objectives because Congress had permitted state laws regulating food labeling as long as they were not expressly preempted.

Private right of action. The court rejected Wallaby’s contention that the purchasers’ claims represented an attempt to re-package a cause of action to enforce FDA regulations as state law claims. Although there was no private right of action under the FDCA, the purchasers were not seeking to enforce the FDCA, but rather to assert “strictly state law claims that happen to be based on the same requirements of the FDCA,” and existed independently of the FDCA.

Although the Ninth Circuit, in Pom Wonderful LLC v. Coca-Cola Co., 679 F.3d 1170 (2012), had held that the FDCA and the Lanham Act can conflict with each other, and therefore that the FDCA limited claims under the Lanham Act, it also had expressly restricted its holding to Lanham Act claims. The Ninth Circuit declined to address whether the plaintiff’s state law claims were also preempted, and later court decisions had “rejected the contention that state causes of action are end-runs around the FDCA and must be barred.”

Unfair Competition Law

The court explained that the UCL prohibited “any unlawful, unfair or fraudulent business act or practice,” with “unlawful,” “unfair,” and “fraudulent” each denoting “a separate and distinct theory of liability.”

Fraudulent prong. The court found that the purchasers failed to state a claim under the “fraudulent prong.” The purchasers had not shown how the term “evaporated cane juice” would be likely to mislead consumers, when the sugar content of the yogurts was displayed next to the ingredients list on the label. The court noted that the plaintiffs’ claims were based on the allegation that they would not have purchased the yogurts had they known that they contained sugar, and that if their claim was that they would purchase products that contain sugar, but not those that contain added sugar, they had to “allege that with particularity in their complaint.”

Unlawful prong. However, the court found that the purchasers stated a claim under the “unlawful” prong, which made violations of other laws independently actionable. The federal food labeling regulations appeared to prohibit using the term “evaporated cane juice” instead of “sugar,” as evidenced by the FDA’s advisory letters. The Sherman Law incorporated those regulations, and the purchasers had alleged that Wallaby had violated the Sherman Law. Although the FDA had not banned the term “evaporated cane juice,” the FDA’s guidance sufficiently expressed the agency’s views on the issue, and “an agency’s interpretation of its own regulation, even if set forth in an informal document, is controlling unless plainly erroneous or inconsistent with the regulation.”

However, the court found that Wallaby’s act of referring to “sugar” as “evaporated cane juice” did not violate the FDA’s yogurt standard of identity because the standard of identity “only regulat[d] what ingredients may be present in yogurt; it [did] not regulate what those ingredients may be called.”

Unfair prong. With respect to the purchasers’ claim under the “unfair” prong, the court noted that the California appellate courts disagreed on the appropriate definition of an “unfair” act or practice, with some holding that the practice must offend “an established public policy” or be “immoral, unethical, oppressive, unscrupulous or substantially injurious to consumers,” with the policy “tethered to specific constitutional, statutory or regulatory provisions,” and others holding that the court must “weigh the utility of the defendant’s conduct against the gravity of harm to the alleged victim.”

Here, the purchasers failed to state claim under either test, in the court’s view. The purchasers failed to identify any “specific constitutional, statutory or regulatory provisions” that Wallaby’s conduct offended, nor did they allege that the conduct was “immoral, unethical, oppressive, unscrupulous or substantially injurious to consumers.” They also failed to plead sufficient facts for the court to determine whether the utility of Wallaby’s conduct outweighed the gravity of the harm to the purchasers.

Consumers Legal Remedies Act. The court found that the purchasers failed to state a claim under the CLRA for the same reason that they failed to state a claim under the “fraudulent” prong of the UCL. Since “evaporated cane juice” was essentially sugar, Wallaby had not represented that its yogurts had characteristics, benefits, or qualities that they did not have, or represented that they were “of a particular standard, quality, or grade … if they were of another.”

False Advertising Law. For the same reasons, the purchasers also failed to state a claim under the FAL. The purchasers failed to “identify any specific advertising that Wallaby did,” apart from the yogurts’ packaging, “let alone ones that are false or that the plaintiffs relied upon.”

The case is No. 13-cv-00296-WHO.

Attorneys: Ben F. Pierce Gore (Pratt & Associates) for Frank Morgan. Kelly Marie Morrison and Kenneth Kiyul Lee (Jenner & Block LLP) for Wallaby Yogurt Co.

Companies: Wallaby Yogurt Co.

Cases: Advertising StateUnfairTradePractices CaliforniaNews