In postings in September 2013 and February 2014, I discussed tactics for opposing class certification in food labeling class actions. These tactics included relying on the Supreme Court’s opinion in Comcast Corp. v. Behrend, 133 S. Ct. 1426 (2013), to challenge the sufficiency of the plaintiffs’ damages model, which should be particularly difficult in these types of claims. In late March 2014, the Northern District of California decertified a food labeling class action largely based on those shortcomings.

In re POM Wonderful LLC Marketing & Sales Practices Litigation, 2014 U.S. Dist. LEXIS 40415 (N.D. Cal. Mar. 25, 2014), involves allegations that the defendant falsely advertised that certain of its juice products provide various health benefits and that substantial scientific research demonstrates those benefits.  The plaintiffs alleged familiar theories based largely on California consumer fraud statutes. The court had earlier certified the class, and the plaintiffs proposed two damages models from their expert as part of that process. The first would grant a full refund of the entire purchase price to the entire class--$450 million. That model assumed “that consumers would not have purchased Defendant’s juices if not for the alleged misrepresentations.” Id. at *11.  The court rejected that model, however, because it failed to acknowledge that consumers received some benefit even if they purchased the juice based on the “fraudulent” representations. It would be an improper windfall for the plaintiffs to receive a full refund when they could not “plausibly contend that they did not receive any value at all from Defendant’s products.” Id. at *14.

The second damages model was the “price premium” model. It assumed that consumer demand for the products would have been lower if not for the alleged misrepresentations. That damages calculation was approximately $290 million.  But the plaintiffs did not use any sort of consumer research data to show why consumers purchased these products or the effect of the alleged misrepresentations. Instead, they tried to rely on the fraud on the market theory that familiarly appears in securities fraud class actions. The fraud on the market theory, however, really only applies to establishing or overcoming the need to prove reliance on a class wide basis. It does not calculate damages. Plus, no case seems to have applied this theory to a consumer class-action.  Id. at *16.  Furthermore, the plaintiffs did not establish that an efficient market for the juices exists, which is a predicate to the securities fraud on the market theory.  It truly would be impossible to establish such an efficient market because consumers by such products for a host of different reasons, and the marketplace has not adjust the price to reflect all of those reasons.  “Absent such traceable market-wide influence, and where, as here, consumers buy a product for myriad reasons, damages resulting from the alleged misrepresentations will not possibly be uniform or amenable to class proof.”  Id. at *18.

Things going downhill for the plaintiffs. Even if a fraud on the market theory somehow were relevant, the plaintiffs could not show that the alleged misrepresentations caused the class to pay a price premium. The plaintiffs’ expert tried to compare the POM products to the average prices of refrigerated orange, grape, apple, and grapefruit juice. He never tried to explain why the POM juices were more expensive; he simply observed that they were and assumed that all of that price difference was attributable to the misrepresentations.  The expert “assumed, without any methodology at all to support the assumption, that not a single consumer would have chosen POM juice over some agglomeration of orange, grapefruit, Apple, and grape juice if not for POM’s allegedly deceptive advertising.”  Id. at *21.  But that ignores that consumers purchased products for several reasons-- because they are thirsty, they want to try something new, a friend likes the flavor, it was on sale, etc. That type of damages model did not meet the requirement that class-wide damages be tied to a legal theory, and the court could not conduct a rigorous analysis when “there is nothing of substance to analyze.”  Id. at *22.  Significantly, the court also noted that the expert’s opinions were not admissible under Daubert, implying that the court believes that standard governs the use of expert testimony at class certification.  Id. at *22 n.7.  Admittedly, that is an unresolved question across the Circuit Courts and the United States Supreme Court.

The final blow to class certification was ascertain ability.  It seems impossible to believe that many consumers would have retained receipts to prove that they purchase these products.  “Here, at the close of discovery and despite Plaintiffs’ best efforts, there is no way to reliably determine who purchased Defendant’s products were when they did so.”  Id. at *24.  See this earlier post for another analysis of using ascertain ability to defeat class certification in these cases.

