Recent Happenings in Advertising & Product Risk Management - May 2013
THE MONTH'S TOP SIX ADVERTISING & PRODUCT RISK MANAGEMENT DEVELOPMENTS
1) CPSC Proposed Significant Changes and New Obligations for Importers Relating to Certificates of Compliance
The Consumer Product Safety Commission (CPSC) recently voted to approve a proposed rule amending 16 C.F.R. Part 1110 et. al., more commonly known as the '1110 rule.' Released in the Federal Register at 78 FR 28,080, the proposed amendment proffers numerous changes to the rule, including who is required to certify, what information is listed on the certificate, and when and how long the certificates must be issued and maintained. Importantly, if finalized, the rule would require electronic filing of certificates with each shipment as a requirement for imported products to make entry into the United States. In one of the most significant changes discussed below, the CPSC proposes to impose a certification requirement on common carriers, freight forwarders, and third party logistics providers that assume the role of "importer of record" for direct to consumer shipments from foreign manufacturers.
Parties must comment on the proposed rules by July 29, 2013, to provide the CPSC with information on all issues, including:
- whether including the name of the foreign manufacturer on a certificate of compliance creates issues because that information is proprietary;
- what issues are presented by requiring the filing of certificates at the time of filing an entry with the U.S. Customs & Border Protection (CBP);
- what, if any, issues are presented by allowing, but not requiring, certificates to be filed electronically with CBP in advance of filing an entry;
- whether and when products subject to the Federal Hazardous Substances Act (FHSA) and regulated by the CPSC as banned hazardous substances require certificates; and
- what compliance burden the rule imposes upon importers and manufacturers of regulated products.
In the 2008 Consumer Product Safety Improvement Act (CPSIA), codified as 15 U.S.C. §§ 2051 et al., Congress mandated that manufacturers, importers and private labelers of regulated products certify that regulated consumer products comply with certain CPSC administered product safety rules based on testing conducted for each product or on a reasonable testing program. The statute required this certificate for both imported and domestically manufactured products. Regulated children's products require a certificate attesting to their compliance based on testing conducted by a third party conformity assessment body.
Since 2008, the CPSC has promulgated additional testing, labeling and certification regulations relating to consumer products in continued implementation of the CPSIA. Notable examples include testing rules under 16 C.F.R. Part 1107, which established standards and protocols for continued testing of regulated children's products that went into effect on February 8, 2013 and rules under 16 C.F.R. Part 1109 related to component part testing and certification that became effective in December, 2011. To update the 1110 rule for consistency with these new rules at parts 1107 and 1009, the CPSC staff presented proposed amendments to the then-existing 1110 rule in December, 2012. After months of delay, a slightly modified proposed rule was voted on by the Commission on May 1, 2013 and published in the Federal Register on May 13, 2013, 78 FR 28,080.
Key Proposed Changes
The proposed 1110 rule would strike and replace the existing 1110 rule in its entirety. Key changes to the existing 1110 rule and their implications include:
- new definitions specifying the different types of certificates required under the CPSIA such as children's product certification, general conformity certificate, finished product certificate and component part certificate, among others;
- a new definition of "importer" to mean 'importer of record' as used in the customs statute, 19 U.S.C. § 1484(a)(2)(B), and an indication that a common carrier, express courier, third-party logistics provider or freight forwarder will become subject to the certification requirements of the statute if such party "chooses to become a licensed customs broker and . . . agrees to serve as the importer of record;"
- clarification that the importer must certify products manufactured outside the United States, except when foreign manufacturers sell and ship products directly to consumers in the U.S., such as those purchased via the Internet;
- confirmation that brand owners are not required finished product certifiers unless they are the importer of record, domestic manufacturer or otherwise meet the 'private labeler' definition;
- additional requirements for the use of certain electronic certificates, including identification by a unique identifier or URL at an accessible location without password protection, identified on the product, its packaging, or its invoice, and available to the CPSC as soon as the product or shipment itself is available for inspection, which is clarified to be 'on or before the date the finished product is distributed in commerce;'
- expansion of the information required on a certificate including the certification date and scope of products covered by the certificate, a requirement to list the specific location where the product was manufactured (down to the street address), including foreign manufacturer locations;
- clarification that the harmonized tariff code and the registered identification number, or RN number, for apparel are not sufficiently unique identifiers of a product on a certificate;
- imposition of a requirement that certificates for imported merchandise must be electronically filed with CBP at the time of entry, along with the other customs documents required for entry (either .pdf copy or upload of 10 required data elements) creating additional compliance obligations and risk, which is further discussed below;
- indication that certificates for imported products may also be required up to 24 hours in advance of arrival as part of an importer's current Importer Security Filing ('ISF' or '10+2') obligations;
- a requirement that the certifier attest to the accuracy of the certificate to the best of the certifier's knowledge, information, and belief, and an acknowledgement of an understanding that it is a federal crime to knowingly and willfully make any materially false, fictitious, or fraudulent statements, representations or omissions, on the certificate; and
- confirmation that duplicative testing to the same standard is not necessary when a CPSC rule (such as the lead paint ban or the small parts standard) is incorporated by reference in another standard which becomes law (such as the crib standard or the toy standard).
