Food and Beverage Law Update: July 2019

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Wage and Hour

80/20 Rule Still Followed in Some Parts

Nathan A. Adams IV

The U.S. Department of Labor (DOL) issued guidance doing away with the so-called "80/20 rule" in November 2018. District courts have greeted the new guidance with differing reactions.

As background, the Fair Labor Standards Act (FLSA) defines a "tipped employee" as an employee "engaged in an occupation in which the employee customarily and regularly receives more than $30 a month in tips." 29 U.S.C. §203(t). In some situations, employees who fall into this category work "dual jobs" such as, for example, when a maintenance man in a hotel also serves as a waiter. 29 C.F.R. §531.56(e). Such a person may not take a tip credit for hours of employment served as a maintenance man. Id. But this is distinguishable from a "waitress who spends part of her time cleaning and setting tables, toasting bread, making coffee and occasionally washing dishes or glasses." Id. "Such related duties in an occupation that is a tipped occupation need not by themselves be directed toward producing tips. Id. Through 2016, DOL's Field Operations Handbook (FOH) interpreted section 531.56(e) to mean that, "where the facts indicate that tipped employees spend a substantial amount of time (i.e., in excess of 20 percent of the hours worked in the tipped occupation in the workweek) performing such related duties, no tip credit may be taken for the time spent in those duties." 30d00(f)(3). This became known as the "80/20 rule." On Nov. 8, 2018, DOL issued Opinion Letter FLSA2018-27, which did away with the so-called "80/20 rule," re-issuing FLSA2009-23, and stating that "[no] limitation shall be placed on the amount of duties [related to a tip-producing occupation] that may be performed...."

Courts are not uniformly following DOL's 2018 opinion letter. In Cope v. Let's Eat Out, Inc., 354 F. Supp. 3d 976 (W.D. Mo. 2019), the court determined that the new opinion letter was "unworthy of Auer deference" or "Skidmore deference." Under Auer, an agency's interpretation of its own ambiguous regulation is controlling unless "plainly erroneous or inconsistent with regulation." Where Auer deference is not warranted, a court may afford "Skidmore deference," which is "deference proportional to the 'thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give it power to persuade[.]' " The court fell back to Eighth Circuit precedent according Auer deference to the 80/20 rule in the FOH and determined that even if it is rescinded or revised, the Eighth Circuit's rationale treating the 80/20 rule as a reasonable interpretation of the dual jobs regulation is controlling. The court in Esry v. P.F. Chang's China Bistro, Inc., 373 F. Supp. 3d 1205 (E.D. Ark. 2019), also fell back on Eighth Circuit precedent after determining that the measure of Skidmore deference that the 2018 DOL letter is owed is negligible. Following Cope, the court determined to continue following the 20 percent rule. Likewise, the court in Callaway v. Denone, LLC, No. 1:18-cv-1981, 2019 WL 1090346 (N.D. Ohio Mar. 8, 2019), questioned whether Auer deference was appropriate to the 2018 letter, but determined that it did not need to resolve the matter because some of the plaintiffs' duties did not appear in the online list of tasks (the O*Net task list) that the 2018 letter says may be performed contemporaneously with duties involving direct service to customers or for a reasonable time immediately before or after without limitation. Therefore, the court denied judgment on the complaint.

Big Settlements Reported of Wage-and-Hour and Securities Case

El Pollo Loco reported paying $36.3 million before taxes in the fourth quarter of last year to settle multiple class action wage-and-hour lawsuits and a securities class action lawsuit.

Regulation

FDA Invites Public Comment on CBD Products

Sara M. Klock

Dr. Amy Abernethy, Deputy Commissioner of the U.S. Food and Drug Administration (FDA), and Lowell Schiller, Principal Associate Commissioner for Policy (who co-chaired FDA's cannabidiol (CBD) working group) released a statement on June 19, 2019, underscoring FDA's commitment to "sound, science-based policy on CBD." This statement follows FDA's public hearing on May 31, 2019, where the agency heard from various industries and consumers about the safety, manufacturing, quality, marketing, labeling and sale of products containing cannabis or cannabis-derived compounds.

