Retail and Consumer Products Law Roundup

Retail Spotlight for FDA Compliance: Jeremy Lutsky

Manatt recently welcomed Jeremy Lutsky to the firm. Jeremy brings with him two decades of deep experience advising major companies on a wide range of legal and regulatory matters, including Food and Drug Act (FDA) compliance, promotional review, regulatory guidance, M&A/transactions, advertising and sponsorships. His experience is particularly deep in the areas of pharmaceutical, over-the-counter and cosmetic products. In addition, Jeremy has experience within the retail industry, including with companies in the food and beverage space, and on regulatory guidance and litigation assistance, including advising on the Food, Drug and Cosmetic Act, FDA/OIG guidance, the Anti-Kickback Statute, the False Claims Act, and other state and local transparency and sale licensure laws. He is also available to assist on promotional and marketing reviews for retail and consumer services companies across the board.

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Will Single-Use Products and Packaging Be a Thing of the Past in California?

By Charles A. White, Senior Advisor, Environment

Walk down virtually any street, sidewalk, path, beach or trail in California and you will invariably find at least some single-use product or packaging as discarded waste. In most urban areas this has become a significant problem.1, 2 These wastes take the form of cigarettes, butts and filters; food wrappers and containers; caps and lids; paper and plastic bags; cups, plates and utensils; straws and stirrers; glass and plastic bottles; and beverage cans. In fact, this list reflects the top nine categories making up 82% of the trash found on California beaches over the past 30 years—according to the California Coastal Commission3—and all are single-use products or packaging. During California Coastal Cleanup Day each year, close to 1 million pounds of waste debris is cleaned up, with the vast majority being single-use products and packaging. Further, the State Water Resources Control Board has adopted a trash plan4 that requires all stormwater permitted entities in California (cities, counties and industry) to achieve 100% control of trash entering the state’s waters by 2030.

Over the past 30 years, California has largely relied on recycling infrastructure in other countries, mostly China and Pacific Rim nations. California has enacted aspirational 75% recycling goals by relying on these foreign outlets to provide well over 50% of its paper and plastic processing and recycling capacity. This came crashing to an end in 2017 when China and other waste-importing countries became alarmed with the inflow of these materials and enacted bans and barriers to such waste commodities.5 While domestic and international outlets still exist, these markets now dictate significantly more processing and contaminant removal, at more expense, than in the past. Due to the increasing cost of recycling, many jurisdictions, in spite of California’s aspirational recycling goals, are resorting to landfill disposal. To counter this trend, others have even suggested instituting bans on the land disposal of single-use products and packaging. But would this help address the problem of single-use product and packaging discarded onto the streets? Certainly not. Such landfill bans would invariable lead to further mismanagement of these wastes.

Who is responsible for addressing this problem? Who is going to pay for the cost of achieving zero trash by 2030? Should cities and counties with stormwater collection systems be held accountable? Is the problem primarily due to the irresponsibility of individuals who improperly discard these items? Should we rely on public workers or volunteers to clean up this improperly managed waste? Should more regulatory pressure in the form of rules, regulations, fines and penalties be imposed on citizens and waste producers for the proper management of these wastes? Or, as California is considering, should more pressure be inflicted on the companies who manufacture and sell single-use products and packaging in California? While these supply-chain entities are not directly responsible for the improper discarding of these items, should they be held responsible for providing such single-use items that facilitate discarding rather than recycling or reuse? For the most part, this is a zero-sum game for the citizens of California. The cost of reducing improper single-use product and packaging disposal will likely fall to the people of the state, through either higher taxes and fees or higher prices for consumer products. But what approach will be the most cost-effective?

The California legislature is now considering two companion measures, SB 54 (Allen)6 and AB 1080 (Gonzalez),7 that are identically worded while moving through their respective forums. Both are titled “California Circular Economy and Plastic Pollution Reduction Act,” and both measures are widely supported by approximately 100 environmental organizations, public agencies, and entities seeking to benefit from restrictions on single-use products and packaging. Opposition to these measures, as proposed, is being voiced by a handful of national product and packaging associations.

Both SB 54 and AB 1080 are currently on their way to the second house, and both measures declare it is the policy goal of the state that by 2030, manufacturers and retailers of single-use products and packaging achieve a 75% reduction in the amount of waste generated by these materials. The bills further require CalRecycle, the state agency responsible for solid waste and recycling, to adopt regulations by January 1, 2023, that would require manufacturers and retailers of single-use products and packaging to source-reduce those products and ensure that they are recyclable or compostable. Single-use plastic products would be further defined as the 10 single-use plastic products that are most littered in California as determined by CalRecycle (i.e., those plastic items identified in the first paragraph above). Although not in either of the bills now, there is some speculation that these measures could morph into a new Extended Producer Responsibility (EPR) program whereby manufacturers and retailers of single-use products and packaging would be responsible for the collection and management of these items at the end of the items’ useful life. This is not something that the manufacturers and retailers view with enthusiasm.