Impact to Import Compliance
The proposed rule would require certificates to be electronically filed and made available at the ports, upon request. The certificate, in essence, is required for the right to make entry of the imported products. The lack thereof, then, permits CBP to deny entry of the products into the United States. Additionally, as the certificates will now be a component of the entry process for imported merchandise, they will be subject to CBP's rules for entry documentation, record keeping and penalties, which are separately regulated and enforced from CPSC's rules. While the proposed 1110 does not impose any new CPSC recordkeeping requirements, under CBP's regulations, import documents and any records supporting or substantiating information required for the entry of merchandise must be kept at least five years from the date of entry. For example, in addition to the certificate, the supporting testing documentation would also likely be required for retention. This would be similar to CBP's current requirements for supporting documents to substantiate other governmental agency import registrations and forms or preferential duty claims made under a free trade agreement. Likewise, recordkeeping penalties imposed by CBP would also likely be separate from any CPSC action. The CPSC has estimated that the additional burdens for importers related to the certificates are acceptable. The CPSC seeks comments on the format for electronic filing of certificates at entry as well as the resource issue presented to importers as they move to include the certificate as another electronic entry document.
Certifying to Bans
In the CPSIA, Congress mandated certification that products comply with all bans "applicable to the product." The language "applicable to the product" provides the Commission with the flexibility it needs to provide guidance as to what products must be certified as to which bans. For example, the lawn dart ban applies only to "devices with elongated tips that are intended to be used outdoors and that are designed so that when they are thrown into the air they will contact the ground tip first." Logic suggests that the lawn dart ban is not "applicable" to every children's toy and that only such items that fall within the definitions of the ban would need to be certified by an accredited third party laboratory to demonstrate compliance with the lawn dart ban. To date the Commission has not accredited labs for many of the Commission's bans, especially FHSA bans. While not tackling that issue directly, the Commission states that a "finished product certifier is responsible for knowing what rules, bans, standards, or regulations apply to each product and for listing them all on the certificate." The CPSC's discussion of this issue opens up an important, controversial question with significant cost and safety implications.
Certification by Common Carriers
The proposed 1110 rule does not provide any policy rationale for imposing new certification requirements on common carriers and making them the guarantor of product compliance when they act as the importer of record. The Commission fails to explain why a carrier should bear that burden and not the foreign manufacturer. It appears that the foreign manufacturer is only required to certify product compliance on sales and shipments directly to the consumer, in which the consumer serves as the "importer of record," unless the product bears a private label.
Failure to furnish a certificate required by the statutes enforced by the Commission is an unlawful, prohibited act under section 19 of the CPSA subjecting the person who knowingly violates section 19 to civil penalties of up to $15,000,000 for any related series of violations as well as potential criminal liability. CBP can also impose penalties against any party whose importations are contrary to law (e.g., lack of certification or failure to file), or any party who imports products by means of a material false statement or omission. As CBP operates on a transaction by transaction (i.e., per shipment) basis, each entry is viewed as a separate transaction and also potential violation of the statute. The monetary penalties may be up to the full domestic value of the merchandise or the amount of an importer's customs bond.
