Consumer Class Actions and Mass Torts : Class Action Lawyer & Attorney : J. Russell Jackson : Skadden Law Firm : Complex Class Actions : Consumer Class Actions & Mass Torts Law Blog

In February I wrote about a decision in litigation about Dannon's statements involving the health benefits of its Activia and DanActive lines of yogurt, which the defendant claimed were backed up by numerous scientific studies.  The California decision allowed plaintiffs to presume reliance upon alleged misrepresentations without actually pleading it. 

Just a little over a week ago Dannon filed in federal court in Ohio a $35 million settlement of the series of putative class actions involving its yogurt brands that it had been defending.  See Gelmas v. The Dannon Co., No. 1:08-cv-00236, Stipulation of Settlement, Docket Entry # 38 (N.D. Ohio Sept. 18, 2009).  The settlement purports to cover and release all claims -- except personal injury claims -- that were asserted or could have been asserted in the yogurt lawsuits.

The settlement structure and proof of claim process for this proposed settlement is interesting, since the settling parties are dealing with the problem of consumer product purchasers who already consumed the products and, for the most part, cannot be expected to have retained proof of purchase.  Class members may recover up to $15 merely by submitting a claim form.  To obtain between $15 and $30, they must submit a claim form "signed under penalty of perjury attesting to the amount purchased."  Claimants seeking between $30 and the maximum of $100 must not only submit the claim form with the amount sworn to under penalty of perjury, but they also must provide "a register receipt or other sufficient proof of purchase for the amount of Product for which payment is sought."  Each claimant's claim must include, "to the extent reasonable," the number and type of products purchased, the amount paid, the approximate dates of purchase, and the name of the retailer from whom purchased.  A claims administrator will be charged with whittling out the false claims.  

The settlement fund is capped at $35 million, so what individual claimants actually receive will depend on the total amount of claims and whether the fund is fully expended.  The settlement fund also covers administration fees and expenses, as well as the fees of class counsel.  Class counsel indicate in the agreement that they want "no more than" $10 million plus expenses out of the $35 million fund.  The settlement proposes that the named plaintiffs receive incentive payments of up to $5,000 if they were deposed and up to $1,000 if they were not. 

If -- as I think is highly likely -- too few claims are made to deplete the settlement fund, Dannon will distribute the value of the remainder in the form of yogurt products to charities to feed the poor, which is highly commendable.

The proposed settlement also contains "equitable relief" in the form of restrictions on advertising and labeling.  Reading these so-called restrictions, I am struck by the fact that the statements challenged in these lawsuits clearly were not false.  Indeed, if I were still teaching my Product Liability course, I would ask my students to study this settlement and tell me whom they trust the most to issue restrictions on speech based on the results of scientific research:  lawyers (as here), judges, juries, or scientists employed by regulatory bodies. 

Compare the lawsuits' allegations with the settlement. 

In the case I wrote about in January, Wiener v. The Dannon Co., 255 F.R.D. 658 (C.D. Cal. 2009), the complaint had alleged statements about Bifidus Regularis and L. casei Immunitas -- types of patented probiotic bacteria used in the Activia and DanActive products, respectively.  These were the alleged misrepresentations:

Throughout its marketing . . . Dannon advertises that Activia is "scientifically proven" to naturally regulate digestion when eaten daily for two weeks.  According to Dannon, this claim is supported by approximately twelve clinical studies . . .  

. . . In its marketing campaign . . . Dannon claims that DanActive is "clinically proven" to strengthen the immune system.  According to Dannon, this claim is supported by approximately twenty-one clinical studies.

. . . These [plaintiffs'] causes of action are based on allegations that Dannon's claims regarding the health benefits of Activia, Activia Light, and DanActive (the "Products") are unsubstantiated and deceptive.

Id. at 663 (citations omitted).

Now, here is what the settlement allows Dannon to say about its products:

First, it may say that its Activia products with Bifidus Regularis are "scientifically proven" or "clinically proven" to help regulate the digestive system, so long as it also says that it "helps with slow intestinal transit when eaten daily for two weeks, as part of a balanced and healthy lifestyle."  The settlement also provides that "[i]n existing television commercials where the qualifying language currently exists, the qualifying language shall be made materially more prominent."  (Emphasis added.)

Second, for its DanActive products with L. casei Immunitas, the defendant must remove the word "IMMUNITY" from its labeling and packaging, but it may say that the DanActive products are "'clinically proven' or 'scientifically proven' to help strengthen your body's defenses," and that they help "support the structure or function of the digestive tract's immune system."   The settlement also requires the defendant to remove the phrase "they have a positive effect on your digestive tract's immune system," which it can replace with "they interact with your digestive tract's immune system."

