Food and Beverage Law Update: July 2020

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Bankruptcy and Workouts

Potential Strategies for Food and Beverage Retailers in Financial Distress

Noel R. Boeke

Since COVID-19 hit, there has been a wave of bankruptcies in the food and beverage industry, and more are expected to follow. See, e.g., In re TooJay's Management LLC et. al., No. 9:20-bk-14857 (Bankr. S.D. Fla. April 29, 2020); In re Garden Fresh Restaurants LLC (Sweet Tomatoes), No. 3:20-bk-02477 (Bankr. S.D. Cal. May 14, 2020); and In re Bar Louie dba BL Restaurants Holding LLC, No. 1:2020bk10156 BL (Bankr. Del. Jan. 27, 2020). Although brands such as Sweet Tomatoes, TooJay's, Bar Louie and others have chosen bankruptcy, there are other options that restaurants facing financial distress can also consider.

Out of Court Workouts

At the first sign of trouble, retailers should communicate openly and honestly with their landlords, suppliers and lenders to explain the situation and to offer an exit strategy. Creditors may be understanding and willing to work through troubled situations given the economic reality that COVID-19 has substantially reduced sales. Expect creditors to request financials. If the business has multiple locations and lots of angry creditors, consider hiring an outside turnaround consultant or bankruptcy lawyer to advise from the outset. An independent financial consultant may bring credibility and comfort to skeptical creditors by providing accurate financial projections and a turnaround plan.

Liquidation Options

If it simply is impossible to survive, restaurants may liquidate their assets outside of court with the consent of their secured creditor or their lenders may orchestrate a Uniform Commercial Code secured party sale of collateral. If the owner simply wants to walk away, the restaurant can assign its assets to an independent fiduciary to liquidate for the benefit of creditors. A restaurant may also liquidate in a Chapter 7 bankruptcy as Sweet Tomatoes did, although smaller restaurants should certainly consider other alternatives since Chapter 7 cases sometimes result in litigation against the owners.

Chapter 11 Bankruptcy

Chapter 11 bankruptcy is an important tool that enables a cash flowing operation to restructure its balance sheet and to de-leverage if the assets are worth less than the secured debt. Bankruptcy also provides an important tool for restaurants with multiple lease locations that are no longer profitable. Under Section 365 of the U.S. Bankruptcy Code, a debtor can assume and continue performing under good locations, or reject leases for bad locations while capping a landlord's claim essentially at one year's rent. In addition, bankruptcy affords a quick sale process by which certain restaurant locations or the entire operation can be sold free and clear of liens pursuant to Section 363 of the Bankruptcy Code.

COVID-19

Executive Orders Upheld Limiting Gatherings and Workforce

Nathan A. Adams IV

In Amato v. Elicker, No. 3:20-cv-464 (MPS), 2020 WL 2542788 (D. Conn. May 19, 2020), the court denied injunctive relief to the co-owners and operators of 50's Lounge LLC against Connecticut Gov. Ned Lamont and New Haven Mayor Justin Elicker in relation to their emergency executive orders, including ones limiting restaurants, bars and private clubs to serving food and alcohol for off-premises consumption and limiting the number of people who may gather for social or recreational purposes. The plaintiffs averred that the orders present a great financial hardship to the business, but they voluntarily closed their restaurant before the orders required it. Because of this and because the plaintiffs offered no allegations or testimony that the lounge would reopen if the court grants a favorable ruling, the court determined that they lack standing to challenge Executive Order No. 7D, prohibiting on-premises consumption and banning non-essential gatherings. Even if they had standing, the court added that they also failed to prove irreparable harm because they failed to allege that permanent closure of their business is likely or imminent. They added that plaintiffs are unlikely to succeed on their First Amendment claim because the order has a real or substantial relation to public health and safety, and the action is not "beyond all question, a plain, palpable invasion of rights." States may "institute extraordinary measures to protect public health." As to Executive Order No. 7N limiting gatherings and the plaintiffs' right to assemble and associate with customers and friends, the court assumed standing and irreparable harm of a First Amendment right, but once again found that the plaintiffs are unlikely to succeed for the same reason and under a stricter level of review on their First Amendment claims. In his ruling, U.S. District Judge Michael Shea stated, "[E]ven if the plaintiffs did have a First Amendment right to associate in person, I would find that Executive Order 7N was a reasonable state action … or was otherwise constitutional under traditional First Amendment analysis … ."