For more information, contact: Cheri Falvey, John Brew, Jini Koh, Natalia Medley
2) New NHTSA Guidelines Recommend Changes to Built-In Electronic Devices; Mobile Device Guidelines to Follow
On April 26, NHTSA released its final Visual-Manual Driver Distraction Guidelines for In-Vehicle Electronic Devices. The guidelines' primary recommendation is that motor vehicle manufacturers "lock out" certain features of built-in electronic devices, preventing a driver from engaging with these features while driving. Built-in electronic devices are devices built into the vehicle at the time of manufacture, including navigation, entertainment, and communications systems. These guidelines are the first of three sets that NHTSA expects to issue governing in-vehicle use of electronic devices.
The new guidelines are part of NHTSA's broad campaign to reduce driver distraction, which has been ongoing for years. Concerned that driver distraction plays a role in a high percentage of automobile accidents, NHTSA released a Blueprint for Ending Distracted Driving in June 2012. Among other goals, the Blueprint aims to limit driver distraction from electronic devices. The new guidelines take the first step towards this goal by recommending restrictions on drivers' use of built-in electronic devices that require visual-manual operation. Visual-manual operation refers to any task that requires a driver to look at the device, operate it by hand, and then wait for a reaction to her input.
Functions Per Se Locked Out
Among other recommendations, the guidelines designate certain electronic device functions for "lockout," recommending that manufacturers build electronic devices so that certain functions are automatically disabled while the car is being driven. The devices recommended for lockout fall into two categories. First, NHTSA has designated certain device functions for "per se lockout." NHTSA recommends that these functions always be inaccessible to the driver while driving. NHTSA also recommends that most of these activities be inaccessible to a passenger if the electronic device's display is within view of the driver. Tasks designated for per se lockout are:
- manual text entry for the purpose of text-based messaging, other communication, or internet browsing;
- displaying video (though there are some enumerated exceptions);
- displaying images (also with enumerated exceptions);
- display of scrolling text that moves at a pace not controlled by the driver;
- visual presentation of non-driving-related textual information, including books, periodicals, web page content, social media content, text-based advertising and marketing, and text-based messages and correspondence; and
- all other "device functions and tasks not intended to be used by a driver while driving."
Other Functions Subject to Lockout
Second, in addition to the specific tasks designed for per se lockout, NHTSA recommends that manufacturers evaluate certain other tasks to see if they divert the driver's attention from the road. Tasks that do not meet the guidelines' testing criteria should be locked out. NHTSA designates two alternate modes of testing, both designed to measure how long the driver's eyes are engaged by certain tasks. NHTSA prefers that tasks engage the driver's glance for no more than two seconds at a time, and for no more than twelve seconds in total.
Tasks slated for manufacturer testing include all "non-driving-related tasks," such as making phone calls. The guidelines do not recommend testing of most driving-related tasks, including operating the steering wheel, throttle, brake pedal and other driving controls; tasks relating to proper use of a driver safety warning system; or using any electronic device that has a function, control, or display governed by the Federal Motor Vehicle Safety Standards (FMVSS). But even some driving-related tasks are subject to the guidelines, including cruise control operation, resetting trip odometers or computers, and observation of emissions controls. The guidelines are applicable not just to relatively new technologies such as GPS navigation systems, but also to "conventional" electronic devices, including radios, clocks, and temperature controls. They do not apply to devices that are only accessible to backseat passengers.
In addition to designating activities for lockout and potential lockout, the guidelines also make the following recommendations about built-in electronic device design:
- no part of an electronic device should obstruct the driver's view of the roadway or of any vehicle controls or displays required for driving;
- electronic devices should be mounted in a location easy to see and reach while driving;
- electronic device display should be within a certain range of driver's forward line of sight (driver should not have to look too far down to see display);
- text displayed on electronic devices should meet minimum size requirements;
- sound level of electronic devices should be limited so as not to mask any safety warning sounds or cause distraction;
- sound level of electronic devices should be fully mutable;
- operation of electronic devices should require no more than one hand, allowing driver to maintain one hand on steering wheel at all times;
- driver should always have the option to pause while inputting information into electronic device (e.g. device should not automatically delete input from driver if driver stops inputting information);
- electronic device should respond to driver's input in under 0.25 seconds, or, alternatively, should display a clear message that a response is pending; and
- all electronic devices should be able to be turned off or disabled.