Third, for both product lines, the defendant is required to place on its websites' FAQs and in any product overwrap packaging the following statement:  "[This] is a food product and not a treatment or cure for any medical disorder or disease.  If you have any concerns about your digestive system, you should consult a healthcare professional."

Finally, the defendant will place the correct genus, species and strain designation of the bacteria in close proximity to the FDA-required nutritional label and ingredient list.  For Activia, that is "Bifidobacteria lactis DN 173-010," and for DanActive it is "Lactobacillus casei DN 114-001."

It's understandable that it could make economic sense for a defendant to settle a series of class actions after years of litigation.  But this settlement's so-called "equitable" relief involving the defendant's advertising and labeling makes it crystal clear that these lawsuits were not based on any real fraud at all.  The settlement allows Dannon to say practically the same thing it always has said.  The lawsuits obviously were lawyer-invented, and although they may have survived some motions to dismiss, the settlement's equitable relief demonstrates that the defendant's statements were backed up by real science.  

Is this another instance of regulation by litigation in which the only ones who really benefit are class counsel, who seek to take more than $10 million of the settlement fund in fees and expenses?  Submit a comment and let me know what you think.  

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As someone who has drafted his fair share of class action settlements, I can tell you that I always get a little nervous when I start reading a case in which a court is required to construe the language and effect of a prior class action settlement.  I had that same trepidation when I picked up Lester Building Systems v. Louisiana-Pacific Corp., 2009 WL 537501 (Minn. March 5, 2009).

The plaintiff, Lester Building Systems ("Lester"), makes hog barns, which it sells directly to farmers and indirectly through a network of independent builder-dealers.  In the early 1990s, Lester stopped using plywood in favor of an external siding product called "Inner-Seal," which was made by Louisiana-Pacific.  Around that same time, Louisiana-Pacific started receiving complaints from around the country about its Inner-Seal product swelling and deteriorating.  Eventually, Louisiana-Pacific ended up settling a nationwide class action in federal court that resolved all potential Inner-Seal claims.  The opt-out settlement did not require Louisiana-Pacific to fund the settlement all at once; rather, it was to make annual payments.  The claims ended up far out-pacing Louisiana-Pacific's contributions, and many class members were forced to either accept immediately-reduced payouts on their claims, or wait until such time as Louisiana Pacific could make a full payment.

Lester had bought around $3.4 million of Inner-Seal and used it to make some 2,600 hog barns.  Many of its customers were not happy.  Lester estimated that to repair its customers' barns would cost $13.2 million.  Many of Lester's customers, however, chose an early payout from the settlement fund of only $640,000.

In negotiating the settlement, Louisiana-Pacific -- like many product manufacturers -- had tried to protect not only itself, but also the intermediate sellers of its products by including within the settlement a complete release of liability for them:  "To the extent claims may be asserted against persons or entities in the chain of distribution, installation or finishing of the Exterior Inner-Seal siding, the Releasing Party shall be deemed to and does hereby release and forever discharge those persons or entities from claims based solely on distribution, handling, installation, specification, or use of the Exterior Inner-Seal Siding."  2009 WL 537501 at *5 (quoting the settlement).

Lester was far from grateful for such protection, however.  In fact, it sued Louisiana Pacific in Minnesota state court, asserting theories of breach of contract, breach of implied and express warranties, and fraud.  Lester won at trial handily:  the jury awarded Lester $3.4 million for Lester's purchase price for the Inner-Seal products, $10.2 million for lost profits up through 2002, $2.8 million for the cost of restoring goodwill, and $13.2 million for the estimated cost of repairing its customers' barns.

Louisiana Pacific argued that the cost of repairing Lester's customer's barns was not a proper element of damages because Lester had no legal obligation to conduct such repairs, since it had received a full and complete release from the federal settlement.  Lester countered that even if it did not have a legal obligation to make such repairs, it had a practical business obligation to do so, and Louisiana-Pacific should pay for it. 

The Minnesota Supreme Court examined the language of the federal settlement and held that it clearly and unambiguously released all entities in the chain of distribution -- including Lester -- from liability to repair the farmers' barns.  Moreover, the court held, Lester already had received from the jury awards for lost profits and loss of goodwill, and thus no "practical business obligation" could exist to support the so-called consequential repair costs.  Without Lester having a legal obligation to repair its customers' barns, Lester could not force Louisiana-Pacific to pay for it.

Lester Building Systems is another good decision for my class action settlements file that squarely considers the language of an intermediary release provision and gives it full force and effect.  The irony, of course, is that the release ultimately operated to the detriment of the intermediate seller, who instead wanted to extract money from the manufacturer to pay for repairs to its customers' barns. 

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