Antitrust Law Daily Wrap Up, STATE UNFAIR TRADE PRACTICES—N.D. Cal.: Claims that soft drink manufacturer violated California CLRA and UCL survive, (Jun 8, 2015)

By Michael Menzhuber, J.D., LL.M.

A soft drink manufacturer’s motion to dismiss a consolidated amended complaint (CAC), which alleged violations of California’s Proposition 65 (Prop. 65), California’s Consumer Legal Remedies Act (CLRA), and California’s Unfair Competition Law (UCL), was granted in part and denied in part by the federal district court in San Francisco (Sciortino v. Pepsico, 2015, Chen, W.).

Background. PepsiCo, Inc. (Pepsi), manufactures Pepsi, Diet Pepsi and Pepsi One (collectively, “Pepsi products”). A Consumer Reports testing revealed that the Pepsi products each contained 4-Mthylimidazole (4-Mel), a carcinogenic chemical) at levels above the safe harbor threshold (safe harbor) set by Prop. 65.

Mary Hall, Kent Ibusuki, and Kelly Ree brought an action against Pepsi, on behalf of themselves and a putative class of California consumers (collectively, “plaintiffs”) who purchased Pepsi beverages. In their CAC, Hall and Ibusuki (individuals) alleged a violation of Prop. 65. The plaintiffs also alleged: (1) a CLRA violation, based on Pepsi’s alleged active concealment and failure to warn that Pepsi beverages contain 4-Mel level in excess of the Prop. 65 safe harbor; and (2) a UCL violation, based on Pepsi’s alleged unfair, unlawful, and fraudulent business practices. The plaintiffs’ action sought damages, restitution, and injunctive relief.

Pepsi filed a motion to dismiss on the grounds that: (1) the individuals failed to comply with Prop. 65’s mandatory notice provisions before filing suit; (2) the plaintiffs’ California state law claims were preempted by the federal Food, Drug, and Cosmetic Act (FDCA) and the Food and Drug Administration’s (FDA) regulations; and (3) the district court should not adjudicate the action because the FDA has primary subject matter jurisdiction and another Prop. 65 action was pending in state court.

The court granted Pepsi’s motion to dismiss Ibusuki’s Prop. 65 claim. However, it denied Pepsi’s motion to dismiss Hall’s Prop. 65 claim and the plaintiffs’ state law claims under California’s CLRA and UCL. The court also denied Pepsi’s motion to stay or dismiss under primary jurisdiction and abstention doctrines.

Proposition 65 (Prop. 65) Notice Requirements. California’s Prop. 65 warning requirement requires that a business provide a clear and reasonable warning if a product that is available to the public contains a chemical known to cause cancer or reproductive toxicity and the level of that chemical exceeds the “no significant risk level.” Private enforcement of Prop. 65’s warning requirement requires a pre-suit notice that must be sent at least 60 days before a private person commences an action.

Prior to filing the CAC, the individuals, in their original complaint, did not file an action directly under Prop. 65 and did not provide the 60-day pre-suit notice required for an action under Prop. 65. Pepsi moved to dismiss the individuals’ subsequent Prop. 65 actions on the grounds that their initial complaint effectively “recast” their Prop. 65 claims as state law claims.

The court granted Pepsi’s motion to dismiss, with respect to Ibusuki, and denied the motion to dismiss, with respect to Hall. The court determined that Ibusuki’s initial complaint was derivative of the Prop. 65 warning requirement and, therefore, subject to the Prop. 65 pre-suit notice requirement. The court determined that Hall’s initial complaint was not derivative of a Prop. 65 warning requirement, and, therefore, subject to the notice requirement because it was based on: (1) Pepsi’s public actions which, allegedly, misrepresented its actions; and (2) Pepsi’s failure to disclose, in its advertising and its public statements, the presence of 4-Mel in its Pepsi products, irrespective of Prop. 65.

Safe Harbor & Exposure Limits. Pepsi argued that the plaintiffs’ entire lawsuit rested on the mistaken belief that exceeding the Prop. 65 threshold 4-Mel level in a single serving of constituted a violation of Prop. 65 on the grounds that the plaintiffs’ methodology did not align with that of Prop. 65, which calculates consumption based on lifetime exposure patterns. The court determined that the plaintiffs’ CAC adequately pled that the Pepsi products did not fall within the safe harbor established by Prop. 65 and that any challenge to the plaintiffs’ calculation methodology could be done at summary judgment or at trial.

Express Preemption. The plaintiffs alleged that Pepsi failed to include a health warning, even though the 4-Mel level from the coloring of the Pepsi beverages was at a level above Prop. 65’s safe-harbor level. Pepsi argued that, because mandating a Prop. 65 warning would impose a labeling requirement that was not identical to the requirement of the FDCA, the plaintiffs’ action was subject to the Nutrition Labeling and Education Act (NLEA). The court found that there was no conflict with the NLEA labeling requirements because Prop. 65’s regulation of carcinogenic warnings did not alter FDA sanctioned labels on coloring and were, therefore, not inconsistent with the letter or purpose of the NLEA.