In sum, this decision is an important victory for food labeling class action defendants that ties together several tactics. First, these plaintiffs tend to rely on that same price premium theory. It seems impossible, however, to create a coherent theory of establishing that damages model under Comcast.  People buy food products for too many different reasons to suggest that alleged fraud harmed everyone. This is where a defendant may want to use its own consumer survey research data to affirmatively demonstrate those different motivations for product purchases. And ascertain ability will continue to be a very difficult hurdle for these plaintiffs to overcome. Not yet addressed in an opinion I have seen is any effort to show which class members actually were “injured,” even under a price premium theory. That is, the actual price someone pays varies greatly from day to day and store to store. A product may be on sale because a particular store has too much in stock. The manufacturer may be running a promotion as well.  Supermarket customer loyalty programs also may result in discounts. It seems impossible to segregate “injured” class members from those who did not suffer any purported injury because they paid a price that is beneath the supposed “premium price.”

James Smith is a partner in the Phoenix office of Bryan Cave LLP.  He is a member of the Class and Derivative Actions Client Service Group and the Food & Beverage Team.

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A recent federal court decision rejected a preemption argument under the Food, Drug, and Cosmetic Act and the Nutrition Labeling and Education Act regarding Smart Balance “fat-free” milks.  Admittedly, those defendants advocated a novel preemption theory.  It also did not help that a competing product used labeling that the plaintiffs acknowledged complied with all federal laws and would not provide a basis for state law claims.