For the purposes of the guidelines, NHTSA has defined "driving" to include any time the vehicle's engine or motor is running, except if the vehicle is in "park" or, for vehicles without a "park" position, three conditions are met: the parking brake is engaged, the transmission is in neutral position, and the speed is less than 5 mph. The agency specifically rejected the suggestion from some commenters that "driving" include any motion of the vehicle up to 5 mph. NHTSA explained that it does not want drivers engaging with electronic devices at traffic lights or stop signs.
Enforcement of Guidelines
Though extensive, the guidelines are not Federal Motor Vehicle Safety Standards. NHTSA therefore cannot require any company to report failures to comply with the guidelines. It also cannot require recalls of non-complying vehicles or equipment. NHTSA has also clarified that failure to adhere to the guidelines would not in itself lead NHTSA to determine the existence of a safety-related defect, though it is possible that in general, a device subject to the guidelines could malfunction in a way that constitutes a safety-related defect.
While the guidelines are not binding, they may have a significant impact on vehicle manufacturers. NHTSA has announced that it "intend[s] to monitor manufacturers' voluntary adoption of" the guidelines. NHTSA "plan[s] to test actual production vehicles, either internally by NHTSA or through outside contractors. Vehicles will be selected for such monitoring so that they cover a large portion of all makes and models." NHTSA will consider making its monitoring results available to the public. NHTSA has stated that it expects compliance with the guidelines to occur within three years for both existing and new vehicle models. The guidelines may also foreshadow future regulations. NHTSA has "emphasize[d] that the issuance of voluntary guidelines at this time does not represent a decision to never issue regulations in this area."
As part of the Blueprint, NHTSA expects to release two additional sets of guidelines: one governing portable electronic devices not built into the vehicle, including aftermarket GPS navigation systems, smart phones, electronic tablets and pads, and other mobile communications devices (phase 2 guidelines); and one covering voice-activated controls in factory-installed aftermarket and portable devices (phase 3 guidelines).
NHTSA has expressed a desire to maintain open lines of communication with manufacturers and other stakeholders as it moves through the next steps of its driver distraction elimination plan. NHTSA "is interested in working with all interested parties to keep the NHTSA Guidelines up-to-date and, to the extent possible, to coordinate future efforts and research." NHTSA may hold a workshop for stakeholders interested in the development of the guidelines. NHTSA also welcomes requests for interpretation letters and is open to meeting with interested parties that have concerns about the guidelines.
For more information, contact: Ariel Applebaum-Bauch, Dan Campbell
3) Judge orders BPA Removed from Proposition 65 List-For Now
Just about a month after the American Chemistry Council (ACC) filed suit against California's Office of Environmental Health Hazard Assessment (OEHHA), a California judge has issued a preliminary injunction ordering the state to remove Bisphenol A (BPA) from the Proposition 65 list of "known reproductive toxins" until there is a final determination on the issue.1
Responding to the Court's order, Steven G. Hentges, Ph.D. of the ACC's Polycarbonate/BPA Global Group stated, "[w]e do not believe there is a scientific basis for including BPA on the Proposition 65 list and we look forward to our case being heard on the merits sometime this summer."
In addition, OEHHA has withdrawn BPA's "safe harbor limits" proposal, which would require products to carry warning labels if they could expose people to more than the maximum allowable dose level. If BPA is placed back on the Prop 65 list, labeling requirements would go into effect one year thereafter.
1 See, California Intends to Add BPA to Prop. 65 List of 'Known Reproductive Toxins', January 31, 2013; Recent Happenings in Advertising & Product Risk Management - April 2013 Chemistry Industry Files Suit to Prevent State from Placing BPA on Prop 65 List.