The court determined that, even if the Prop. 65 warning requirement somehow improperly added a non-identical burden on labeling or conflicted with the FDA’s caramel color listing, the savings clause (Pub. L. No. 101-535, § 6(c)(2)), which saves state laws requiring food safety warnings from express preemption, applied. The court based its determination on its finding that: (1) the language of the Section 6(c)(2) expressly excluded warnings concerning the safety of food from the express preemption provision; (2) legislative history supports a broad construction of the savings clause; (3) preemption is particularly disfavored where state laws, in exercise of traditional and historic police powers to protect health and safety, are rendered ineffective; and (4) food manufacturers have petitioned Congress to enact legislation expressly preempting state warning requirements that the FDA has deemed safe but no such legislation has been passed. The court also determined that the Color Additive Amendments, which established an elaborate system for the regulation of color additives in the interest of safety, and the Delaney Clause, under which the FDA issued its safety finding, contained no express preemption provision.

Lastly, the court determined that the plaintiffs’ claims, based on the allegation that Pepsi materially misstated the steps that it had taken to conform its Pepsi beverages to state regulations, were deceptive claims regarding a consumer product. The court concluded that these claims were not preempted, expressly or otherwise, because there was no provision in the FDCA or FDA regulations that preempted claims based on such alleged misrepresentations.

Implied Preemption. The court addressed the issue of implied preemption by considering both field and conflict preemption. The court determined that the plaintiffs’ claims were not barred by field preemption because the absence of a federal private consumer remedy to enforce the FDCA evidenced Congress’s determination that widely available state rights of action provide appropriate relief for injured customers.

The court noted that the NLEA left open the possibility that warning requirements regarding food safety may be preempted by federal law not amended by the NLEA. The court further noted that there are two types of this conflict preemption: (1) impossibility preemption; and (2) obstacle preemption. The court determined that the “impossibility” preemption did not apply because it was not impossible for Pepsi to comply with the FDA’s labeling requirement while at the same time including a Prop. 65 warning.

The court also determined that the “obstruction” preemption did not apply because the Prop. 65 was not an “obstacle to the accomplishment and execution” of Congress’s “full purposes and objectives’ in enacting the Delaney Clause. Noting that the Delaney Clause set a minimum floor, not a ceiling, on consumer protection from carcinogens, the court found that the Prop. 65 warning requirement did not ban affected compounds permitted by the FDA but, rather, merely required a warning.

Primary Jurisdiction Doctrine. The court noted that primary jurisdiction is a consideration whenever enforcement of a claim requires resolution of issues which, under a regulatory scheme, have been placed within the special competence of an administrative body. The court determined that, despite Pepsi’s allegations regarding future FDA considerations regarding 4-Mel guidelines, the plaintiffs’ allegations regarding Pepsi’s materially misleading public statements, as well as its failure to warn under Prop. 65, did not clearly fall within the FDA’s labeling jurisdiction. Furthermore, the court determined that the issues raised by the plaintiffs’ claims did not clearly require the FDA’s expertise or would benefit from uniformity in administration. Finally, the court determined that, although both the Prop. 65 claim and the FDA regulations did involve some scientific analysis of the actual health and safety risk of 4-Mel in Pepsi beverages, invoking the primary jurisdiction doctrine would frustrate positive state law on this subject.

Abstention in Favor of Pending State Action. Pepsi also sought to dismiss on the basis of abstention, in light of a pending state action, Center for Environmental Health v. Pepsi Beverages, Co., et al., Nol RG14711020 (2014) (CEH complaint). While the court noted that abstention may be proper due to considerations of “wise judicial administration giving regard to conservation of judicial resources and comprehensive disposition of litigation.” Nakash v. Marciano, 882 F2d 1411 (1989); it also noted that such cases require the clearest of justification supporting abstention.

The court further noted eight factors to be considered in determining whether to stay a case pursuant to abstention. The court determined that one of these factors, whether the state court proceeding will resolve all issue before the federal court, was dispositive. Applying this factor, the court determined that abstention was not required because the CEH complaint only alleged a violation of Prop. 65, and not any other misstatements or UCL or CLRA violations as alleged by the plaintiffs. Also, the CEH complaint only sought recovery of civil penalties, and not monetary damages and restitution on a class basis, as sought by the plaintiffs.

The case numbers are Nos. C-14-0478 EMC; C-14-0713 EMC; C-14-1099; C-14-1105; C-14-1192; C-14-1193; C-14-1316; C-14-2023.

Attorneys: Marc Lawrence Godino (Glancy Prongay & Murray LLP) for Stacy Sciortino. Christopher Chorba (Gibson, Dunn & Crutcher LLP) for PepsiCo, Inc.

Companies: PepsiCo, Inc.

Cases: StateUnfairTradePractices CaliforniaNews