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

The Sixth Circuit recently affirmed dismissal of a putative class action against a car rental company based on the voluntary payment doctrine.  See Salling v. Budget Rent-A-Car Sys., Inc., No. 10-3998, Slip op. (6th Cir. Feb. 29, 2012).

In Salling, Plaintiff challenged Budget's EZ FUEL fee.  Under the rental contract, Budget will charge you the EZ FUEL fee (a flat, $!3.99 fee) for gas if you have driven the car less than 75 miles.  To avoid having the fee charged, you have to fill the tank with gas and provide a receipt.  The receipt requirement makes sense, since the amount of gas used on short trips may not be visible from looking at the gas gauge.  

Plaintiff objected to paying the fee when he returned his car.  But he apparently did not have his gas receipt with him.  Ultimately, he paid the fee, receiving a receipt that broke out the EZ FUEL fee that he disputed.  He then filed a class action against Budget.  Budget removed it to federal court and moved to dismiss based on the voluntary payment doctrine.  The trial court granted the motion, and Plaintiff appealed.

The Sixth Circuit first examined its jurisdiction, It observed that Budget bore the burden of proof on the jurisdiction question, but held that it met its burden with a spreadsheet that listed more than 1 million renters who drove less than 75 miles, were charged the EZ FUEL fee, and had a fuel gauge reading of "full" upon return of the car.  The spreadsheet indicated that Budget collected $11.2 million from those drivers.  This was enough to satisfy CAFA's pre-requisites. 

The court then turned to the voluntary payment doctrine, finding that it is recognized by Ohio law.  The doctrine is best described in this way:  "money voluntarily paid by one person to another on a claim of right to such payment, cannot be recovered merely because the person who made the payment mistook the law as to his ability to pay."  Slip op. at 5.  The court noted that the Plaintiff had paid the fee in anticipation of filing suit, and held that the payment was voluntary.  It explained that a payment that is made on a disputed construction of a contract term is not made under a mistake of fact, but rather under a mistake of law.  Although a payment made under a mistake of fact might be recoverable, a payment made under a mistake of law is still voluntary and cannot be reversed.  Slip op. at 6.

A little over a year ago I had written about an opinion from the Seventh Circuit written by none other than Justice Sandra Day O'Connor, which applied the "voluntary payment doctrine" with even more discussion.  That opinion, along with the Sixth Circuit's opinion in Salling, reiterate that the voluntary payment doctrine is alive and well as a defense in consumer class action litigation.

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Senior US District Judge W. Harold Albritton recently issued an opinion in a nuisance case that once again reminds us of the importance of having a class that is capable of objective, ascertainable definition at the outset of the litigation.   See Benefield v. International Paper Co., Civ. A. No. 2:09cv232-WHA, Slip op. (M.D. Ala. Oct. 20, 2010). 

In Benefield, the plaintiffs alleged that the defendant's paper mill had discharged hazardous substances over the course of many years, resulting in property damage to properties within a two-mile radius of the facility.  The class was defined as all people who, as of the date of the filing of the Complaint, owned real property located within two miles of the facility which was contaminated by what was released from the defendant's facility and who suffered as a result a diminution in property value of $100 or more.  Slip op. at 2.  There were a number of exclusions, including people who suffered personal injuries and people who were litigants or class members in other similar cases.

The court denied class certification, beginning its analysis with the problems with the class definition.  Establishing that each property was contaminated would require individualized proof, the court concluded, as would determining whether the property value was diminished by more than $100.  Slip op. at 7-8.  Although the court ultimately concluded -- unlike many other courts -- that the admissibility of expert testimony was not ripe for adjudication at the class certification stage, the court focused on the weaknesses in the plaintiffs' experts' blanket conclusions and ill-conceived methodologies in rejecting the class definition:

In short, while the Plaintiffs have argued, correctly, that this court should not engage in any merits determination in determining whether the class should be certified, the Plaintiffs have asked the court to find facts, based on disputed evidence, to determine who is in the class.  The court concludes, therefore, that it is not administratively feasible for the court to determine whether a particular individual meets the class definition. 

Slip op. at 8 (citation omitted).  The court also noted that the exclusions carved out of the class definition also presented their own problems:  "That [personal injury] exclusion will require a determination of which people within the geographic area who own residential property also have personal injuries caused by releases from the Facility, which itself poses causation issues, and therefore makes the class definition improper."  Id. at 9.

The court went on to consider the standing of one plaintiff, who could not establish by deed or will that he actually had an ownership interest in his property.  The court concluded that he lacked standing to assert claims on behalf of property owners.  (He had asserted some damage to personal property as well, but the court indicated that this presented typicality/adequacy of representation problems, although it might cure his personal standing problem.)