For more information, contact: Lynn Levitan
4) ALJ Grants CPSC's Request to Name Individual CEO as Respondent in Aggressive Prosecution of Buckyballs Matter
In a groundbreaking opinion issued on May 3, an Administrative Law Judge granted the Consumer Product Safety Commission's (CPSC) motion to name an individual as a respondent in its ongoing administrative action seeking a mandatory recall of high-powered magnet products.
In the action, which the CPSC brought pursuant to Section 15 of the Consumer Product Safety Act (CPSA),2 the agency seeks an order that the magnet products contain a defect that creates a substantial product hazard. The CPSC also seeks to compel the three corporate respondents, including Maxfield and Oberton Holdings, LLC, marketer of Buckyballs and BuckyCubes, to recall those products and, among other things, pay for all of the costs associated with the recall. After Maxfield dissolved, the CPSC sought to add Craig Zucker as a respondent, both in his individual capacity and as CEO of Maxfield.
In granting the Commission's motion, the ALJ relied heavily on his interpretation of the "responsible corporate officer" doctrine derived from the Supreme Court's decisions in United States v. Dotterweich3 and United States v. Park.4 These cases both considered the imposition of criminal sanctions against corporate officers for violations of the Federal Food, Drug, and Cosmetic Act of 1938 (FDCA). The ALJ reasoned that, like the FDCA, the CPSA was enacted to protect the public health and safety, which justified holding responsible corporate agents responsible under the statute even "in the absence of consciousness of wrongdoing."5 The opinion interpreted Park as establishing that an individual may be liable where he or she has "a reasonable relation to the situation" and the "authority and responsibility to deal with the situation" leading to the violation "by virtue of his [or her] position."6 The ALJ disagreed with Zucker's view that Dotterweich and Park were inapplicable to Section 15 for several reasons, including that they dealt with statutory provisions that clearly contemplated action against individuals who owned or worked for corporations, whereas, Zucker argued, Section 15 does not.
Applying Dotterweich and Park to the CPSC's allegations, the ALJ concluded that the allegations in the administrative complaint were sufficient to make Zucker "a proper party to the proceeding," as the person who allegedly "was responsible for ensuring Maxfield's compliance with applicable statutes and regulations," and "personally controlled the acts and practices of Maxfield, including the importation of Buckyballs and BuckyCubes."7
While there is a great deal to digest in this opinion and the history of this litigation, we offer here some immediate practical observations:
- The CPSC's approach in this case is yet another sign that the agency is increasingly targeting individuals and not just the companies they own or manage. Pursuant to Sections 20 and 21 of the Act, the CPSC has long had the authority to seek civil and criminal penalties against individuals in their individual capacities for their roles in corporate violations of CPSA requirements or Commission orders, under certain circumstances. The agency has rarely exercised this discretion, generally choosing instead to pursue penalties from companies. The CPSC's decision to bring Zucker into this matter is indicative of the Commission's increasingly aggressive interpretation of its authority under the CPSA. In short, owners and managers of companies regulated by the CPSA should be aware that the corporate form is not a perfect shield against CPSC action, including charges of personal liability.
- Cooperation with the CPSC does not insulate a company from a future Section 15 action. Respondents Maxfield appeared to have established a working relationship with the CPSC through a history of cooperation and compliance prior to the filing of the complaint. The company had agreed to a voluntary recall of Buckyballs and BuckyCubes in 2010 and thereafter relabeled those products as intended for consumers over 14 years old. Despite this, the CPSC revisited the same issue and decided to pursue a mandatory recall to ban the products from sale. Other companies working with the CPSC should not assume that agreeing to a voluntary corrective action will afford absolute protection from future Section 15 litigation.
- The CPSC's pleading highlights the fact that individuals must be very careful about personally making statements to the agency. The agency relied in part on Zucker's own conduct before the CPSC when it argued in its motion that he "personally controlled the acts and practices of the corporation." Among other things, it noted that he personally submitted formal responses to the agency on behalf of the company and recited statements he personally had made to CPSC staff. Regardless of whether the CPSC fairly characterized Zucker's conduct or its relevance to the issues, the case is a reminder that the Commission can and may well use individuals' statements against them in administrative or enforcement proceedings if issues cannot be voluntarily resolved. It is especially important that owners and managers of regulated companies bear this risk in mind in cases that potentially could result in a CPSC referral to the DOJ for criminal enforcement.