In Koenig v. Boulder Brands, Inc., No. 13-CV-1186 (ER) (S.D.N.Y. Jan. 31, 2014), the plaintiffs alleged that the defendants deceptively labeled milk products as “fat free” when they truly contained one gram of fat per serving.  The defendants added an Omega-3 oil blend to fat-free milk, so the product contained less than 0.5 gram of milk fat per serving, but contained one gram of fat per serving due to adding the oil blend.  As is common in these types of claims, the plaintiffs alleged that the “fat-free” labeling deceived them and that they paid a premium for the products because of that deceptive labeling.
While the product labeling touted the “fat-free” nature of the milk, the front label also disclosed that it contained “(1 g fat from Omega-3 oil blend),” albeit in smaller font.  Of course, the nutrition facts panel also disclosed that the milk contained one gram of fat per serving, and the oil blend was the third ingredient listed. Unfortunately for the defendants, however, the nutrition facts panel did not contain an asterisk or disclaimer modifying that description.  As we will see below, that was an important omission from the court’s perspective.
It is well-recognized now that states cannot impose labeling requirements different from those imposed by the Food, Drug, and Cosmetics Act (“FDCA”) and the Nutrition Labeling and Education Act (“NLEA”).  Federal law, however, does not preempt state laws that only impose identical labeling requirements.  A state consumer law may provide a claim even though the relevant federal laws do not provide any private remedies for consumers.  Thus, these plaintiffs had to establish that their state law claims only imposed the same obligations as federal law, while the defendants argued the opposite.
Not surprisingly, a specific regulation regarding labeling of “fat free” products exists.  Under that regulation, products labeled as “fat free” and that have an added ingredient consisting of fat must have an asterisk next to the ingredient and a statement along the lines of, “adds a trivial amount of fat,” “adds a negligible amount of fat,” or “adds a dietarily insignificant amount of fat.”  21 C.F.R. § 101.62(b)(ii).  That is why the lack of an asterisk came back to haunt these defendants.
The defendants argued, however, that FDA compliance policy guides allowed them to treat this milk product essentially as two combined products—one that is “fat-free milk” and the other that is not fat-free Omega-3 oil.  The defendants pointed to such policy guides regarding water with added minerals and peas and carrots.  No such guidance existed for a “fat-free” product with added fat, though.  The court rejected the argument that the policy guides for other products somehow pointed to preemption here.  After all, no policy guide exists for this type of milk product, and a competing milk product appropriately uses the asterisk to note added oil.  In fact, the court could not find any FDA policy guide involving combining an ingredient that is fat with a “fat-free” food.  Considering that a regulation specifically addresses such situations of adding fat to “fat-free” foods, there was no reason to try to analogize to other policy guides for different types of food.  Thus, the court concluded that the plaintiffs’ claims only sought to impose requirements that were identical to federal law.
The court then turned to the sufficiency of the state law claims.  First, the plaintiffs alleged consumer fraud under New York’s General Business Law (“GBL”) § 349.  That law relies on an objective test to assess whether practices are likely to mislead reasonable consumers acting reasonably under the circumstances.  The court noted that a reasonable consumer may conclude that the product contains a gram of fat per serving, but also noted that a reasonable consumer might focus on the more prominent wording on the label touting the product as “fat-free milk and Omega-3s.”  That was enough to defeat the motion to dismiss.  The court also concluded that the plaintiffs adequately alleged injury because they contended that they paid price premiums based on the defendants’ misrepresentations.
The court dismissed the plaintiffs’ breach of express warranty claims, however, due to the lack of privity.  It did so without prejudice, so the plaintiffs may attempt to replead that claim.  It seems difficult, however, to conceive of retail plaintiffs buying products directly from the manufacturers, rather than from a grocery store.  The court also dismissed the plaintiffs’ unjust enrichment claims as duplicative of other claims.
At this point in food and beverage labeling class actions, several courts have ruled on preemption issues and provide fairly consistent guidance on that doctrine.  That guidance, of course, cuts both ways for manufacturers—plaintiffs have fairly clear road maps for how to plead claims to avoid preemption.  More interesting questions, and perhaps more successful defenses, will arise in later proceedings such as summary judgment and class certification.  For example, nearly every state’s consumer fraud laws purport to rely on an objective standard.  That is, what would the reasonable consumer believe or would the labeling deceive the reasonable consumer?  It is not clear how class action plaintiffs intended to satisfy this burden in many respects.  Labels typically disclose the relevant information even when a plaintiff seizes on only one portion of the label (e.g., “fat free” or “all natural”).  It should not be sufficient for class action plaintiffs to rely only on the named plaintiff’s subjective interpretations.  There should be some requirement that they establish that a “reasonable” consumer would not have read other portions of the label, would not have understood them correctly, or would have disregarded them.  This seems particularly difficult to do and, at a minimum, should require statistically significant and valid survey data regarding consumer perceptions of the labels.  If a plaintiff does not offer that type of survey, a defendant should have grounds for summary judgment or to defeat class certification.
Another issue that these types of plaintiffs do not thoroughly address is injury due to alleged “premium” payments.  In sum, plaintiffs argue that they paid more for a mislabeled product than they otherwise would have.  That tends to be the entire measure of damages proffered by these types of class actions.  But this should be a difficult proposition to prove.  Grocery prices vary significantly depending on several factors.  Was the product on sale?  Did a customer belonging to a store’s “membership” program buy the product at a price lower than that for a non-offending product because of that membership?  Did a customer buy the product because her preferred alternative product was sold out?  Any number of differences may explain (1) whether a consumer actually paid a “premium” price and (2), if so, whether she paid that price because of the labeling or for unrelated reasons.  The United States Supreme Court’s recent decision in Comcast Corp. v. Behrend, 133 S. Ct. 1426 (2013), gives class action defendants considerable ammunition to attack plaintiffs’ proposed methodologies for establishing injuries and damages.  That ruling should play a significant role in defending any of these labeling class actions.
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This past holiday season, Target Corporation was victimized by one of the largest retail data breaches in the United States. On December 19, 2013, Target confirmed reports that hackers stole payment data from approximately 40 million customers who shopped in its stores from November 27, 2013 through the middle of December. Since learning that data was also stolen from online shoppers, Target has since revised the number of potential customers affected up to between 70 million and 110 million. Retail analysts anticipate Target’s security breach will result in massive losses for the retailer due to federal and state regulatory penalties and lost revenues from cautious shoppers. More immediately, Target should be concerned with the onslaught of plaintiff class action lawsuits typically filed after a retail security breach. 