The other plaintiff presented multiple typicality and adequacy problems.  First, he jointly owned his property with his wife, and his wife was the plaintiff in a similar action that had been carved out of the class definition.  Moreover, after filing the class certification motion, plaintiff filed an amended complaint that asserted claims for public nuisance, private nuisance, and fraud.  Yet he did not seek class certification for those claims.  This led the court to conclude that his adequacy was "undermined by the pendency of those claims."  Slip op. at 15 ("because Johnson's claims are factually the same as only some of the putative class, he is pursuing some damages not sought by the entire class, and he apparently seeks to recover on theories not asserted on behalf of the entire class, his claims are not typical, and he is not an adequate class representative").

In analyzing the predominance requirement of Rule 23(b)(3), the court observed that the claims for public nuisance, private nuisance, abnormally dangerous activity, and fraud likely would require "highly individualized determinations."  Slip op. at 19.  Moreover, there were significant individualized damages issues that -- when combined with the individualized causation issues -- counseled against certification.  Id. at 21. 

The court also found the superiority requirement lacking, particularly in light of the other actions already pending.

Benefield is a good reminder that how one defines the class -- and who is excluded from the class -- matters, and can prove fatal to a putative class action.

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Do consumer product sellers have a duty to inform buyers about legal requirements associated with product installation and use? 

The Ohio Court of Appeals recently considered that question in Taylor v. Best Buy Co., 2010 WL 3931487 (Ohio App. Oct. 7, 2010).  In Taylor, a homeowner was shopping for a new stove.  She had received an estimate at Home Depot, and Best Buy offered to match it, and to install the stove at a special price of $49.99.  The salesman told her:  "We do this all the time.  We take it, we install it, and it will be in your house ready to go.  You can cook dinner that night."  Slip op at *1.  

Plaintiff didn't know that Ohio law requires every gas outlet to have an individual shut-off valve within 6 feet of the appliance.  Her shut-off valve was in the basement, far from the gas outlet in her kitchen.  Plaintiff did not tell the salesman that she had an old home or discuss in any way the necessity for a shut-off valve.

In what must have been a huge disappointment, Best Buy arrived at plaintiff's house with the stove, but then refused to install it because to do so would be against the code.  Best Buy's installers are not licensed plumbers; they informed plaintiff that she needed to find a licensed plumber to install a shutoff valve before they could install a stove.

Plaintiff hired a plumber, whom she paid $68 to install a shut-off valve.  Best Buy then installed the stove for $49.99; it apparently did not charge her for the earlier failed installation attempt.

Plaintiff complained, and Best Buy offered her a courtesy check of $75.  Plaintiff didn't cash it, but instead filed a putative class action for fraud, breach of warranty, unjust enrichment, breach of contract, and violation of Ohio's Consumer Sales Practices Act.  The trial court granted summary judgment for defendant.  And the Court of Appeals affirmed.

The court was unequivocal that the burden was on the homeowner -- not the appliance seller -- to know and comply with state law:

Best Buy had no responsibility to ensure that Taylor's home was code-compliant before delivering and installing Taylor's new stove.  Under Ohio law, Taylor is required to have a gas shut-off valve present near the stove.  This duty exists independent of any agreement between the parties. . . .  In this instance, Taylor's failure to have the required shut-off valve was a violation of state code and a safety concern.  Pursuant to Best Buy's policy, once Taylor's home was made code-compliant, Best Buy performed the installation for the contracted price and fulfilled its contractual obligations. . . .

Taylor further argues that Best Buy falsely represented that it would install the gas stove for a stated price.  We agree with Best Buy's position that it had no duty to inform Taylor of applicable codes and that it performed the represented service for the stated price once Taylor complied with code requirements. . . .

Id. at *2.

Notably, Best Buy actually included in its product brochure information about the code requirement, although plaintiff claimed never to have read it.  The court said that although including information about the code in the brochure made sense where the issue was commonplace, Best Buy was under no duty to do so.  In fact, it held that plaintiff could not prove reliance on any representations by Best Buy because "[t]he presence of a shut-off valve as required by state code is a matter of law which Taylor is presumed to know."  Id.

This decision highlights an important defense in many consumer product cases:  the requirements of state law.  Although this decision involved summary judgment, the conclusive nature of this defense often can support a motion to dismiss because it operates as a matter of law.  This Court's twin conclusions of "no duty" and "no reliance" as a matter of law served as the basis for summary judgment on a variety of claims, from fraud, contract, "unjust enrichment" and the Consumer Sales Practices Act.

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Regular readers of this blog know that there are a plethora of decisions dismissing class actions brought by so-called "third party payors" (e.g., union health and benefit plans) to recover sums they paid for medicines that their members took.  Typically, courts hold that the injury in such cases is simply too remote for the third party payors to have standing.  Put differently, courts hold that the defendant's challenged conduct is not the direct cause of these third party payors' "injuries" because the decision to prescribe and take the medicine was a result of the independent conduct of prescribing physicians and their patients.

