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Stay ADvised: What's New This Week, February 21

02.25.22
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In This Issue:

FTC and DOJ Take Their Beef With Fast Food Chain Franchise to Court

The Department of Justice (DOJ) filed a lawsuit on behalf of the Federal Trade Commission (FTC) accusing once rapidly expanding fast food burger franchise BurgerIM of overpromising "would-be entrepreneurs" and further bilking them of tens of millions of dollars.

According to the complaint, filed in California federal court, BurgerIM and owner Oren Loni deceptively marketed franchise opportunities by pitching them as a "business in a box." Defendants allegedly understated the risks and significant monetary investment involved while omitting vital information and making promises they failed to keep, which the FTC claims violated the FTC Act and Franchise Rule. BurgerIM also allegedly misrepresented the financial performance of existing locations and the performance potential of new franchise locations.

Targeting newbie entrepreneurs, including veterans, the company BurgerIM allegedly promised that it would soften investors' significant financial obligation by providing assistance with the nuts and bolts of setting up and running a BurgerIM franchise restaurant "every step of the way." To further sweeten the deal, the company allegedly promised would-be franchisees that it would refund the franchise fees of those who were unable to obtain financing or secure a restaurant location.

Franchisees who bought into BurgerIM's promises invested significant funds in reliance on the company's misrepresentations, according to the complaint. The "promises were illusory," say the FTC and DOJ. Franchisees who were unable to obtain financing after paying a hefty BurgerIM franchise fee often did not get their money back, even after repeated attempts. The majority of the franchises the company sold never even opened. The suit follows the company's threats of bankruptcy after the State of California ordered the company last year to pay $4 million in fines for violation of state and federal franchising laws.

Key Takeaways

The FTC has made clear that its loss of Section 13B authority to obtain equitable monetary relief is not slowing down its intention to seek consumer redress wherever and whenever possible. The Franchise Rule allows the FTC to pursue inflated promises of financial reward, an area it will clearly continue to take very seriously.

Defendant Fails to Sterilize Fluoride False Ad Suit

Despite claiming federal law preclusion, H-2 Pharma LLC has largely failed in its bid to dismiss a competitor's claims alleging that by including an "Rx" symbol on its fluoride dietary supplement product, the company falsely advertises its products as prescription drugs. With the exception of one claim, the Alabama District Court found H-2 Pharma could not hide behind the Food, Drug and Cosmetic Act (FDCA), allowing most of the suit to proceed.

The details contain some odd technicalities. Prescription drugs include numerical identifiers on the packaging, called serialization, to allow tracking of each product for manufacturing defects. Serialization comes with a cost for the manufacturer.

Plaintiff Method Pharmaceuticals LLC sells a variety of prescription-only fluoride enhanced vitamin and other fluoride products. It alleged that H-2, a competing fluoride product manufacturer, essentially tricked consumers into believing they were receiving a prescription drug product while actually selling far-cheaper-to-produce dietary supplement products. Method alleged H-2 used the Rx symbol as a way to save "millions" in their production and to price the products lower than competitors, including Method.

Method alleges that H-2 further misleads the market by advertising the products online as prescription drugs. According to plaintiff, these false representations confuse the market and give H-2 an unfair advantage. Method asserts claims for false advertising under the Lanham Act, contributory false advertising, and unfair competition.

H-2 moved to dismiss the claims as precluded by the FDA's exclusive authority to enforce the FDCA. It argued that Method failed to allege that H-2's products are misleading because the federal agency has not determined whether fluoride may be sold as a dietary supplement or only as drug products.

Judge Emily C. Marks held that only Count II of Method's complaint intrudes into the FDA's "sole FDCA enforcement power." In that count, Method alleged that H-2 claims that its products are dietary supplements while simultaneously promoting them as prescription drugs. Because that logic assumes that the products are dietary supplements, and the FDA has not weighed in on that matter, "it is impossible to evaluate the veracity of H-2's alleged representations" without interpreting the FDCA, wrote the court.

All of the other claims, however, "are different in kind." In Count I, for example, Method asked the court not to determine whether H-2's products are required to be serialized per FDA regulations but, rather, whether they "are" serialized. "The determination of that fact requires no interpretation of the FDCA," wrote the court.

The same is true of Method's allegations that H-2 labels the products "Rx." Method alleges only that H-2's labeling of "Rx" conveys the message to market participants that the products are prescription drugs—it doesn't ask the court to determine whether the "Rx" mark "by law" represents the products as prescription drugs.

Key Takeaways

Issues of preclusion arise often in the food and drug space. Here, the court was very clear on the dividing line. That is not always the case.