One way Target could have reduced the risk of defending class action lawsuits after a security breach (at least from claims stemming from online purchases) was to include an arbitration clause in its online Terms and Conditions. Online retailers are starting to require that their customers agree to arbitrate disputes on an individual basis only, with customers being obligated to waive any rights they might have to pursue claims through class actions. Litigation in this area over the last several years has focused on the enforceability of these online arbitration agreements.

For example, in 2012, customers sued and its subsidiary (an online apparel and shoe retailer) in various courts, alleging they received emails from Zappos notifying them that a hacker had breached Amazon’s computer servers and downloaded files containing their personally identifying information. Zappos and Amazon attempted to compel arbitration, arguing that Zappos’ terms of use require customers to arbitrate any disputes based on their use of the retailer’s website. However, the court denied Amazon and Zappos’ request based in part on deficiencies in the customers’ consent. 

In an upcoming article, Jones Walker commercial litigation attorney, Mia Mitchell Grandpre (New Orleans, Los Angeles), will review the latest court opinions in this area and propose best practices for companies ensuring the enforceability of online arbitration agreements. 

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On August 21st, the U.S. Court of Appeals for the Ninth Circuit in Richards v. Ernst and Young held that an employer’s arbitration agreement could be enforced, despite any limitation on joint or class actions.

The decision came after defendant; Ernst & Young LLP appealed the district court’s decision denying its motion to compel arbitration of state wage and hour claims brought by its former employee, Michelle Richards. The district court ruled that the defendant had waived its right to arbitration by failing to raise the agreement as a defense early in litigation. However, plaintiff Richards’ action was consolidated with other former employees’ claims at a later date.

In reversing the district court’s decision, the Court of Appeals noted that waiver of a contractual right to arbitration is not favored. Therefore, any party arguing waiver of the right has a heavy burden of proof which includes demonstrating: (1) knowledge of an existing right to compel arbitration; (2) acts inconsistent with that right; and (3) prejudice to the party opposing arbitration resulting from the inconsistent acts.

The plaintiff argued prejudice as a result of the defendant’s failure to compel arbitration at an earlier date, after she had already provided pretrial information and incurred expenses. However, the Court of Appeals ruled this was insufficient prejudice. Plaintiff further argued she was prejudiced as there were meritorious arguments and as a result of compelling arbitration, some of her claims were dismissed. However, the Court noted that one of her claims was dismissed without prejudice, which did not constitute a decision on the merits. Furthermore, another of her claims was resolved when it was determined that she lacked standing to bring the claim- a decision that precedes and does not involve any analysis of the merits.

Last of all, the plaintiff argued that the Court should follow a decision of the National Labor Relations Board (NLRB) in D.R. Horton, 357 N.L.R.B. No. 184, 2012 WL36274 (Jan. 3, 2012) in which it was held that an arbitration agreement that did not allow employees to file joint, class, of collective employment related claims was invalid. The Court of Appeals declined to entertain the argument, as it was not properly raised before the district court for argument. However, it more importantly noted that it, as well as a majority of courts, have declined to follow the NLRB’s decision because it conflict with explicit pronouncements of the U.S. Supreme Court and the Federal Arbitration Act (FAA) 9 U.S.C. §§ 1–16. It specifically noted that the U.S. Supreme Court recently reiterated the importance of courts enforcing arbitration agreements, including those whose subject matter involves claims of federal law violations.

This case is important for employers, who may be able to limit their exposure to class actions by utilizing mandatory arbitration agreements such as the one in this case. Employers should be careful to understand the benefits of litigation versus arbitration and seek advice from an experienced attorney regarding the use of such an agreement in its employment contracts.

This blog was originally posted on September 19 on the Jampol Zimet website. Click here to read the original entry. 

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As was reported yesterday the plaintiffs in the 2011 landmark class action case Dukes v. Wal-Mart haven't given up and are now attempting to pursue regional class cases in federal courts in California, Tennessee, Texas, Florida and Wisconsin.  In an attempt to overcome the issues raised by the U.S. Supreme Court, counsel for the Wal-Mart plaintiffs contend the narrower, regional classes pass muster because they are geographically focused and allegedly identify specific store, district and regional practices that led to the alleged discriminatory practices.  Counsel for Wal-Mart contends the plaintiffs' class certification motion merely "recycles" arguments previously rejected by the high court, noting the remaining differences between the individual plaintiffs in each of the proposed classes.