Last week the MDL court in the Yaz Marketing, Sales Practices and Products Liability Litigation reached the same conclusion after canvassing the case law.  See Philadelphia Firefighters Union Local No. 22 Health and Welfare Fund v. Bayer Healthcare Pharmaceuticals, Inc., 3:09-cv-20071-DRH-PMF, Slip op. (S.D. Ill. Aug. 5, 2010).

The class definition in Philadephia Firefighters was as broad as could be:  "'[a]ll third party payors in the United States and its territories that purchased, reimbursed, and/or paid for all or part of the cost of YAZ dispensed pursuant to prescriptions in the United States.'"  Id. at 2.  Plaintiffs pled causes of action under RICO, as well as common law negligence, fraud, misrepresentation, and unjust enrichment.  (Notably, plaintiffs did not plead state consumer fraud statutes.  Presumably this was because the state consumer fraud statutes are simply too different to be adjudicated in a single class.)  Plaintiffs' theory of the case was that although Yaz was approved by the FDA as an oral contraceptive and to treat moderate acne and Premenstrual Dysphoric Disorder (PMDD), the defendant had promoted Yaz to treat off-label conditions like mild acne and Premenstrual Syndrome (PMS) without telling people about the substantially increased risks of heart and gallbladder problems from the medicine.  This allegedly caused the market for Yaz to expand and allowed the defendant to maintain a "falsely inflated price" for Yaz.  Id. at 6.

The court began its analysis by considering whether the plaintiffs had the necessary standing to assert a RICO claim under federal law.  Reciting the Supreme Court case law, the court observed that RICO requires plaintiffs to show not only that defendant's conduct was a "but-for" cause of their injuries, but also that it is the proximate cause as well.  In other words, there must be a direct relationship between the injury asserted and the injurious conduct alleged.

The court surveyed a majority of the third party payor opinions, concluding that the injury to third party payors is simply too remote and speculative to meet RICO's direct injury requirement.  The court adopted the reasoning of Ironworkers Local Union No. 68 v. Astrazeneca Pharmaceuticals LP, 585 F. Supp. 2d 1339 (M.D. Fla. 2008), explaining:

[P]hysicians use independent medical judgment to decide whether to prescribe the subject drug to a particular patient and that judgment can be influenced by any number of factors.  Accordingly, establishing that the third party payor's injuries were caused by the alleged misconduct would require an inquiry into each doctor patient relationship to determine whether the physician was influenced by the alleged misrepresentations and to what extent.

Philadelphia Firefighters, Slip op. at 16.

The court concluded that "multiple steps separate the alleged wrongful conduct . . . and the alleged injuries . . . including patient preference, the independent judgment of the prescribing physician, and the reimbursement decision rendered by the third party payor and its benefits manager."  Id. at 18.  Accordingly, the complaint flunked RICO's direct injury requirement.

The court applied the same analysis to plaintiffs' common law causes of action, finding no proximate causation for negligence, misrepresentation or fraud.  As for unjust enrichment, the court reasoned that because that theory was based on an underlying tort, and no tort cause of action had been sufficiently pled, the unjust enrichment complaint also failed as a matter of law.

Philadelphia Firefighters is a strong opinion that confirms what already has become quite clear:  although plaintiffs lawyers have gravitated toward these claims as a way to possibly avoid learned intermediary and causation defenses, the overwhelming weight of authority is that third party payors stand far too remote from the medical treatment decisions to plead proximate causation.

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By now the scenario has become formulaic:  a pharmaceutical company is alleged to have promoted certain medicines for "off-label" uses, i.e., to treat conditions that are not indicated on the FDA-approved label.  The patients who took the medicines don't sue; rather, the "Third-Party Payors ("TPPs")" who paid for the prescriptions sue, claiming that they would not have paid for the prescriptions (or would have paid less for them) but for the pharma company's promotion of the medicines for off-label use.  These cases are routinely dismissed on the pleadings as failing to state a claim.

Central Regional Employees Benefit Fund v. Cephalon, Inc., 2010 U.S. Dist. LEXIS 29677 (D.N.J. Mar. 29, 2010), is no exception.  In this case, local government health and welfare benefit funds sued Cephalon over a variety of medicines that it purportedly promoted for off-label use:  Provigil (which treats narcolepsy), Gabitril (which treats seizure disorders), and Actiq and Fentora (which manage cancer pain in opiod-tolerant patients with malignancy).  Plaintiffs sought to represent a nationwide class of "'all governmental entities in the United States of America who have been caused to expend monies for Provigil, Gabitril and Actiq as a result of the off label promotion by the defendants.'"

(Frequent readers will note that the class definition is a failsafe class:  it requires a determination of the merits in order to determine who is in the class.  The court, unfortunately, does not take up this issue.)