In Henry v. DeSantis, No. 20-cv-80729-SINGHAL, 2020 WL 2479447 (S.D. Fla. May 14, 2020), the court denied relief to a Palm Beach County resident who was laid off from Pit Row (a bar) and Buffalo Wild Wings during COVID-19 and sued Florida Gov. Ron DeSantis, alleging that the effect of his allegedly unconstitutional executive orders was to close her places of employment and cause her to lose her jobs. The court determined that the resident lacked standing as there was no form of relief from the court that would secure the resident's re-employment at either of her former employers. In addition, the court determined that the plaintiff could not sufficiently allege causation because the source of her injury was her employers' decision to reduce their workforce, not the governor's actions. The executive orders prohibited food services businesses from offering the sale of food and alcohol for on-premises consumption, but they were always able to offer take-out and to-go alcoholic sales. Furthermore, the court determined that the executive order that restricted free movement in four southeastern Florida counties was rationally related to a legitimate government interest in ensuring public health and slowing the spread of COVID-19 in a highly concentrated region, and thus withstood rational basis review for purpose of equal protection analysis. Furthermore, the court determined that the plaintiff had no generalized right of social association under the First Amendment and no fundamental due process right to a job. The court dismissed claims for various violations of Florida's Constitution under the Eleventh Amendment.

In McCarthy v. Cuomo, No. 20-cv-2124, 2020 WL 3286530 (E.D. N.Y. June 18, 2020), the court denied injunctive relief to Blush Gentleman's Club against certain executive orders issued by New York Gov. Andrew Cuomo, prohibiting gatherings of more than 50 people; banning restaurants and bars from serving food or beverages on-premises; and requiring businesses to reduce the in-person workforce at work locations by 50 percent, then 100 percent with exceptions for essential businesses. The plaintiff also sued the federal government to enjoin the U.S. Department of the Treasury from enforcing an eligibility requirement of the Paycheck Protection Program (PPP), precluding his business from applying. The court determined that the plaintiff had no likelihood of success on its 1) Fourth Amendment unreasonable seizure claim for lack of any law enforcement investigation; 2) First Amendment free speech or peaceful assembly claim because the plaintiff's business was not targeted, the orders were content neutral and the orders were narrowly tailored to serve a significant governmental interest; (3) Fifth Amendment takings claim because the orders do not deny the plaintiff all economically beneficial use of his property, 4) due process and equal protection claims because the plaintiff identified no deprivation or any property right or violation of a fundamental right nor reliance on a suspect classification; or 5) Article IV claim to a republican form of government under the guarantee clause because it does not provide the basis for a justiciable claim. The court dismissed the plaintiff's state law claims as barred by the Eleventh Amendment and claims against federal defendants because the statute does not provide a cause of action against them.

In Lawrence v. Colorado, No. 1:20-cv-00862-DDD-SKC, 2020 WL 2737811 (D. Colo. April 19, 2020), the court denied injunctive relief to the plaintiff who complained that as a result of emergency orders 1) the restaurant where he works as a cook closed, causing him to lose wages; 2) the church he attends ceased conducting in-person Mass, preventing him from taking Communion; 3) he was unable to visit with friends or assemble with others outside his home; and 4) he was unable to travel by car. The court determined that temporary moratoria on various business activities, including those of the plaintiff's employer, are not compensable takings (particularly to an employee, rather than the business owner). Furthermore, to the extent that the plaintiff lost wages due to an unconstitutional taking, those harms are compensable with money damages and thus are not irreparable. The court also determined that the plaintiff failed to show that being denied visits with friends and associates under the circumstances was a "plain and palpable deprivation of any recognized constitutional right." Last, the court determined that the plaintiff lacked standing to challenge the orders under the free exercise clause, because the Catholic bishops canceled in-person Mass before the orders were issued, and the plaintiff failed to show that if the court were to enjoin enforcement of the orders, his church would begin to offer the public Mass and Eucharist.

ADA

ADA Case Stayed But Not Dismissed Due to Stay-at-Home Order

Nathan A. Adams IV

In Whitaker v. Sharky's Beverly Hills, Inc., No. CV 19-8189-MWF-MAA, 2020 WL 3800419 (C.D. Cal. May 27, 2020), the plaintiff, a quadriplegic, sued the defendant, owner of Sharky's Woodfired Mexican Grill, for violation of the Americans with Disabilities Act (ADA). Specifically, he claimed inaccessible dining surfaces and failure to provide accessible bathrooms. The defendant moved to dismiss the lawsuit, arguing that it is now moot due to the COVID-19 crisis and effective closing of the restaurant, and because the defendant remedied the alleged violations. The court denied the motion on the grounds that the stay-at-home order is not permanent and the defendant failed to identify the changes that it made to the restaurant. The defendant alternatively sought a stay of the matter while the nation deals with the pandemic. The court approved the latter request "as customers are not currently permitted to encounter the alleged barriers at Sharky's" and "it is unclear when customers will be permitted to dine-in again, and considering Sharky's assertion that it has remedied the alleged barriers." The court recommended settlement.