Do these new regional classes meet the standards announced in Dukes v. Wal-Mart?  How have the plaintiffs overcome the conflicts present in the initial classe, such as including female managers and their female subordinates in the same class?


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A current trend in consumer class action litigation across the country focuses on food and beverage labeling.  Plaintiffs will allege that products labeled as “all natural,” being a good source of a certain nutrient, or having “no artificial ingredients” are deceptive and violate various unfair competition laws.  The United States District Court for the Northern District of California has become a particularly active forum for these claims, earning the nickname, “the food court.”  That court often denies motions to dismiss and grants class certification, largely relying on California’s consumer-friendly False Advertising Law, Unfair Competition Law, and Consumers Legal Remedies Act.  A recent decision on one of the earliest “all natural” class actions, however, emphasizes that defendants can succeed against these claims even after losing the motion to dismiss and motion for class certification.  This decision reminds us that, as with any class action, it is important to prepare the case as if you will take it to trial (and be prepared to try it) and to put the plaintiffs to the test of meeting the essential elements of their claims.

Reis v. AriZona Beverages USA LLC, No. 10-01139 RS (N.D. Cal. Mar. 28, 2013), began in March 2010 and is one of the earlier “all natural” food labeling cases.  Those two plaintiffs alleged that the defendants falsely labeled AriZona Iced Tea as “all natural,” “100 percent natural,” and “natural” even though the products contain high fructose corn syrup and citric acid.  The plaintiffs contended that those ingredients are not natural and that the marketing, advertising, and labeling was deceptive.  The Northern District of California denied a motion to dismiss, denied a motion for summary judgment, and certified a class under Federal Rule of Civil Procedure 23(b)(2) to pursue claims under California law.

Things changed, however, after discovery had closed.  The plaintiffs never disclosed any expert opinion as to whether high fructose corn syrup and citric acid are not “natural,” and they did not provide any evidence as to how to measure restitution or disgorgement under California law.  Thus, the defendants renewed their motion for summary judgment.

The court took a particularly harsh view of plaintiffs’ failure to conduct basic discovery or provide evidence supporting essential elements of the claims.  Central to the claims, of course, is the assertion that high fructose corn syrup and citric acid are not “natural.”  The defendants provided an expert report from a food scientist who described the processes of making those ingredients, and who opined that they are natural.  The defendants also provided declarations from their suppliers reflecting that the high fructose corn syrup supplied to defendants satisfies FDA natural policy, and a certificate of the natural status of their citric acid.

The plaintiffs did not offer any evidence that high fructose corn syrup is artificial.  Instead, they asked the court to take judicial notice of patents issuing for the process of producing that product.  They argued that high fructose corn syrup is not natural as a matter of law because a patented process is necessary to create it.  The court quickly dismissed that argument as it lacked any legal support and was nothing more than an extension of plaintiffs’ contention that a product is artificial if it cannot be grown in soil, plucked from a tree, or found in the ocean.  As the court noted (Slip Op. at 7), “[i]n the face of a motion for summary judgment, rhetoric is no substitute for evidence.”

The plaintiffs truly seemed to discard their “not natural” argument.  Instead, they contended that the labels were misleading under California law because ordinary consumers would not know that “all natural” includes such ingredients derived through complex processes.  The court rejected that argument as well because California law requires that the statements be likely to mislead the public, not merely that they could mislead the public.  To succeed on this type of claim, the plaintiffs should have demonstrated by extrinsic evidence (such as consumer survey evidence) that the challenged statements tend to mislead the public.  Ambiguous deposition testimony from one of the defendant’s executives about the decision to include the “all natural” labeling on the products did not meet the plaintiffs’ burden.  