The court dismissed the complaint pursuant to Rule 12(b)(6) for failure to plead a cognizable claim.  Its overall criticism of the complaint was that it was "yet another legally unsupportable attempt to bring a private cause of action against Cephalon for its 'misbranding' and off-label promotion violations of the Federal Food, Drug and Cosmetics Act ("FDCA") and implementing regulations."  Id. at *17.  The FDCA does not create a private right of enforcement; rather, it is enforced by the FDA.  It allows doctors to prescribe medicines for uses not approved by the FDA, but FDA regulations restrict pharmaceutical companies' right to promote such unapproved uses to doctors.  The U.S. Supreme Court recognized in Buckman, however, that off-label use of medicines is part of standard medical care, and courts -- like the court in Cephalon -- repeatedly recognize that "off-label promotion" that may be restricted by FDA regulations is not inherently false or misleading.  See 2010 U.S. Dist. LEXIS 29677 at *9 (citing cases).  The court in Cephalon held that plaintiffs could not sue to enforce any violations of FDA regulations, and yet they had not adequately pled any actual cause of action for fraud.

Indeed, the court dismissed the claim under New Jersey's RICO statute because plaintiffs failed to allege fraud with particularity.  It noted that even an allegation that the defendant paid for studies did not mean that the studies were actually fraudulent.  The plaintiffs' error -- as is so often the case in these cases -- is that they failed to connect any generic allegation of so-called fraud to a particular doctor or prescription at issue.  Id.  Interestingly, the court noted that the plaintiffs did not even allege that the medicines their plan members took were ineffective for the off-label uses for which they were prescribed.  Id. at *10.

The court dismissed the fraudulent concealment and "illegal common law fraud" counts for the same reasons.

Plaintiffs also pled that favorite of Hail Mary counts:  Unjust Enrichment.  This, of course, is a theory of recovery in quasi contract.  It just doesn't fit in the scenario where a purchaser buys and actually receives a product; it is more suited for the "incomplete performance" scenario.  The court held that where, as here, unjust enrichment is pled accompanying traditional tort causes of action, the claim must be dismissed if the traditional tort claims are dismissed for lack of proximate cause.

The opinion in Cephalon does not really break new ground, but it is yet another strong decision indicating that so-called "third-party payor" claims lack merit.

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Recently U.S. District Judge John Feikens affirmed the report and recommendation of U.S. Magistrate Judge R. Steven Whalen, holding that Michigan's economic loss doctrine barred common law fraud claims in consumer fraud litigation.  See Murphy v. The Proctor & Gamble Co., 2010 WL 889796 (E.D. Mich. Mar. 9, 2010).

The case clearly presented one of the most pressing consumer fraud issues of the day.  (Not.)  The defendant makes Fusion and Fusion Power handles for disposable razor heads.  Fusion Power -- as you might guess -- houses a little battery and vibrates.  Plain ole Fusion does not.  The defendants also make Fusion and Fusion Power disposable razor heads that plaintiffs say are identical, except that Fusion Power razor heads cost a dollar more than plain ole Fusion razor heads.

(Can't you just picture a federal judge getting up in the morning and saying to himself "It's cases like this Murphy case that are why I went to law school.  They're simply fascinating!")

The defendants moved to dismiss the common law "fraud" and "silent fraud" counts.  Judge Feikens held that Magistrate Judge Whalen correctly analyzed Michigan law, concluding that the economic loss doctrine bars torts claims for purely economic losses arising out of the quality of the goods because such claims arise out of contract -- not tort -- and are governed by the Uniform Commercial Code, not common law fraud.  Although Michigan recognizes an exception for fraud in the inducement, that exception does not apply if the alleged misrepresentation concerns the quality of the goods sold.  Accordingly, plaintiffs' claims were nothing more than contract claims repackaged as fraud claims, and thus were barred by the economic loss doctrine.

Although it was a close shave, the defendant got out of the common law fraud counts without so much as a nick.

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Well, this is a little awkward.  I mean, it's the New Year . . . Christmas is over . . . and I didn't get you anything.  I got a Nano and a couple of gift cards for iTunes.  But what to get you . . .

I know!  A boxed set of three decisions involving Apple, circa December 2009!

In Hovespian v. Apple, Inc., 2009 WL 5069144 (N.D. Cal. Dec. 17, 2009), the court granted Apple's motion to dismiss and its motion to strike class allegations.  (It was a good holiday for Apple, too, apparently.)  Plaintiff -- a Florida resident -- had brought a class action in California federal court, purporting to represent all people who bought iMAC G5 personal computers.  Plaintiff alleged that the display screen was prone to developing vertical lines that ultimately rendered the screen unusable, that Apple knew of this fact and concealed it, refusing to repair the machines because the lines developed after the one year express warranty had run on the machine.  (Plaintiff bought his Mac in October 2006, but the lines did not appear until March 2008.)  Plaintiff's Second Amended Complaint ("SAC") pled causes of action under California's Consumer Legal Remedies Act, the Unfair Competition Law, for fraudulent omission, for unjust enrichment, and for a declaration that the one-year warranty limitation was unenforceable.

