Defending the Castle: Five Tips For Protecting Your Company Against Class Actions

Written By:
Justin J. Prochnow and Robert J. Herrington, Greenberg Traurig
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The food and beverage industry is under siege. The same group of plaintiffs’ lawyers who extracted billions from tobacco companies has publicly declared war on food and beverage manufacturers, joining others in filing hundreds of class action lawsuits during the last two years. Lawyers filing those lawsuits demand that allegedly “mislabeled” products be removed from store shelves, seek billions in “damages” for supposedly misled consumers, and ask the court to award hundreds of millions more in attorneys’ fees.

It is not just the larger retailers and manufacturers that are at risk. Another group of lawyers troll convenience stores and grocery store shelves, searching for labels from small and little-known companies that might be just a bit “off.” Then, they send demand letters threatening litigation unless the company forks over tens of thousands to settle the matter before a class action lawsuit is filed. Many companies cannot afford the litigation and have no insurance. They are left with no option but to pay money (i.e., attorney’s fees and money to the plaintiffs who are at times “found” by the attorneys rather than the other way around) to make the lawsuit go away.   

But, the news is not all bad. There are things business executives can do to try to stay off the radar and protect themselves against the growing risk of class action litigation. Here are five tips for protecting your company against class action litigation.

Educate Yourself and Your Executives
The first step to avoiding class actions is to understand the risk. Executives in the food and beverage industry should be aware of the primary theories trial lawyers are pursuing so they can identify situations in which their own products may be at risk. 

Here are five of the top areas generating class action litigation:

  • “All Natural”—Litigation of “all natural” claims started the explosion of class actions over labeling claims. The U.S. Food and Drug Administration (FDA) has declined to formally define “natural” and the trial lawyers have embraced this gray area to file class action after class action, claiming that any number of ingredients render an otherwise natural product, “non-natural.”  Frequent targets include products containing alkalized cocoa, high-fructose corn syrup, genetically modified ingredients, processed forms of ingredients like citric acid, and other allegedly “man-made” additives.
  • Nutrient-Content Claims—The FDA has detailed regulations defining how and when companies can use terms like “low,” “lite,” “less,” “high” and “free” when describing the level of nutrients in products. Plaintiffs’ lawyers have studied these intricate regulations and are filing class actions when they find violations of these regulations. 
  • “Healthy” Claims—The FDA also has regulations that address when a company can legally use the term “healthy” in the labeling of a product. Plaintiffs’ lawyers are scrutinizing the ingredient lists of products that make these types of claims, filing class actions where companies violate FDA regulations or where a product contains ingredients that arguably are not nutritious or healthy (such as trans-fats or high sugar/salt content). 
  • Lack of Substantiation—Aside from “all natural” claims, this area may be the most active.  Plaintiffs’ lawyers often will send demand letters to companies asking them to turn over whatever scientific evidence they have to support the claims made on their products. If a company doesn’t respond, or if the evidence provided is sparse, the plaintiffs’ lawyers sue, alleging that the labels are false and misleading because the company does not have adequate scientific substantiation for its claims. 
  • False Advertising—Even where a product label does not violate a specific FDA regulation, plaintiffs’ lawyers still may sue claiming that the “overall impression” of the label is misleading. One common example is a label that prominently displays pictures of a fruit or other ingredient. If the product does not contain the featured ingredient or only contains trace amounts, plaintiffs’ lawyers often sue, claiming the label misleads customers into believing that the product contains more of that ingredient than it actually does. Unfortunately, several courts have ruled that an accurate ingredients list generally is not a defense to this type of a claim. 

Risk Assessments
One of the most cost-effective ways to win a class action is to avoid it altogether. You should work with experts to periodically conduct detailed litigation risk assessments of your company’s products to identify potential risks. Then, you should take steps to mitigate those risks. 

Risk assessments should focus first on product labels. For most products, just about every purchaser will view the label. Because nearly everyone sees the label, a court can more easily certify a case as a class action based on a problem with the label. So, the first step in a good risk assessment is to make sure your labels are bullet proof. 

Also review your advertising and Web site. The first place trial lawyers often go when evaluating whether to file a new case is the company’s Web site, particularly if customers can purchase products online. Television, print, online and social-media advertising also should be vetted. The advertising and marketing folks often have a tendency to “push the envelope,” and many class actions are born through a poorly phrased advertisement. 

As part of the risk assessment, you should review the support for the claims made about your product.  Have you done independent testing of your product? If asked, what would you point to as the substantiation for your claims? If you’re not sure or the support is lacking, consider whether the claims are worth the risk of having to defend a class action lawsuit. 

Understand Where Class Actions Come From
Many business executives wonder where class actions come from and how they are filed so quickly after a problem becomes public. A company will receive a warning letter from a regulator on Friday, and by Monday morning, plaintiffs’ lawyers have filed a class action parroting the allegations in the warning letter. How do they find a plaintiff and file a lawsuit so quickly? 

