July 26, 2012

FTC Consent Doesnt Mean Class Action Success

Seller Beware: Consumer Protection Insights for Industry

Following on the heels of an FTC consent order settling allegations that Nestle made deceptive advertising claims about the health benefits of its BOOST Kids Essentials drink, two plaintiffs filed class actions alleging violations of California's Unfair Competition Law, False Advertising Law, and Consumer Legal Remedies Act, New Jersey's Consumer Fraud Act, and Pennsylvania's Unfair Trade Practices and Consumer Protection Law, negligent misrepresentation, and breach of warranty. The cases were consolidated in the New Jersey federal district court, which threw out all of the plaintiffs' false advertising and negligent misrepresentation claims on Nestle's motions to dismiss and for summary judgment.

The court concluded that "the core allegations of fraud in the Complaint are clearly grounded in a prior substantiation theory of liability." It is a deceptive practice in violation of the FTC Act for an advertiser to disseminate an advertising claim that lacks substantiation, and the FTC's complaint alleged that Nestle lacked substantiation for some of its claims for BOOST when they were made. However, there is no private right of action under the FTC Act and neither New Jersey's nor California's false advertising laws recognize claims based on a lack of prior substantiation. Accordingly, the court dismissed the plaintiffs' claims to the extent they were based on a prior substantiation theory. (The court dismissed the claims based on Pennsylvania's consumer protection law because it had ruled that New Jersey, rather than Pennsylvania, law applied.)

This left plaintiffs with a claim that Nestle's claims that BOOST was "clinically shown" to provide health benefits were false, on which the plaintiffs bore the burden of proof. Nestle proffered over 40 studies and articles as substantiation for its "clinically shown" claims. The court found that plaintiffs experts only criticized the strength of Nestle's substantiation not that Nestle lacked support for its "clinically shown" claims as plaintiffs were required to prove. Accordingly, the court granted Nestle summary judgment on the consumer protection and negligent misrepresentation claims. (The court denied Nestle's motion for summary judgment on the breach of warranty claim because the parties failed to adequately address this count.)

As documented on this blog, some courts have questioned whether a court should approve settlements with a government agency if the defendant does not admit liability. Addressing the plaintiff's allegations that the FTC had "concluded" that Nestle's "clinical studies show" claims were false and misleading, the New Jersey district court was careful to explain that by issuing a complaint the FTC is indicating only that it has reason to believe that there has been an FTC Act violation, not that it had reached any final conclusions. If Nestle would have been required to admit to these allegations before entering into the consent with the FTC, it would have had a much more difficult time defending against the class action. As discussed in our prior post, this risk would likely make companies much less likely to settle.

© Arnold & Porter Kaye Scholer LLP 2012 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.

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