The court dismissed plaintiff's CLRA claim without leave to amend because it failed to state with particularity -- as required by Rule 9(b) -- "when and where Apple made an affirmative misrepresentation, if any, that contradicts its alleged omissions."  Id. at *3.  The complaint contained only generalized allegations that Apple had exclusive knowledge of the problem and concealed it.  This was insufficient -- without affirmative statements that contradict the omitted information -- to state a CLRA claim.

The court also granted dismissal of the UCL claim without leave to amend.  Citing to Clemens v. DaimlerChrysler Corp., 534 F.3d 1017 (9th Cir. 2008), the court held that an alleged defect that may shorten the life span of a product that performs as warranted throughout the express warranty term does not cause a substantial injury to consumers and cannot serve as the basis for a UCL claim.

The court granted dismissal of the common law fraudulent omission claim for the same reason it dismissed the CLRA claim, but it made the dismissal without prejudice to give plaintiff leave to re-plead to elaborate on what duty to speak Apple had that it allegedly had violated.

The court also dismissed the unjust enrichment claim with prejudice, holding that an unjust enrichment claim that is premised on the same course of conduct that underlies the statutory and common law tort claims cannot stand alone as an independent claim for relief.  Id. at *5.  It fails for the same reason the other claims fail.

The court also granted Apple's motion to strike the class allegations, citing its authority under Federal Rules of Civil Procedure 23(c)(1)(A), 23(d)(1)(D), and 12(f).  Plaintiff defined the class as all persons who purchased iMAC G5 personal computers from Defendant Apple, Inc.  The court held that the complaint failed to state a valid class action claim against Apple:

First, the class is not ascertainable because it includes members who have not experienced any problems with their iMAC display screens.  Such members have no injury and no standing to sue.  Second, the class is not maintainable under Rule 23(b)(3) because it includes members who can have no claim against Apple.  For example, the putative class includes members who (a) did not purchase the particular iMac model or the type of iMac screen that Hovespian alleges is defective and (b) experienced the alleged defect after their warranty expired.  Finally, the class is not maintainable under Rule 23(b)(1) or Rule 23(b)(2).  These types of class actions are not suitable for actions where recovery of money damages is the primary relief sought by the plaintiff.

Id. at *6.  The court struck the class allegations without prejudice, thus allowing amendment after plaintiff amended his fraudulent concealment claim.

The second case in our Apple boxed set was well reported on:  Birdsong v. Apple, Inc., 2009 WL 5125776 (9th Cir. Dec. 30, 2009).  Birdsong involved a class action challenge to Apple's iPod based on the potential for hearing loss.  Plaintiffs alleged that the iPod was defective in that it could achieve sounds of 115 decibels, the long battery life allows those sounds to be played over long periods of time, the ear buds are designed to be placed deep in the ears (rather than over the ears), the ear buds lack noise cancelling properties, and the iPod lacks a volume meter that tells users they are listening at dangerous levels. 

Apple includes this warning with each iPod:

Warning:  Permanent hearing loss may occur if earphones or headphones are used at high volume.  You can adapt over time to a higher volume of sound, which may sound normal but can be damaging to your hearing.  Set your iPod's volume to a safe level before that happens.  If you experience ringing in your ears, reduce the volume or discontinue use of your iPod.

Id. at *1.

The Ninth Circuit affirmed dismissal of the implied warranty of merchantability count, observing that nothing in the complaint says the iPod is defective for its ordinary purpose of listening to music.  Rather, the statements in the complaint merely suggest that users have the option of using the iPod in a risky manner, but it does not suggest the product lacks any minimum level of quality.  Where, as here, the complaint merely seeks additional features to make the product safer, it fails to allege the sort of lack of baseline utility that would support a breach of the implied warranty of merchantability claim.  Id. at *2-*3.

Plaintiffs abandoned the breach of express warranty and breach of the implied warranty of fitness for a particular purpose claims on appeal. 

The Ninth Circuit also affirmed dismissal of the Unfair Competition Law claim because they failed to allege the requisite injury to have standing to bring the claim.  To begin with, the complaints did not allege that the plaintiffs themselves ever suffered hearing loss or were at risk of imminent hearing loss.  Nor did they allege that plaintiffs themselves ever used their iPods in a way that exposed them to a risk of hearing loss.  Rather, they cast their allegations as potential impacts on unidentified users.  This was insufficient to meet the injury requirement for Article III standing.  Id. at *4.