- Dissolving a corporation after being sued by the Commission for potential product hazards may increase the likelihood that the Commission takes action against individuals. In determining that Zucker could be individually named as a respondent, the ALJ focused on the fact that Maxfield as a company had been dissolved after the CPSC action was filed and that there was no responsible corporation remaining to comply with any mandatory recall order.8 Indeed, the CPSC said that it sought to add Zucker "in light of" that dissolution. This language makes clear that a corporate dissolution, particularly in reaction to CPSC activity, is likely to shift the Commission's attention to the individuals behind the corporation.
- The CPSC may change its mind over time about how to handle potential product hazards. When Buckyballs and BuckyCubes were initially recalled, Commission compliance staff had determined that the products could continue to be sold after they were relabeled as intended for 14 years old and above, thereby accepting that (after the relabeling) these magnetic products were not de facto toys. By the time the administrative complaint was filed against Maxfield approximately two years later, the CPSC had changed its position, alleging that the high-powered magnet products were "designed, manufactured, and/or marketed as a plaything for children under 14 years of age," despite the cautionary labeling, and for that reason, they violate the federal toy standard. Companies should thus be cautious about relying on the CPSC's position on a potential product hazard or negotiated corrective action as final because, as this case demonstrates, that may be subject to change.
It remains to be seen whether the ALJ's decision will be widely adopted or have a lasting impact on future CPSC litigation. Whatever the outcome, it is apparent that the Commission is continuing to escalate its enforcement activity and maximize the reach of its powers. Companies and individuals should take heed of the CPSC's view of its jurisdiction and approach in this case in considering the development of compliance programs, assessment of risks, and engagement with the CPSC.
A copy of the ALJ's Order granting the CPSC's motion is available here.
2 Section 15 of the CPSA authorizes the CPSC to, among other things, order public notice of the product hazard, a suitable corrective action, and reimbursement of others in the supply chain for the costs associated with the mandatory recall of a product.
3 320 U.S. 277 (1943).
4 421 U.S. 658 (1975).
5 In re Maxfield and Oberton Holdings, LLC, et al., CPSC Docket No. 12-1, 12-2, 12-3 (May 3, 2013) ("ALJ Op.") at 12 (citing Park, 421 U.S. at 669 (citing Dotterweich, 320 U.S. at 280-81)).
6 ALJ Op. at 12 (citing Park, 421 U.S. at 674) (internal quotations omitted).
7 ALJ Op. at 14, 17. The ALJ also concluded that naming Zucker would not unduly delay or broaden the scope of the case. ALJ Op. at 6-7.
8 ALJ Op. at 18.
For more information, contact: Natalia Medley, Ann Mason Rigby
5) Federal Court Rejects Preliminary Injunction in False Advertising Case
On April 25, 2013, a federal district court in New York rejected the North American Olive Oil Association's (NAOOA) motion for a preliminary injunction in a false advertising case. North American Olive Oil Ass'n v. Kangadis Food Inc. 2013 WL 1777774 (S.D.N.Y. Apr. 25, 2013). As the plaintiffs learned in Kangadis Food, it has become increasingly difficult for parties to obtain preliminary injunctions under §43(a) of the Lanham Act in recent years. This trend can be traced back to the Supreme Court's decision in Winter v. Natural Res. Def. Council, Inc., 555 U.S. 7 (2008) which heightened the standard for preliminary injunctions.
Since Winter, parties seeking a preliminary injunction have experienced the greatest success rate in the Second Circuit because its preliminary injunction standard is more liberal than the other circuits. Most circuits require parties to prove that they are likely to suffer irreparable harm and are likely to succeed on the merits. But even after Winter,the Second Circuit has applied a more flexible standard and continues to hold that a party seeking a preliminary injunction must show (a) irreparable harm and (b) either (1) likelihood of success on the merits or (2) sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tipping decidedly toward the party requesting the preliminary relief. Id. at *2.