We’re going to let you in on a little secret about the plaintiffs’ bar. They find clients the same way you find customers. Advertising. Trial lawyers place ads online, on specialized Web sites for disgruntled consumers (e.g., ripoffreport.com), even in the classified ads section of the local paper. Although the details differ, the ads usually convey the same message: “such-and-such plaintiffs’ law firm is investigating XYZ Company regarding a specific product, and anyone with information should call or e-mail.”  One of your customers responds and, after a brief interview, often ends up lending his or her name to a class action lawsuit. 

In addition to monitoring regulators and advertising, plaintiffs’ lawyers also find cases by keeping their ears and eyes open. They watch for news stories about problems with a product. They listen when friends and family have bad experiences with a company. They monitor complaint Web sites and social media, looking for consumers that have similar problems with a product or company. When they find a problem that looks like it might make a good class action, they start the advertising and the investigation. And soon, one of your customers is a plaintiff.

What lesson should you take away from this? Aside from being outraged at the way the system operates, business executives may want to consider how much they know about the sources of information trial lawyers use to find new cases and clients. Might it make sense to monitor social media and the same complaint Web sites that trial lawyers are mining to see if your company has a problem on the horizon? If you can identify and fix the problem before the trial lawyers find it, you may be able to avoid a class action altogether. 

Understanding Risk Transfer
One of the most basic risk-management techniques is risk transfer. It also is one of the most ignored most misunderstood concepts. 

The concept of risk transfer is simple. To the extent a company faces risk that it cannot eliminate or otherwise mitigate, a company can transfer the financial impact of that risk to a third party. This is accomplished by purchasing insurance and entering into indemnification agreements with suppliers and other business partners. 

Many executives in the food and beverage industry do not realize that insurance is available to guard against the risk of labeling class actions. Others do not realize that most “off the shelf” insurance policies do not cover this risk and that a little work is necessary to ensure that your company is properly covered. Time spent with an insurance expert can make all the difference if a class action is filed.

In other cases, food and beverage makers facing litigation point to representations from suppliers and flavor houses that ingredients are natural or have specific characteristics. Although these representations may be helpful, they are far less helpful than a properly drafted indemnification provision requiring the supplier to defend and indemnify the company should the ingredient become the subject of litigation. 

The bottom line is that risk transfer can provide powerful protections against class actions. But, risk transfer also requires expertise and attention to detail. Spend the time to get it right. 

Be Prepared For Litigation
Cases are filed when it looks like they will be profitable. And before plaintiffs’ lawyers take on the risk of a new case, most check the company’s litigation history. Do they have a track record of settling cases (which is what the trial lawyer wants to see)? Or, do they aggressively defend their products, forcing plaintiffs to prove their case? 

A company that has a proactive, aggressive response to litigation (fixing problems early where there is no defense and litigating hard where the case is defensible) is not a good target for a class action. The early fix can be used to defeat a class action and few lawyers want to engage in protracted litigation, where they must spend the time and incur the expenses necessary to prove their case, with no guarantee that they will see a return in the long run. 

So before your company is targeted, decide on its litigation strategy. Will you succumb to the pressure and expense of litigation, making your company a target?  Or, will you defend your company and products, where appropriate, forcing plaintiffs to prove their case? WF

 

Rob Herrington is a litigation shareholder in the Los Angeles office of Greenberg Traurig LLP and serves as Co-Chair of the firm’s National Products Liability and Mass Torts Practice Group. His practice focuses on defending and helping companies prevent mass tort and class action litigation. Rob is the author of the best-selling book Verdict for the Defense (Sutton Hart Press 2011), which provides a blueprint for business leaders to protect their companies against mass tort and class action lawsuits.  He can be reached at herringtonr@gtlaw.com or www.robherrington.com.

Justin J. Prochnow is an attorney and shareholder in Greenberg Traurig’s Denver office. His practice concentrates on legal and regulatory issues affecting the food and beverage, dietary supplement and cosmetic industries. He can be reached at prochnowjj@gtlaw.com and posts on Twitter as @LawguyJP.

This article is issued for informational purposes only and is not intended to be construed or used as general legal advice. The opinions expressed are those of the authors exclusively.

Published on WholeFoods Magazine Online, 12/12/12

Comments

From Justin J. Prochnow: Thank you for your response.  I’m not sure what you are specifically referencing with your statement that you thought it was illegal to have somebody sign their rights away, but let me take a crack. There are certain rights that you can’t sign away, such as constitutional rights. You also can’t sign away obligations, such as statutorily created duties. However, in a business context, you can certainly sign away rights to collect damages or you can sign rights to be responsible  for damages. The whole concept of indemnification is essentially a contract for one person to assume the responsibilities of another party. Companies often do this in the business context to clarify who will be responsible in case something goes wrong.  Instead of having to  spend more money and fight about it in court, companies agree who will be responsible beforehand.

I thought it was illegal to have somebody sign their rights away. That would make this whole story mute.
But i like the ideas you shared.

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