The court also held that plaintiffs failed to allege an economic harm (lost money or property) that would confer standing to sue under the UCL because "the alleged loss in value does not constitute a distinct and palpable injury that is actual or imminent because it rests on a hypothetical risk of hearing loss to other consumers who may or may not choose to use their iPods in a risky manner."  Id. at *5.  And the court rejected plaintiffs' "benefit of the bargain" theory, holding that the "plaintiffs' alleged injury in fact is premised on the loss of a 'safety' benefit that was not part of the bargain to begin with."  Id.

The third case in our boxed set is a lump of coal:  Owens v. Apple, Inc., 2009 WL 5126940 (S.D. Ill. Dec. 21, 2009).  Plaintiffs brought a putative nationwide class action, alleging that Apple breached a contract and violated various consumer fraud statutes when it sold gift cards to people with the representation that songs cost $.99 a song, and then on April 7, 2009 raised the price of certain songs to $1.29.

Apple moved to dismiss, asserting a privity defense to the breach of contract claims.  The court rejected it outright, where the gift card at issue was marketed by Apple and could be used only on Apple's website. 

The court also held that there was nothing vague about the representation:  "Songs are 99 cents, and videos start at $1.99."  The complaint alleged plaintiffs relied on the price guarantee as part of the basis of the bargain, and that plaintiffs were damaged as a result of the price increase.  The court refused to dismiss the breach of contract counts.

The court also refused to dismiss the consumer fraud counts.  Apple had argued that the statement "Songs are 99 cents," did not mean that the price of all songs was 99 cents, but rather that some songs were 99 cents.  Plaintiffs argued that this interpretation was a "slippery slope" that would allow Apple to market its gift cards in the same way so long as one song was 99 cents.  The court refused to find that the phrase was not deceptive as a matter of law.

So that's it.  A boxed set of Apple decisions for you.  If they don't fit and you want to exchange them for a sweater vest I received this Christmas, just let me know.

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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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Yesterday the Second Circuit Court of Appeals affirmed the right of the City of New York to require chain restaurants to post calorie counts for items on their menus and menu boards.  New York State Restaurant Association v. New York City Board of Health, No. 08-1892-cv (2d Cir. Feb. 17, 2009). 

The City's regulation requires chains with 15 or more locations nationally to display calorie content next to each menu item in the same size and appearance as the name or price of the menu item.  Such chain restaurants purportedly account for ten percent of the restaurants in New York City.  The regulation permits restaurants to provide additional nutritional information and to include disclaimers that calorie content may vary across servings based on serving size or quantity of ingredients.  The courts previously had refused to stay the effectiveness of the regulation during the appeal, so it currently is in effect in New York City.

The New York State Restaurant Association had challenged the City's right to impose such obligations, arguing that the City's regulation was preempted by the federal Nutrition Labeling and Education Act of 1990 ("NLEA"), and that the regulation violated the First Amendment by forcing restauranteurs to emphasize calorie counts over other kinds of nutrition information.  The court rejected both arguments.

The Second Circuit's unanimous opinion -- authored by Judge Rosemary Pooler and joined in by Judges Sonia Sotomayor and Jane Restani (sitting by designation from the US Court of International Trade) -- relied heavily on the so-called "presumption against preemption" recently re-articulated in Altria Group, Inc. v. Good, 129 S. Ct. 538, 543 (2008).  The court observed that the presumption against preemption is heightened where the state is acting in a traditional sphere of regulation, and it posited that where there is more than one plausible interpretation of a preemption provision, "courts 'have a duty to accept the reading that disfavors pre-emption.'"  NYSRA, slip op. at 12 (citing Bates v. Dow Agrosciences LLC, 544 U.S. 431, 449 (2005)); see also id. at 23-24.

To be clear, the court's analysis is solely one involving express preemption, not implied preemption.  The NLEA says the statute "'shall not be construed to preempt any provision of State law, unless such provision is expressly preempted under [21 U.S.C. sec. 343-1(a)] of the [FDCA].'"  Slip op. at 12 (quoting NLEA).

As for its express preemption analysis, the Second Circuit acknowledged that "the federal statutory scheme regarding labeling and branding of food is a labyrinth and interpreting the statute are a series of agency regulations that sometimes appear to conflict and are difficult to harmonize."  Slip op. at 3. 

Basically, the federal statute, NLEA (which amended the Food, Drug, and Cosmetics Act), has two relevant provisions.  The first is Section 343(q) -- entitled "Nutrition Information" -- which requires mandatory nutrition information to be disclosed for most foods.  You and I know this nutrition information as "Nutrition Facts" on the label of most pre-packaged foods.  Section 343(q) expressly states, however, that restaurants are exempt from the requirement to provide such information.  The express preemption provision relating to Section 343(q) preempts any state or local "requirement for nutrition labeling of food that is not identical to the requirement of [S]ection 343(q) . . ., except a requirement for nutrition labeling of food that is exempt" from this provision -- namely, restaurant food.  In essence, restaurants have no obligations under -- and no preemption protection from -- Section 343(q).