Labeling

Marketing "Steak" Sandwich Shown to Contain Ground Beef Not Actionable as Deceptive

Nathan A. Adams IV

In Chufen-Chen v. Dunkin' Brands, Inc., 954 F. 3d 492 (2d Cir. 2020), the court affirmed dismissal of consumers' claims that a company's advertisements for sandwich products using the word "steak" but depicting a beef patty were not actionable as false advertising or deceptive acts under New York law. The court determined that all three advertisements of the so-called "Angus Steak & Egg Breakfast Sandwich" and "Angus Steak & Egg Wake Up Wrap" conclude with multiple zoomed-in images that clearly show the "steak" in the products as a beef patty. The court also observed that there are examples of ground beef serving as "steak" such as in chopped steak, hamburger steak and Salisbury steak; the products sold in fact contain "Angus beef"; and a reasonable consumer would not be misled to believe that "grab-and-go products that can be consumed in hand, without the need for a fork and knife" contained an "unadulterated piece of meat." The court dismissed the claims of several plaintiffs for lack of personal jurisdiction because they purchased the products at franchises outside of New York. A foreign corporation does not consent to general personal jurisdiction in New York by merely registering to do business in the state and designating an in-state agent for service of process. The plaintiffs waived because they failed to raise in the district court the argument that Dunkin' consented to general personal jurisdiction due to contacts with New York.

Plaintiff Stated Claim That "100% Natural" Deceives When GMOs Are Used

Nathan A. Adams IV

In Lee v. Conagra Brands, Inc., 958 F. 2d 70 (1st Cir. 2020), the court reversed the district court and ruled that a consumer plausibly stated a claim that the label "100% Natural" on Wesson brand vegetable oil violated the deceptive prong of the Massachusetts Unfair and Deceptive Trade Practices Act. This was because 1) the oil contained genetically modified organisms (GMOs); 2) the U.S. Food and Drug Administration's (FDA) informal policy not restricting use of the term "natural" and not requiring disclosure of GMOs was not preemptive; 3) nor was the National Bioengineered Food Disclosure Standard, which prohibits states from establishing any requirement related to the labeling of whether a food is genetically engineered, because the plaintiff did not request a specific court-ordered label; and 4) the defendant waived a claim that the plaintiff's claim was preempted by the Nutrition Labeling and Education Act. The plaintiff alleged injury based on allegations that GMO-free oil is sold at a premium price. The court also decided that removal jurisdiction was proper under the Class Action Fairness Act (CAFA). The case was remanded for further proceedings.

Wage and Hour

80/20 Rule Prevails Again in FLSA Suit

Nathan A. Adams IV

In Esry v. OTB Acquisition LLC, No. 4:18-cv-155-DPM, 2020 WL 3269003 (E.D. Ark. June 17, 2020), the court denied the defendant's motion for judgment on the pleadings on a class action Fair Labor Standards Act (FLSA) lawsuit in light of the U.S. Department of Labor's (DOL) new interpretation of the Dual Jobs regulation, which sets an upper limit on how much time an employee can spend on related, untipped duties while remaining a tipped employee for all hours worked. Under the old interpretation of this regulation known as the 80/20 rule, DOL indicated that if an employee spent "in excess of 20 percent" of his time on untipped work, that work was performed more than "occasionally," and thus "no tip credit may be taken." In November 2018, DOL said that it was abolishing the limitation on "the amount of duties related to tip-producing occupation that may be performed," so long as such related duties were performed "contemporaneously" or within "a reasonable time" before or after "direct-service duties." Although recognizing that the 80/20 rule is no longer binding, the court adopted it anyway as a reasonable interpretation of the Dual Jobs regulation. The court noticed the pendency of Tip Regulations Under the Fair Labor Standards Act (FLSA), 84 Fed. Reg. 53956 (Oct. 8, 2019), but said it has no effect on the case until adopted.

Unfair Competition

Claim Stated for "Blueberry" Bagels That Allegedly Have More Imitation Than Real Blueberries

Nathan A. Adams IV

In Izquierdo v. Panera Bread Co., No. 18-cv-12127, 2020 WL 1503557 (S.D. N.Y. March 30, 2020), the court denied injunctive relief to the plaintiff for lack of standing for failing to allege that he planned to purchase the product in the future, but the court refused to dismiss the consumer's putative class action claim that the defendant violated New York's prohibition against deceptive business practices and engaged in false advertising and fraud allegedly by misrepresenting the contents of its blueberry bagels. The plaintiff claimed that signs in the bakery and on its website refer to the product in question as a "blueberry" bagel; placement of discrete pieces of fruit throughout the bagel; and placement of the bagel alongside blueberry muffins that contained only real blueberries would lead the reasonable consumer into believing that the bagel consisted solely of real blueberries, when in fact the bagel contained primarily imitation blueberries with a lesser quantity of real blueberries. The plaintiff claimed that he paid a higher price for the bagel than he would have had he known that it contained only trace amounts of real blueberries. According to the court, the U.S. Court of Appeals for the Second Circuit has found it materially misleading to suggest that a product contains a greater proportion of a preferred ingredient than it actually does, even where there is a visible ingredients list that states the correct composition of the food. The plaintiff alleged fraud by claiming that the bakery knew the true composition of its blueberry bagel, as evidenced by its publication of the ingredient list; produced the bagel in such a way that imitation blueberries were indistinguishable from real ones; purposely advertised "menu transparency" and its "clean" food; knew of consumer beliefs about the healthful qualities of blueberries; and sought to capitalize on those beliefs and its branding to sell more bagels.

 

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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