The statement reiterates FDA's long-standing position on CBD, which is that CBD products will be treated "just like [] any other substance," including applying the appropriate regulatory authorities. As such, "it is currently illegal to put into interstate commerce a food to which CBD has been added, or to market CBD as, or in, a dietary supplement." However, FDA is aware of the considerable public interest in CBD food, dietary supplement, cosmetic and pet products. The agency is committed to listening and learning from stakeholders, and evaluating regulatory frameworks for non-drug uses of CBD. FDA is encouraging the public to submit written comments to the public docket, which will remain open until July 16, 2019.

Class Action Telephone Order Suit Filed

In Tiffin EPS, LLC and Tiffin Mount Airy, LLC v. Grubhub, Inc., Case No. 2:18-cv-05630-PD, plaintiffs have filed a class action lawsuit in the U.S. District Court for the Eastern District of Pennsylvania, accusing the defendant of a "misleading" scheme involving "sham telephone orders." The lawsuit alleges that Grubhub has been charging commissions on phone calls that are routed through Grubhub, even if the calls do not result in a customer placing an order.

ADA

Drive-Thru Windows Alleged Inaccessible in Violation of ADA

Nathan A. Adams IV

In Davis v. Wendy's International, LLC, Case No. 1:19-cv-04003, the defendant was sued in the U.S. District Court for the Northern District of Illinois in a putative class action by visually impaired persons claiming that they are unable to access its products and services during late-night hours using "drive-thru" windows in violation of Title III of the Americans with Disabilities Act (ADA), 42 U.S.C. §§12181 et seq., and California Unruh Civil Rights Act. The plaintiffs argue that, because it is not safe for them to walk through the drive thru, visually impaired individuals are precluded from accessing the defendant's products during late-night hours. They seek certification of both a nationwide and a California class. This is the second such lawsuit against a restaurant franchise filed in the same court.

Beverage

State Liquor Regulations Upheld Against Antitrust Challenge

Joshua D. Aubuchon

In Connecticut Fine Wine and Spirits, LLC v. Seagull, 916 F. 3d 160 (2d Cir. 2019), the court affirmed dismissal of an antitrust challenge to provisions of Connecticut's Liquor Control Act. A liquor retailer alleged that the state's minimum retail price provisions, "post-and-hold" provisions and price discrimination/volume discount provisions inhibited meaningful price competition at the retail level. The court ruled that none of the provisions were preempted, determining the following:

  • The provision requiring liquor retailers to sell to customers at or above a statutorily defined minimum price was not preempted by Section 1 of the Sherman Act as it compelled only vertical pricing arrangements among private actors.
  • The provision prohibiting price discrimination and requiring wholesalers to sell a given alcohol product to all retailers at the same price was not preempted by Section 1 of the Sherman Act, because the provision left each wholesaler at liberty to choose the price to charge all retailers and is purely vertical in operation.
  • The provision requiring wholesalers to post prices for alcohol products that they intended to sell during the following month did not impose a restraint on trade or require communication or collaboration between competitors, although it invited and facilitated conscious parallelism in pricing.

Poultry Price Fixing Allegations in Court

Darden Restaurants has filed an antitrust suit in the U.S. District Court for the Northern District of Illinois alleging that multiple poultry companies engaged in price fixing.

Labeling

Multistate Claims for Product Labeling Fraud Require Specification of Other States' Laws

Nathan A. Adams IV

In Augustine v. Talking Rain Beverage Co., Inc., No. 18-cv-2576-CAB-BGS, 2019 WL 1590469 (S.D. Cal. April 12, 2019), the court dismissed a putative nationwide class action for fraud by omission, negligent misrepresentation, and breach of express warranties and implied warranties, but not the corollary California class claims. The plaintiffs contend that they relied on the Sparkling Ice product labels and believed they were buying all-natural products with natural flavoring ingredients, instead of artificially flavored sparkling water. The plaintiffs claim that to perpetuate false impressions, the label prominently displays a "naturally flavored designation" and omits the legally required "artificially flavored" disclosure, yet an ingredient identified on the back, "malic acid," is an artificial flavor. The court rejected the defendant's argument that the plaintiffs' claims premised upon the theory that the words "artificially flavored" are omitted from the front label are preempted by the federal Nutrition Labeling and Education Act. California's Sherman Law adopts the Federal Food, Drug, and Cosmetic (FD&C) Act without modification. The court also refused to dismiss as preempted the plaintiffs' claims based on "malic acid," notwithstanding the defendant's theory that the term sufficiently describes the ingredient and is not vague. "Malic acid" may allegedly refer to several forms, including natural and commercially manufactured forms. The court dismissed the plaintiffs' nationwide claims in response to the defendants' argument that there is no way to determine if the multistate claims have been adequately pled absent the identification of the relevant state laws. The court granted the plaintiffs leave to amend.