The second relevant provision of NLEA is Section 343(r).  Restaurants are not exempt from this section and therefore have preemption protection under it.  Section 343(r) -- entitled "Nutrition Levels and Health-Related Claims"  -- "prohibits the use of terms that 'characterize[]' the level of any nutrient in a food unless they conform to definitions established by the FDA, and requires that claims about the relationship between nutrients and health conditions be supported by scientific consensus."  Slip op. at 6.  The provision adds that statements of the type required by Section 343(q) -- which does not apply to restaurants -- that appear as part of nutrition information required or permitted by Section 343(q) are "'not a claim which is subject to this paragraph.'"  Slip op. at 6 (quoting statute).  The express preemption provision relating to Section 343(r) "expressly preempts state or local governments from imposing any requirement on nutrient content claims made by a food purveyor . . . that is not identical to the requirement of Section 343(r)," with certain irrelevant exceptions relating to cholesterol, fat, fiber and the like.  Slip op. at 7 (quoting statute).

The Second Circuit reasoned that the text of the statutes thus was very simple:  states were free to regulate nutrition information labeling ("Nutrition Facts") for restaurant food because no federal regulations applied to restaurants under Section 343(q), but were preempted from having rules different from the FDA's for nutrition content and health claims on restaurant foods because there were federal regulations for restaurants on those claims under Section 343(r).  

The problem, the court recognized, was that the FDA's regulations made it difficult to distinguish "nutrition information" from "nutrition content claims."   Is requiring the calorie count "nutrition information" that is not preempted?  Or could it be a "nutrition content claim" that might be preempted?  The NYSRA had argued that Section 343(q) applied only to pre-packaged food, and that any time a restaurant was required to provide similar information -- such as calorie content -- that was a nutrition content claim governed under Section 343(r).  The FDA's regulations gave restaurants flexibility in how to present nutrition information about menu items, the NYSRA maintained, allowing for in-store signs, posters, brochures, or charts.

The court engaged in a tortured analysis of FDA regulation, the parties' proposed interpretations, and the FDA's amicus brief.  Ultimately, the court sided with the FDA, concluding that a statement is "nutrition information" if it is of the type generally required or permitted by Section 343(q).  Calorie counts fall squarely within that type of "Nutrition Facts," and thus -- for restaurants -- are a fair subject for local regulation, according to the court.  Slip op. at 25-26.

The NYSRA also had challenged the regulations on First Amendment grounds, arguing that being forced to convey one piece of nutrition information -- calorie counts -- on menus infringed on its members' First Amendment rights because its members disagreed with the City that calorie counts were the most important factor people should consider in choosing food.  The restauranteurs believed that all nutrition information must be looked at in context with the amount of energy being expended by the customer; posting only a calorie count contradicted this message, they argued.  The NYSRA argued that such forced speech was unconstitutional under United States v. United Foods, Inc., 533 U.S. 405 (2001), which had held that a monetary assessment imposed on mushroom growers to fund mushroom advertisements violated the First Amendment because it compelled some growers to subsidize commercial speech with which they disagreed.

Those of you who are marginally familiar with commercial speech cases may remember the intermediate scrutiny of regulations that is required under the four-part test of Central Hudson Gas & Elec. Corp. v. Pub. Serv. Comm'n of New York, 447 U.S. 557 (1980).  That test focuses on whether there are less speech-restrictive alternatives to achieve the state's legitimate governmental interest.

The Second Circuit held that the intermediate scrutiny of the Central Hudson test was not the appropriate standard for reviewing the City's regulation here.  Central Hudson applies where speech is restricted, the court explained, while here the City is merely forcing disclosure of purely factual and uncontroversial information.  Thus, although the regulation impacts commercial speech, the Second Circuit held that it is properly measured by the rational basis review standard of Zauderer v. Office of Disciplinary Counsel, 471 U.S. 626 (1985). 

Applying this rational basis review, the court cited materials indicating that there is an obesity epidemic, that people eat more calories when they eat out -- particularly at fast food chain restaurants -- than they do when they eat at home, that consumers have "distorted perceptions about how many calories food contained," and that providing calorie counts on menus (at the "point-of-decision") will help consumers make better choices.  The court concluded that the City's regulation easily met the rational basis review standard.

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In In re Cessna 208 Series Aircraft Products Liability Litigation, MDL No. 1721, 2009 WL 274509 (D. Kan. Feb. 5, 2009), the plaintiffs -- the estates and relatives of 9 Washington residents who perished in a Cessna crash near Naches, Washington -- sued the aircraft manufacturer under a variety of theories for a plane crash allegedly caused by a faulty de-icing system.  Cessna moved to dismiss the fraud and punitive damages counts of the Complaint.

Cessna's motion presented the court with two primary questions:  (1) whose law applied? and (2) were the facts pled in the complaint sufficient to state a cause of action?

