Antitrust Law Daily Wrap Up, STATE UNFAIR TRADE PRACTICES—S.D. Cal.: Class action against manufacturer of weight loss supplement survives, (Jan 29, 2014)

By Jody Coultas, J.D.

The manufacturer of weight loss supplement Hydroxycut was denied dismissal of class action consumer protection law claims alleging false advertising and misrepresentations, the federal district court in San Diego has held (In re Hydroxycut Marketing and Sales Practices Litigation, January 27, 2014, Moskowitz, B.). Related class action claims against Hydroxycut retailers were dismissed for failure to state a claim.

Purchasers of Hydroxycut filed class action consumer protection claims against manufacturer Iovate Health Services and Hydroxycut retailers for falsely marketing Hydroxycut. Specifically, the purchasers alleged that Iovate and the retailers misrepresented the effectiveness and safety of Hydroxycut.

Iovate argued that Federal Rule of Civil Procedure 23, which provides for the maintenance of class actions, did not apply to the state claims at issue because application of the Rule 23 would be outside the scope of the Rules Enabling Act. A number of the state laws involved in the suit did not allow class actions. The provisions of the state consumer protection acts prohibiting class actions were so intertwined with state rights or remedies that application of Rule 23 would violate the Rules Enabling Act, according to the manufacturer.

Iovate’s argument was based on Justice Steven’s concurring opinion in Shady Grove Orthopedic Ass’n v. Allstate Ins. Co., 559 U.S. 393 (2010). In Shady Grove, the Supreme Court used contrasting approaches to determine whether a New York statute prohibiting class actions in suits seeking penalties or statutory minimum damages precluded a federal district court sitting in diversity from entertaining a class action under Rule 23.

Application of Rule 23 to the purchasers’ state law claims did not run afoul of the Rules Enabling Act, according to the court. The Rules Enabling Act provides that rules of procedure “shall not abridge, enlarge, or modify a substantive right.” Because the Ninth Circuit had not determined how to apply Shady Grove, the court looked to pre-Shady Grove Ninth Circuit cases. Whether the state laws that prohibit class actions for unfair or deceptive practices are “procedural” or “substantive” was a difficult question with no clear answer. However, the court generally views these limitations on class actions as procedural in nature. Prohibitions on class actions do not affect the substantive rights of individuals seeking to bring claims. Rather, such prohibitions only affect how claims are processed.

The court dismissed the claims for failure to allege that the retailers participated in or controlled representations that the purchasers saw or heard before purchasing Hydroxycut. Federal Rule of Civil Procedure 9(b)’s heightened pleading standard applied to all of the consumer protection claims because the purchasers alleged a unified course of fraudulent conduct. The retailer allegedly participated in the advertising and marketing process with Iovate, adopted Iovate’s product representations as their own, and made their own false and deceptive statements about the products’ safety and efficacy. Although the purchasers alleged they were exposed to television or print advertisements, in addition to reading the product label in the store, it was unclear whether the purchasers saw or heard any representations made or adopted by the retailers, as opposed to Iovate. Also, the purchasers could not lump all the retailers together. The purchasers failed to specify which advertisements they were exposed to prior to purchase, as the claims required allegations that each retailer made, adopted, or controlled representations that purchasers saw or heard prior to purchasing Hydroxycut.

The purchasers failed to show that the retailers knew or should have known about the falsity of the advertising, according to the court. The retailers moved to dismiss the California, Florida, Louisiana, New Jersey, and New York claims on the ground that these laws require knowledge of the alleged defect. With the exception of Louisiana, knowledge was not a requirement to maintain an action based on an affirmative representation under the consumer protection laws. However, regardless of the specific knowledge requirements of the individual statutes, the purchasers’ choice to plead a unified course of fraudulent conduct involving Iovate and the retailers required allegations to support an inference of knowledge as to all of the state consumer claims. The purchasers failed to allege facts to support a finding of knowledge on the part of the retailers that the advertisements were not true. The allegations that the retailer “knew or should have known” were conclusory.

The case is No. 09md2087 BTM (KSC).

Attorneys: Gayle M Blatt (Casey, Gerry, Schenk, Francavilla, Blatt & Penfield LLP) for Cody Coleman. Alexandria Armida Amezcua (Morrison & Foerster LLP) for Iovate Health Sciences U.S.A., Inc.

Companies: Iovate Health Sciences, Inc.

Cases: Advertising StateUnfairTradePractices CaliforniaNews