Equally important, the plaintiffs failed to meet their burden of establishing some way to measure damages.  Under California law, plaintiffs and the class would only be entitled to restitution or disgorgement.  The proper measure of such damages is the difference between what plaintiffs paid for and what they received.  Even under the plaintiffs’ theory, the drinks they purchased had some value—presumably the same value as “correctly” labeled beverages that did not tout being “all natural.”  But the plaintiffs did not even address this essential element of their claims.  “They offer not a scintilla of evidence from which the finder of fact could determine the amount of restitution or disgorgement to which plaintiffs might be entitled if this case were to proceed to trial.”  [Slip Op. at 11]  That failure alone was sufficient to grant summary judgment.    

Last, the court also decertified the Rule 23(b) (2) class that it had certified.  The court concluded that the plaintiffs and their counsel were not adequate representatives for the absent class.  The failure to even attempt the necessary discovery and to fail to address at all in their summary judgment opposition the proper measure of damages indicated they could not protect the class’ interests.

Although Ries is a district court decision, it is significant for a few reasons.  First, it is an important victory for class defendants facing such food labeling claims in the Northern District of California. That court has become a magnet for these types of claims.  Second, the decision emphasizes that class action defendants cannot view class certification as the end of their case.  Class action plaintiffs’ reliance on the vague meaning of “all natural” can work against them on the merits of the claim.  At some point, plaintiffs must prove that the ingredients they challenge truly are not “natural” or not a good source of a nutrient.  While plaintiffs in this district often defeat motions to dismiss through rhetoric (i.e., it is not natural if it can’t be grown or raised), meeting the burden of proof at summary judgment is a different matter altogether.  Defendants should be able to compel plaintiffs to provide, at a minimum, expert testimony to meet this burden.  Of course, expert testimony must satisfy Daubert at the summary judgment stage, so that provides another avenue of attacking the plaintiffs’ case.  As with every case, prepare it from the outset as if you are going to trial.  

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Class Action Deemed to Be Improperly Certified by Lower Courts

CHICAGO – (March 27, 2013) The Supreme Court this morning reversed the judgment of the Third Circuit Court of Appeals in the case of Comcast v. Behrend, an opinion in alignment with the position of DRI – Voice of the Defense Bar in its amicus brief filed in August of last year. The majority held that the class action in Comcast v. Behrend was improperly certified under Rule 23(b)(3). 

In this case, subscribers sued Comcast Corp. and various Comcast subsidiaries, alleging that Comcast monopolized Philadelphia’s cable market and excluded competition in violation of federal antitrust laws. To constitute a class, plaintiffs proffered an expert damages model that purported to prove each class member’s damages by evidence common to all. Comcast responded that the plaintiffs’ model was incapable of calculating damages for the class because it was based on several erroneous assumptions about the asserted claims, and indeed that common proof of damages is impossible given significant differences among the class members. The district court nonetheless certified the class.

Comcast sought review in the Third Circuit Court of Appeals, which affirmed the certification order after expressly declining to consider Comcast’s contentions. While the Third Circuit acknowledged that, “[t]o satisfy . . . the predominance requirement, Plaintiffs must establish that the alleged damages are capable of measurement on a class-wide basis using common proof,” it nonetheless insisted that “[w]e have not reached the stage of determining on the merits whether the methodology [offered by Plaintiffs] is a just and reasonable inference or speculative.” The court concluded that Comcast’s “attacks on the merits of the methodology” have “no place in the class certification inquiry.” 

In his dissent, Judge Jordan stated in part, “not only have Plaintiffs failed to show that damages can be proven using evidence common to the class, they have failed to show . . . that damages can be proven using any evidence whatsoever—common or otherwise.” 

The Supreme Court held that the Third Circuit erred in refusing to decide whether the plaintiff class’s proposed damages model could show damages on a class-wide basis. Under proper standards, the model was inadequate and the class should not have been certified. The vote was 5–4 with Justices Breyer, Ginsburg, Sotomayor and Kagan dissenting.

Citing the Federal Judicial Center’s Reference Manual on Scientific Evidence, the majority held that “’The first step in a damages study is the translation of the legal theory of the harmful event into an analysis of the economic impact of that event.’ The District Court and the Court of Appeals ignored that first step entirely.”

