Food and Beverage Law Update: April 2016

Finance

PACA Liens Could Impact Financing Terms

The Perishable Agricultural Commodities Act (PACA) is a federal law enacted in 1930 with the goal of protecting suppliers and sellers of agricultural goods from the effects of nonpayment by certain third parties. PACA requires the establishment of a statutory trust for the benefit of unpaid suppliers or sellers of perishable agricultural commodities, such as fruits and vegetables or products. The statutory trust provides its beneficiaries with superior rights over other creditors, including secured creditors. As such, in lending transactions to purchasers of perishable goods, such as restaurants, secured creditors will try to mitigate the risk of unpaid PACA claims owed by their borrowers. In loan facilities to restaurant companies, secured lenders may require specific covenants in their loan documents requiring restaurant borrowers to provide timely notice of any PACA claims they receive from their suppliers. They also may require the establishment of reserves to cover the costs of any such claims.

The amount of the claim may include the cost of the goods themselves in addition to transaction costs such as shipping fees and taxes. Lenders providing loan facilities secured by real property will routinely require a mortgagee policy of title insurance. Frequently, the title insurer will exclude from coverage liens arising pursuant to PACA. If the lender will not accept an exclusion from coverage, the restaurant borrower may need to obtain a lien waiver from the supplier or a separate indemnity for the benefit of the insurer. Additionally, the lender may require an accounting of the borrower's supply contracts that could potentially result in PACA lien claims, and also require that the borrower establish that any such claims be paid current prior to closing. Such payments may be difficult to ascertain depending on the supplier payment schedule. Lenders and borrowers potentially subject to PACA lien claims should carefully consider the implications for financing structures and consult experienced legal counsel with knowledge of the PACA framework and related case law.

 John A. Decker

Labor and Employment

Court Finds Employees Legally Protected When Disparaging Employer Products

A recent decision by the U.S. Court of Appeals for the Eighth Circuit in Miklin Enterprises, Inc. v. National Labor Relations Board affirmed the 2014 National Labor Relations Board (NLRB) decision requiring a Jimmy John's franchise owner to, among other things, rehire workers who had posted flyers all around their neighborhood suggesting that Jimmy John's sandwiches were made by sick workers. The flyer said that Jimmy John's workers "don't get paid sick days" and "can't even call in sick," and also stated: "We hope your immune system is ready because you're about the take the sandwich test ... Help Jimmy John's workers win sick days."

The court affirmed the NLRB's decision finding that the workers who posted these flyers were protected under Section 7 of the National Labor Relations Act, which guarantees all employees – whether unionized or not – the right to engage in "concerted activities for ... mutual aid or protection," including campaigning for better working conditions. This decision held that such protection could even extend to the kind of derogatory public statements made by the Jimmy John's workers at issue because the court found that the statements had some element of truth, were not intentionally malicious and were connected to a labor dispute.

This decision continues the trend of judicial enforcement of the NLRB's expansion of Section 7 protection for insubordinate or disparaging employee behavior directed at employers – whether made in person or over social media. In light of this development, employers should carefully consider the federal labor law implications of their employment policies and disciplinary decisions.

Katherine H. Marques

Class Actions

Litigating Food and Beverage Labels

An increasing number of consumers demand healthier foods. They are behind an avalanche of lawsuits claiming that labels are deceptive and misleading about the nutritional content and value of food and beverages. Terms such as "all natural," "high in fiber," "fortified," "enriched," "light" or "lite," and "high potency" all have come under scrutiny. In addition, the food and beverage industry has drawn a new battle line relating to the advent of state and local labeling laws stricter than federal law. Federal preemption arguments are not commonly succeeding but challenges to class certification have stymied several lawsuits, leading to ever more creative litigation approaches.

The current federal requirements for "health claims" are contained in the Nutrition Labeling and Education Act (NLEA), 21 U.S.C. §343 et seq. and 21 C.F.R. Part 101 (see §101.14), and for "organic" food labeling in 7 C.F.R. Part 205. A "health claim" is defined, in short, as any claim made on the label or in labeling of a food that characterizes the relationship of any substance to a disease or health-related condition, 21 C.F.R. §101.14(a)(1). Several terms such as "natural" are not defined by the U.S. Food and Drug Administration (FDA) or U.S. Department of Agriculture (USDA). The FDA has adopted a "policy statement" considering "natural" to mean that "nothing artificial or synthetic" is included. Courts have declined to accord it preemptive weight. For example, in Holk v. Snapple Beverage Corp., 575 F. 3d 329 (3d Cir. 2009), the U.S. Court of Appeals for the Third Circuit overruled the district court after it adopted the defendant's preemption argument and dismissed the case for consumer fraud and breach of warranty when the defendant used "all natural" on the label of beverages containing high fructose corn syrup (HFCS).