Even though the preliminary injunction standard used in the Second Circuit has been the most favorable to parties seeking injunctive relief, the NAOOA was unable to persuade the court to enjoin Kangadis from claiming that its olive oil product contained "100% Pure Olive Oil." The Kangadis product originally contained "Pomace," a processed oil that is made from olive pits, skins and pulp. After NAOOA first filed its motion, Kangadis consented to entry of an order prohibiting it from claiming "100% Pure Olive Oil" on any product containing Pomace. However, it then modified its product to substitute 100% refined olive oil in the place of Pomace, and continued to use the "100% Pure Olive Oil" claim.
In its renewed motion for preliminary injunction, the NAOOA alleged that, even though Kangadis had eliminated Pomace from the recipe, its substitution of Refined Oil was no less misleading. It argued that consumers would interpret the claim of "100% Pure Olive Oil" to mean that the product contained virgin olive oil, which it did not. The NAOOA pointed to federal, state and industry labeling standards that distinguish between "olive oil" and "pure olive oil," which must contain at least some virgin olive oil, and "refined olive oil," which need not contain any virgin olive oil.
The court found that the NAOOA had met the first prong of the Second Circuit's preliminary injunction standard by showing the potential for irreparable harm. Id. at *2. NAOOA member companies compete with Kangadis, so additional Kangadis sales come at the expense of NAOOA members. Inducing consumers to purchase olive oil that is not what it seems "may cause consumers to lose faith in olive oil products in general," a harm the court called "quintessentially irreparable." Further, refined olive oil is generally cheaper than virgin olive oil, so if the Kangadis labels were false or misleading they would provide an unfair competitive advantage.
Nonetheless, the court found that the NAOOA failed to meet the second prong of the Second Circuit standard because NAOOA did not make the required showing as to its likelihood of success on the merits. Id. at *3.
As noted by the court, a §43(a) claim must be based on at least one of two theories: (1) that the challenged advertisement is literally false on its face; or (2) that the advertisement is likely to mislead or confuse consumers. Id. at *2 (citing Tiffany (NJ) Inc. v. eBay Inc., 600 F.3d 93, 112 (2d Cir.2010)). Here, the NAOOA offered no extrinsic evidence of consumer confusion, so the claim could only proceed on a theory of literal falsity. The NAOOA cited to a number of state, federal, and industry labeling standards that distinguished between "pure olive oil" and "refined olive oil," but the court found that a reasonable consumer would not be familiar with these standards and could interpret the phrase "100% Pure Olive Oil" to mean simply that the product contains pure olive oil, while remaining silent as to whether that olive oil is virgin or refined. Thus, the court found that the label was not literally false. Id.
The court wrote, "Of course, based on the standards NAOOA cites, olive oil industry insiders would understand Kangadis's label to describe a blend containing at least some virgin olive oil. But in the absence of any evidence to the contrary, it is far from clear that an ordinary consumer, unfamiliar with industry lingo, would perceive the terms that way."
This portion of the ruling is significant and has broader ramifications for litigants in false advertising cases, who often argue that the defendant's breach of an industry labeling standard, or state or federal labeling regulation, constitutes prima facie evidence of deception. As the Kangadis court held, the plaintiff cannot rest its case by citing those standards and arguing they were breached; if the ad is not literally false, the plaintiff must provide evidence that consumers are likely to be deceived by a false implication. This is usually accomplished through a consumer survey.
Finally, the court noted that under the Second Circuit's preliminary injunction standard the NAOOA may have raised "sufficiently serious questions going to the merits to make them a fair ground for litigation." Id. at *5 (citing Citigroup Global Markets, Inc. v. VCG Special Opportunities Master Fund Ltd., 598 F.3d 30, 35 (2d Cir. 2010)). But even under the Circuit's more liberal standard, the NAOOA could not prevail on the motion, because the NAOOA had not shown the other part of that prong, that "a balance of hardships tipping decidedly" in its favor. Id. The court's decision not to enjoin Kangadis demonstrates that even though the Second Circuit's standard may be more flexible, parties still need to show that they are likely to succeed on the merits or they must raise sufficiently serious questions going to the merits.