The Third Circuit’s approach to class certification would have allowed plaintiffs to obtain certification without showing a reasonable likelihood that they will be able to prove their class-wide claims (predominately) by common evidence. This would have significantly lowered class plaintiffs’ burden under Rule 23 and resulted in the certification of many more non-meritorious class actions.
Brief author Jonathan F. Cohn of Sidley Austin LLP, Washington DC, is available for interview or for expert comment through DRI’s Communications Office.
For the full text of the brief, click here.

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The growing industry of litigation funding will be expanding further very soon.  Reuters reported last week that well known former federal prosecutor Andrew Stolper of Santa Ana, California, will open a litigation financing firm.  The new company will be based in Irvine, California and will specialize in funding plaintiffs in commercial litigation cases.  Firms like Stolper’s loan money to plaintiffs in exchange for a percentage of any recovery.  The loans typically do not have to be repaid if the plaintiff does not recover.  

Litigation financing is a very controversial practice.  In 2011 the New York City Bar Association issued a formal opinion stating that it is not unethical per se for a lawyer to represent a plaintiff with a non-recourse financing agreement.  However, the same opinion pointed out that there may be a loss of confidentiality due to sharing privileged information with the litigation finance company. The opinion states “a lawyer representing a client who is party, or considering becoming party, to a non-recourse funding arrangement should be aware of the potential ethical issues and should be prepared to address them as they arise.”

In addition to the various ethical concerns, one of the practical ramifications of litigation financing is that it can often complicate the resolution of a case by settlement since the funding company will typically have a lien against the proceeds, minimizing the plaintiff’s net recovery via settlement.  Many mediations fail because of such liens.

Stolper enters his new business with a history of having been strongly criticized by a federal judge in 2009 for engaging in a “shameful” effort to intimidate witnesses.  Further, his partner in the new venture, Peter Norrell, is a former FBI agent who pled guilty in 2010 to illegally accessing FBI records and threatening criminal prosecution to assist a friend in a debt collection matter.  He received two years of probation and three months of home confinement for that incident.  Apparently, Norrell and Stolper have worked together in the past and they bring their experience to the questionable litigation financing industry.   

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To successfully assert a claim under New York General Business Law § 349 (h) or § 350, "a plaintiff must allege that a defendant has engaged in (1) consumer-oriented conduct that is (2) materially misleading and that (3) plaintiff suffered injury as a result of the allegedly deceptive act or practice" 

A claim is brought under GBL § 349 to allege misleading and deceptive trade practices and under GBL § 350 to allege false advertising.  Typically, these two sections are pled in tandem, both in single plaintiff cases and in class action litigation seeking relief from consumer fraud. 

In their NYLJ article (12/28/12) looking back at the significant New York State class action decisions that were handed down during 2012, authors Thomas A. Dickerson, Jeffrey A. Cohen (both Second Department judges) and Kenneth A. Manning devote special attention to the Court of Appeals decision in Koch v. Acker, Merrall & Condit, in which the court clarified that justifiable reliance is not an element of a GBL § 350 claim. Prior decisions had already done away with any reliance requirement on a GBL § 349 claim

The element of reliance had always seeming been an important defense weapon in deceptive trade practice class action litigation. In Koch, plaintiff alleged that the auction house described its wines as "extraordinary, " "absolutely stunning," and among the "greatest wines...ever experienced"  when, in fact, these wines were undeniably nothing of the kind. But the First Department made short shrift of plaintiff's claims.  The court gave considerable deference to the disclaimer language in the auction house's brochure which provided an "as is" disclaimer.

In addition to the "as is" caveat, the "Conditions of Sale/Purchaser's Agreement" made "no express or implied representation, warranty, or guarantee regarding the origin, physical condition, quality, rarity, authenticity, value or estimated value" of the wine.  Should not a  reasonable consumer, the appellate court reasoned, been alerted by these disclaimers, would not have relied, and thus would not have been misled, by defendant's alleged misrepresentations concerning the vintage and provenance of the wine it sells?  In this instance, according to, the plaintiff was Florida billionaire, William "Bill" Koch, who apparently believed that the auction house had sold him the proverbial "bill of goods".  If anyone was to read and understand the "fine print" in the disclaimer, surely a sophisticated investor like Mr. Koch would.