Insurance

Insurer Had No Duty to Defend and Indemnify Supplier of Contaminated Food Product

Patrick Scott O'Bryant

In Restaurant Recycling, LLC v. Employer Mut. Cas. Co., 922 F. 3d 414 (8th Cir. 2019), Restaurant Recycling sought a declaratory judgment that its insurer, Employer Mutual Casualty Company, was obligated to defend and indemnify Restaurant Recycling against a lawsuit filed by its customer, New Fashion Pork. Restaurant Recycling is a company that purchases fat products, such as waste cooking oil, for processing and reselling to livestock producers for blending into animal feed. Restaurant Recycling delivered a load of blended fats to New Fashion Pork, but the fat products were contaminated with lascadoil and lasalocid, substances that are unsafe for consumption in swine. New Fashion Pork's swine suffered health issues, and the company sued Restaurant Recycling for damages. Restaurant Recycling's insurer, Employer Mutual Casualty Company, successfully argued in the district court that the damage alleged by New Fashion Pork fell within the policy's total pollution exclusion. The Eighth Circuit agreed and affirmed the judgment. Restaurant Recycling acknowledged that Employer Mutual Casualty Company had no obligation to defend it in cases of property damage, which would not have occurred in whole or part but for the dispersal of pollutants, and the company recognized that lascadoil was a pollutant under the terms of the policy. Restaurant Recycling, however, attempted to argue that lasalocid was not a pollutant, and that the dispersal of the pollutants must be an intentional act. Thus, it contended that the district court decision was in error. The Eighth Circuit disagreed, reasoning that the allegations that lascadoil caused some measure of damages was sufficient to place the claim within the pollution exclusion so long as the damage was caused by "dispersal" of the pollutant, and that the ordinary meaning of dispersal is not limited to intentional acts. Thus, the policy exclusion was applicable.

Trial Necessary on Whether Employer Must Indemnify Indicted Employee Against Whom Charges Were Dismissed

Nathan A. Adams IV

In Tangas v. Int'l House of Pancakes, LLC, No. 18-3217, 2019 WL 2591719 (6th Cir. June 25, 2019), the court of appeals vacated summary judgment and remanded the case for trial as to whether the defendants must indemnify its former employee, a franchise business consultant, for the legal fees that she incurred when the Federal Bureau of Investigation (FBI) indicted as co-conspirators her and a franchise owner in her assigned territory for money laundering and hiring undocumented workers, and then dismissed the charges against her. Because the dismissed charges related to her duties as a representative, the plaintiff argued that the defendants should pay her legal fees. In contrast, the defendants contended that she acted in bad faith and is not covered by their indemnification provision. The court of appeals determined that the defendants made conscious choices to create expansive indemnification rights in their governing documents under Delaware law, but determined that there are disputed issues of fact as to whether the plaintiff is entitled to their protection. Critical to its determination that the indemnity clause could cover the plaintiff, the court of appeals disagreed with the district court's conclusion that an employee of a subsidiary company serves at the request of its parent company only when the parent company appoints the employee to a specific condition. In addition to resolving the factual disputes over whether the plaintiff was serving a subsidiary at the request of the parent, a trier of fact must also examine whether the plaintiff acted in good faith. The defendant also argued that indemnity should not apply to the plaintiff as a former employee and that most of her legal bills were incurred after her termination. The court of appeals ruled that the distinction between former and current employees is irrelevant because the plaintiff's rights vested under the agreement when the FBI began investigating her before she was fired.

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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