As another example, in Grocery Mfrs. Ass'n v. Sorrell, 102 F. Supp. 3d 583 (D. Vt. 2015), the court disagreed with the industry that a Vermont statute was preempted, requiring certain manufacturers and retailers to state whether raw and processed food sold in Vermont was produced through genetic engineering, rather than "natural." However, the court did find that the industry stated a viable First Amendment and void for vagueness challenge. Likewise, in Garcia v. Kashi Co., 43 F. Supp. 3d 1359 (S.D. Fla. 2014), the court ruled that FDA regulations and policy allegedly permitting "natural" foods to contain synthetic ingredients and processing aids as long as they are normally expected in the food did not preempt the plaintiff's deceptive trade practice claim that a reasonable consumer would not expect pyridoxine hydrochloride, alpha-tocopherol acetate, hexane-processed soy ingredients or calcium pantothenate in "all natural" labeled food.

Vermont-styled regulations regarding genetically modfied organisms (GNOs) are spreading to other states, such as Connecticut and Maine. Meanwhile, Grocery Mfrs. is fully briefed and argued on appeal.

The food and beverage industry has had more success defending against the requirements for class certification in label cases. For example, "ascertainabilty" requires plaintiffs to demonstrate that members of a proposed class are readily identifiable by objective criteria and that it is administratively feasible to determine whether a particular person is a member of the class. But consumers rarely retain receipts of their food purchases and the labels on the products they buy change. Thus, in Kosta v. Del Monte Foods, Inc., 308 F.R.D. 217 (N.D. Cal. 2015), the court agreed with the defendant that requiring a potential class member to pass a "memory test" to identify which product, flavor and label variation he or she purchased weighed against class certification. Labeling variability also defeated "commonality," or the requirement of common questions of fact and law, for lack of evidence that all of the class members confronted the same objectionable messages.

Variation also may create standing problems for plaintiffs. For example, in Jones v. ConAgra Foods, Inc., No. C 12-01633, 2014 WL 2702726 (N.D. Cal. June 13, 2014), the plaintiff admitted that he purchased just two of the many products that he challenged, and equivocated on whether the "100% natural" label was critical to even those purchases of Hunt's products. With respect to "predominance," another requirement for class certification, the court observed that there is a lack of cohesion among class members when they are exposed to label statements that vary not only objectively by variety and time period, but also subjectively according to consumers' understanding of those representations.

Variety also impacts the damages analysis. In Brazil v. Dole Packaged Foods, LLC, No. 12-CV-01831-LHK, 2014 WL 5794873 (N.D. Cal. Nov. 6, 2014), the court decertified the damages class under the predominance requirement because the expert's regression model failed sufficiently to isolate the price impact of the defendant's use of the "All Natural Fruit" labeling statement from other variables, such as brand, consumers' disposable income, defendant's advertising expenditures, prices of competing and complementary products and population. The plaintiff had promised the court a before-and-after regression to demonstrate the effect of the label on sales, but settled on a hedonic regression analysis to show the effect on price. Although this court and others (see Randolph v. J.M. Smucker Co., 303 F.R.D. 679 (S.D. Fla. 2014)) did not reject the regression model per se, the plaintiff could not sustain class certification after failing to measure only those damage attributable to the defendant's conduct. The same problem plagued Jones' far more simple comparison of the challenged products with a single generic comparator.

Jones has been appealed and briefed. Naturally, the appellate court's ruling could have an important impact on the food and beverage industry and its efforts to keep class actions relating to labeling at bay.

Nathan A. Adams IV

Beverages

Franchise Laws and Craft Breweries 

Unknown to most outside the beer industry, the "franchise laws" refer to the statutory restrictions that govern the relationships between brewers and distributors, and limit or restrict the ability of a brewer to change their distributor. Following the end of Prohibition, the number of breweries dwindled through consolidation until the market was dominated by just a few national players. This prompted the push for state franchise laws, which were enacted during the 1980s as a way to protect distributors from dependence on their single brewing partner. These laws made it extremely difficult for a distributor and brewer to part ways without significant litigation.

These laws have not kept up with the explosive growth of craft breweries in the United States, now at a historical high of 4,269 at the end of 2015. With so many options available, distributors no longer need to be beholden to one of the two multinational brewing conglomerates. This rise in craft beer productivity also has increased competition for shelf space, making the ability of a brewery to fairly choose their distributor even more critical. The lack of real choice in options for these craft brewers has illustrated the great need for franchise reform to create more accountability between brewers and their distributors.

Joshua D. Aubuchon

Regulation and Legislation

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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