For more information, contact: Chris Cole, Jason Crawford
6) California's Governor Seeks to End Prop 65 "Shake-down"
In 1986, Proposition 65 established the laudable goal that companies must warn consumers about potential exposure to harmful chemicals. It requires the Governor to publish annually a list of chemicals known to California to cause cancer or reproductive toxicity. A company selling goods in the state which contain chemicals on the list in excess of safe levels must provide a clear warning to the public. The law allows the attorney general, local district attorneys or "private attorneys general" on behalf of citizens to sue to enforce it. Those "private attorneys general", however, have exploited Prop 65 by filing "shake-down" lawsuits.
In a bold move to improve California's business climate, Governor Jerry Brown has proposed to reform Prop 65. Brown and the California Environmental Protection Agency agree change is necessary because of profit-seeking lawsuits and scientific advances which make some of the standards set 27 years ago obsolete. "Proposition 65 is a good law that's helped many people, but it's being abused by unscrupulous lawyers," Brown said in a statement.
Brown proposes to:
- limit plaintiffs' attorney's fees;
- require stronger demonstration in support of plaintiffs' claims before initiating litigation;
- require greater disclosure of plaintiffs' supporting information;
- set limits on the amount of money that can go into settlement funds in lieu of penalties;
- give the state the ability to adjust safe harbor levels for chemicals that cause reproductive harm; and
- require more useful information to the public on what they are being exposed to and how they can protect themselves.
Brown's plan supports recent efforts by the California Legislature to amend Prop 65. Earlier this year, Assemblyman Mike Gatto (D-Los Angeles) introduced AB 227—which recently achieved a unanimous bipartisan vote of 10-0 in the Assembly Judiciary Committee—and is essentially a "fix-it ticket" for signage violations over the most common, everyday substances covered under Prop. 65. This would include those that naturally occur when grilling food or are present in alcoholic beverages.
Any change to Prop 65 requires approval from at least two-thirds of both houses of the Legislature.
For more information, contact: Lynn Levitan
CROWELL AND MORING SPEAKS
Cheryl A. Falvey will co-Chair and speak at American Conference Institute's Consumer Products Regulation & Litigation conference. She will participate on a panel titled "Minimizing Company Harm from 'No Injury' Class Actions" and will moderate a panel titled "View from the Bench: The Judicial Perspective on Trying a Products Liability Case from Administering Multi-District Litigation, Controlling Discovery, and Motion Practice to the Trail Phase and Settlement" on June 26 & 27, 2013 in Chicago, IL.
Thomas P. Gies, Mark A. Romeo, Shari Ross Lahlou, and April Nelson Ross presented a Crowell & Moring webinar titled "Third Thursday Briefing: Comcast v. Behrend – How Big A Deal?" on April 18, 2013.
Jeffrey A. Smith, Danielle Sugarman, and Robert J. Stein published an article for the Washington Legal Foundation's Contemporary Legal Note series in May 2013. Their article is titled "Sustainability Disclosure: Proxy Exclusion & the Impact of SEC's Decision in PNC Financial" and can be found here.
April Nelson Ross will be a panelist on "Focus on Foreign Crashes: Updates on FNC, Discovery, and Preemption" at American Conference Institute's 5th National Forum on Defending and Managing Aviation Claims & Litigation on May 30, 2013 in Chicago, IL.
Cheryl A. Falvey and Scott L. Winkelman spoke at "The National Law Journal Presents 'Crisis Litigation: Navigating Fallout from Catastrophic Events'" on May 1, 2013 in New York. Their panel was titled "Strategic Legal Planning: Best Practices for 2013 & Beyond."
The Crowell & Moring Advertising & Product Risk Management Group hosted a seminar on March 19, 2013, titled "Staying Afloat When Your Brand is Under Pressure: How to Avoid, Mitigate and Manage Product Crises." In conjunction with the seminar, the group published a Crisis Management Handbook, which can be found here. To request a hard copy of the Handbook, please contact Gabrielle Ballantine.
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For more information, please contact the professional(s) listed below, or your regular Crowell & Moring contact.