S.C. Johnson "Extremely Pleased" With Ziploc Bag Appeal Win at NARB

It turns out that, at least according to the National Advertising Review Board (NARB), Ziploc Slider bags really are "Stronger than Hefty on punctures and tears." True to its word, S.C. Johnson (SCJ) vowed to appeal an October National Advertising Division (NAD) decision brought by competitor Reynolds Consumer Products, the maker of competitor Hefty bags. The NAD decision recommended SCJ modify claims about its Ziploc bags, but SCJ's appeal paid off as NARB reversed NAD on this claim.

As Stay ADvised discussed in its coverage of the earlier proceeding, NAD had considered a number of challenged claims, but the only claim at issue in the appeal was that SCJ's Ziploc bags are "Stronger than Hefty on punctures and tears." NAD initially reviewed the support and determined it did not quite fit the claim, recommending that SCJ modify to clarify the relevant, real-world conditions in which consumers would experience the communicated benefit.

NAD said "when an advertiser relies on tests that reflect the use of a product" in a way that's inconsistent with everyday use, the advertiser "must disclose the conditions under which the claim would apply." Applying this standard, NAD found that the American Society for Testing and Materials' (ASTM) "Dart Drop" and "PPT" tests that SCJ provided in support of the claim "do not support a general unqualified superiority claim on punctures and tears." The testing method was not a good fit for the superiority claim given the questionable consumer relevance of the test when applied to real-world uses of the bags.

On appeal, the NARB panel did not agreed with NAD's assessment of SCJ's claim. NARB concluded that the claim was not an unqualified superiority claim but rather was qualified by the reference to punctures and tears, which provided consumers with information they could use to make their purchase decision. It further concluded that the ASTM test provided a reasonable basis for the claim because it is widely respected and its methodology is set independently.

However, NARB clarified that the claim would be supported only so long as SCJ used it as it had here—where the Ziploc and Hefty products have been tested head-to-head. "Should SCJ seek to expand the use of the claim to other plastic products, it would need to conduct, and prevail on, the ASTM tests with the additional products," concluded the panel.

Key Takeaways

Gone are the days when the NARB was viewed as largely a rubber stamp for NAD decisions. The number of appeals from NAD decisions continues to climb as seemingly does NARB's willingness to disagree in whole or in part with those decisions.

California Federal Court Gets Fourth Helping of Chobani Vanilla Yogurt False Ad Suit

The class action lawsuit alleging that Chobani deceptively labels its vanilla yogurt will move forward after surviving a third amended complaint. The California federal court rejected Chobani's third attempt to dismiss the case, holding that the allegations that Chobani violated FDA regulations do not require proving that a reasonable consumer is likely to be misled by the labeling for the case to move forward.

In essence, the lawsuit alleges that Chobani's popular "Greek Yogurt Vanilla Blended" is deceptively labeled because it is not flavored with vanilla extract or vanilla bean. Plaintiff Elena Nacarino alleged that the product's label is deceptive when it displays the unqualified word "vanilla" alongside images of the vanilla flower.

In her second amended complaint, plaintiff alleged that she relied on the vanilla representations to conclude that the yogurt's vanilla flavor comes "exclusively from ingredients derived from the vanilla plant." The court dismissed all of the unfair and fraudulent prongs of plaintiff's claims under the California Unfair Competition Law (UCL), as well as the False Advertising Law (FAL) and Consumer Legal Remedies Act (CLRA), finding that the product doesn't display any statements that convey that vanilla is the exclusive source of the vanilla flavor. However, the unlawful prong of the UCL survived.

In Chobani's third swing at dismissing an amended complaint, Judge Edward M. Chen rejected Chobani's argument that plaintiff had failed to state a claim that the yogurt label was unlawful under the UCL. Because plaintiff alleged that she relied on the representations about vanilla on the label, the court held she sufficiently pled her actual reliance on the alleged misrepresentations.

It was immaterial that the court had previously held that no reasonable consumer would conclude that the flavor is derived exclusively or independently from the vanilla plant. Moreover, California's Sherman Law "incorporates standards set by FDA regulations, and the FDA regulations include no requirement that the public be likely to experience deception," nor does it require "reliance as measured by the reasonable consumer."

The court also rejected Chobani's argument that plaintiff failed to explain how she relied on the product package representations to reach the conclusion that the vanilla in the yogurt is independently derived from the vanilla plant. Plaintiff "explicitly alleges that she 'read and relied on Defendant's label ... to believe that the characterizing flavor … was vanilla and that the vanilla flavor came independently from the vanilla plant.'"

Finally, the court concluded that plaintiff's request for equitable relief could proceed.

Key Takeaways

As the court notes, this lawsuit was filed by the same law firm that has instigated hundreds of lawsuits alleging false advertising of flavors like vanilla, chocolate, and strawberry. The vast majority of these suits have not gotten very far, but at least for the time being this suit lives to die another day. Chobani is ready for the next battle, now focused on one narrow claim about the label's truthfulness.

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