The choice of law question was particularly important, because Washington -- unlike Cessna's home state of Kansas -- does not allow punitive damages.  The court used section 145(2) of the Restatement (Second) of Torts to evaluate the most significant relationship, looking at "(a) where the place of the injury occurred, (b) the place where the conduct causing the injury occurred, (c) the domicile, residence, nationality, place of incorporation and place of business of the parties, and (d) the place where the relationship, if any, between the parties is centered."

The court noted that the Restatement creates a sort of presumption that the law of the state where the injury occurred will govern, but observed that because the location of air crashes is simply fortuitous, the presumption is easily overcome in air crash cases.

The court reached a curious conclusion.  Although the injury occurred in Washington and the plaintiffs were Washington residents, the court nevertheless chose to apply the law of Kansas because it was Cessna's principal place of business and the place where the misconduct allegedly took place.  And yet, the court noted that Kansas's interests were in both "controlling behavior and in protecting defendant from liability."  Id. at *4.  Of course, the interest in protecting Cessna from liability would have been best served by applying Washington law, which does not allow punitive damages.

Indeed, the court's decision to apply Kansas law without going to the step of evaluating the "interests and public policies of potentially concerned jurisdictions" and the purposes "sought to be achieved by their relevant local law rules" was particularly ironic.  Even in states that allow them, punitive damages are never viewed as a plaintiff's right or entitlement.  Here, the court's decision favored the assertion of a punitive damages claim by residents of a state that bars them as a matter of public policy, using the law of a state that has an interest in protecting the defendant from punitive liability.

Despite the court's nonplussing decision on choice of law, the end result favored the defendant because the court concluded that plaintiffs had failed to meet their pleading burdens for fraud and punitive damages.  The court began by citing Bell Atlantic Corp. v. Twombly, 127 S. Ct. 1955 (2007) for the proposition that plaintiffs must plead facts -- not labels, conclusions, and legal elements -- sufficient to plead a plausible claim.  2009 WL 274509 at *1.  The court recognized that plaintiffs bear a clear and convincing burden of proof on the issue of reliance -- and yet plaintiffs had not pled that they themselves had received and relied upon any misrepresentations from Cessna.  The court rejected the notion that a presumption of reliance could be borrowed from securities law based on a "fraud on the market" theory.  It concluded that "[b]ecause plaintiffs have not alleged that they knew of Cessna's representations to the FAA or to pilots, they cannot establish that they received the information or that they detrimentally relied on it."  Id. at *6.

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The nation’s self-appointed nanny, the Center for Science in the Public Interest (“CSPI”), truly outdid itself last week, filing a class action lawsuit in San Francisco federal court to “protect” Californians from Vitamin Water, which CSPI blames, in part, for America’s "obesity epidemic."  What could possibly be wrong with Vitamin Water, you ask? Not the FDA-required nutritional information on the label, apparently.  CSPI concedes that it accurately reflects the amount of vitamins and other ingredients in this line of beverages.

The fraud – according to CSPI – is that the beverages also contain sugar, while the label and the marketing touts the possible energy and health benefits of the other added ingredients.  Of course, both the amount of sugar and the amount of calories are squarely stated in the “Nutrition Facts” on the label.  And although the beverages do not purport to be “Sugar Free” or “Diet,” they do taste sweet, which should give the calorie-conscious consumer some clue to check the label for sugar content and calories.

Although CSPI claims throughout the complaint that the beverages are “misbranded” and marketed in a “false,” “misleading” and “deceptive” manner in violation of California’s Unfair Competition law (Cal. Bus. & Prof. Code § 17200), its Consumer Legal Remedies Act (Cal. Civ. Code § 1750) and its False Advertising Act (Cal. Bus. & Prof. Code § 17500), the simple fact is this:  the complaint never identifies a single false, misleading or deceptive statement, nor can it truthfully say that the calories or sugar content of these beverages are concealed from the consumer.

The complaint suffers from too many infirmities to list here.  In the unjust enrichment count, it asks for class members to get their money back even though they received the benefit they paid for, drank it, and can’t return it to the defendant.  The complaint also pleads fraud with no particularity whatsoever.  It does not limit the class definition to purchases that were made in California, thus creating choice of law problems.  And it premises liability on satirical marketing copy – such as “this combination of zinc and fortifying vitamins can . . . keep you healthy as a horse” – that obviously would be puffery under California law.  See, e.g., Consumer Advocates v. Echostar Satellite Corp., 113 Cal.App.4th 1351, 1361 (Cal. App. 2003) (“boasts” and “meaningless superlatives” that are not “factual representations that a given standard is met” are akin to puffing and are not actionable).

CSPI’s grandstanding lawsuit against one of America’s most respected product manufacturers – which it filed with two for-profit plaintiffs’ firms as co-counsel – is precisely the sort of abuse of legal process that gives consumer fraud class actions a bad name.
 

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