In answer, the  Court of Appeals held that the "as is" provision does not bar the claim (at least at the pleading stage) and does not establish a defense as a matter of law. 

As Messrs. Dickerson and  Cohen explained in an earlier NYLJ article (4/19/12), the Koch ruling may be a "game changer" in deceptive and misleading business practices class action litigation.  They cite a long series of prior appellate cases, which had established reliance as a basis for obtaining a recovery under GBL § 350, which clearly is no longer good law. In the past, New York courts were reluctant to certify GBL § 350 claims because they found that reliance was not subject to class wide proof. 

When the Appellate Division issued its decision, wine industry attorney Brian Pedigo in Irvine California expressed concern to that it would set bad precedent if all prospective bidders had to satisfy themselves by inspection rather than to trust in the auction house's represenations.  In pertinent part, he commented, "A regular Joe consumer is not going to fly overseas [or across the country] to inspect wine. A reasonable consumer will rely on the representation of the seller, and will not read or understand the fine print disclaimers".  An adverse decision for the auction house, he believed, would be "horrible for consumer trust in the online auction environment; it could possibly destroy this niche market sector".  Would  internet commerce beadversely affected if the e-consumer was not able to trust the e-seller?

The Court of Appeals apparently agreed with Mr. Pedigo that the risk of authenticity should not entirely shift to the consumer, regardless of whether the consumer is Joe consumer or Bill Koch. 
The claim against Acker Merrall is not Mr. Koch's only wine-related lawsuit.  He previously brought a RICO claim against Christie's, another auction house, after purchasing four bottles of wine that he believed were connected to Thomas Jefferson, but turned out were not really that old.  That Koch wine auction case ended up in the Second Circuit; but that's a story for another time. 
At the end of the day, Koch serves to harmonize GBL § 349 and GBL § 350; there is no reliance pleading requirement under either statute. 

However, all is far from lost for the defendants in these cases.  As discussed at the outset of this article, plaintiffs must prove  (1) consumer-oriented conduct that is (2) materially misleading and that (3) plaintiff suffered injury as a result of the allegedly deceptive act or practice".  Accordingly, although reliance need not be shown, the plaintiff must still prove causation.  Proof of causation remains plaintiff's critical hurdle in succeeding in these claims.  

Republished with permission from
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The recent experience of the passengers the Carnival Triumph debacle once again raises the question of remedies sought and available for cruise passengers who suffer harms while at sea.  As with the Costa Concordia shipwreck a year ago, and with most hospitality-related providers, there are limitations on how and what guests can recover.  Forum selection clauses, of a similar type to what most of our clients use, frequently limit where suits can be brought.  For cruise passengers, who frequently travel from another location to the port city, the limitation on permissible fora can be an insurmountable hurdle to bringing suit.  For the passengers on the Triumph, any claims face the additional obstacle that recoveries are likely limited to only those individuals who suffered some physical harm as a result of the incident. 

These limitations are once again causing outrage among some who believe that the recourse of cruise passengers is too limited.  But before jumping on that bandwagon, it is important to consider the consequences of opening the floodgates to more claims.  For example, invalidating the forum selection clauses on cruise ship agreements could also open up hospitality providers like ski resorts or amusement parks, to claims far outside their operating jurisdictions. 

Extending the ability of a party to recover damages for emotional “injuries” without any physical harm could also dramatically change the legal landscape.  Would that allow individuals who claim to receive a “bad” dinner or view an “offensive” show the ability to recover damages for their claimed emotional injuries even without a physical harm?  Even with limitations for only egregious conduct, the implications could be far-reaching for those throughout the hospitality industry and beyond.

It seems as though Carnival is attempting to thwart the legal onslaught, and possibly the push for legal changes, by offering full refunds to passengers plus cash and a voucher for future travel.  We will see if it is enough.  In the meantime, I wonder if those vouchers are transferrable? 

Cynthia P. Arends,

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