Most single-use packaging manufacturers and retailers who are engaged with this legislative process recognize they have a level of responsibility and are willing to entertain the notion that all single-use packaging must be recyclable or compostable at some point in the future, say 2030. Cigarette products, butts and filters will not likely need to be addressed in these measures, as there is another bill, SB 424 (Jackson),8 that has been separately introduced to specifically deal with waste tobacco products. Further, the single-use packaging industry appears willing to allow CalRecycle to further evaluate management options through the development of a scoping plan, with updates, over an extended period. The plan would:

  • further define the universe of single-use packaging to be regulated;
  • assess the current waste collection and recycling infrastructure;
  • evaluate end-use markets for collected materials;
  • assess the effectiveness of alternative policies to achieve defined objectives;
  • evaluate opportunities for encouraging reusable products and packaging;
  • identify incentives for, and streamlining of, instate recycling capacity; and
  • maximize state procurement of products containing recycled materials and compost.

Where this issue goes from here is uncertain. Further amendments to both SB 54 and AB 1080 will be entertained when these measures get to their respective second houses in early June 2019. The legislative session ends on September 13, and the legislature is unlikely to reach consensus on a final measure that can be enacted until much closer to that date. What is certain, however, is that manufacturers and retailers of single-use products and packaging will be increasingly faced with new challenges regarding the acceptability of these items in California—now and in the future.

1 https://www.cbs17.com/news/check-this-out/california-city-to-pay-homeless-15-per-hour-to-pick-up-street-trash/1559339711
2 https://www.ocregister.com/2019/02/04/after-storms-seal-beach-looks-like-a-landfill-blanketed-with-trash/
3 https://www.coastal.ca.gov/publiced/ccd/history.html#top10
4 https://www.waterboards.ca.gov/water_issues/programs/stormwater/trash_implementation.html
5 https://www.calrecycle.ca.gov/markets/nationalsword/globalpolicies/
6 http://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201920200SB54
7 http://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201920200AB1080
8 http://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201920200SB424

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Just Passed: Nevada to Allow Consumers to Opt Out of Data Sales by October

By Jesse M. Brody, Partner, Advertising, Marketing and Media | Brandon P. Reilly, Counsel, Privacy and Data Security

Nevada has just passed its own privacy law, SB 220, allowing consumers to opt out of data sales by web operators in exchange for monetary consideration. Effective on October 1, 2019, Nevada is quietly getting the jump on the California Consumer Privacy Act (CCPA) as the first state to require a broad right to opt out that spans industries. The new law amends Nevada’s 2017 law requiring web operators to make certain disclosures on its websites.

SB 220 is far narrower than the CCPA, applying only to website operators and online service providers, and only with respect to a limited dataset, including name, address, email address, phone number, Social Security number, individual identifiers, and any other information that becomes personally identifiable when combined with an identifier. The CCPA’s opt-out provision, by comparison, is not limited to online operators, applies to a wider dataset, and extends to sales for nonmonetary consideration.

Similar to the CCPA, SB 220’s opt-out right must be facilitated by an online mechanism or toll-free number and may be subject to reasonable verification. Responses must be provided within 60 days, subject to a 30-day extension upon consumer notice, as compared to the CCPA’s 45 days with the potential extension of an additional 90 days.

The law does not apply to entities in the healthcare or financial industries to the extent they are regulated by the Health Insurance Portability and Accountability Act (HIPAA) or the Gramm-Leach-Bliley Act (GLBA), respectively. It also exempts certain entities in the automotive industry and providers of online services working on behalf of other businesses.

While companies rush to identify solutions to meet the CCPA’s many wide-ranging requirements by January 2020, it turns out that Nevada has something to say about compliance timelines of those businesses that monetize consumer data. Any company doing Internet-based business in Nevada should immediately account for these new requirements in its overall privacy management plan or in any CCPA compliance project.

You can access the full text of SB 220 here.

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Class Action Challenges Retailer’s Sale Email, Pricing Model

By Po Yi, Partner, Advertising, Marketing and Media

A Washington resident has filed suit against children’s clothing retailer Carter’s over an email touting a sale price that she alleges was false and deceptive.

On February 16, 2019, Maribell Aguilar received an email from Carter’s Inc. with the subject line “50-70% OFF EVERYTHING.” Believing the message to mean that she would receive a discount of 50 to 70 percent off the retailer’s regular or prevailing prices for all of its products, she visited a Carter’s store in Union Gap and purchased several items.

When Aguilar did not receive the discounts she understood were promised in the email, she filed suit, alleging violations of the state’s Consumer Protection Act and Commercial Electronic Mail Act.

The discounts were actually reductions from Carter’s manufacturer’s suggested retail price (MSRP), she told the court, but there was nothing in the email subject line (such as an asterisk) that communicated that the 50 to 70 percent off referred to something other than Carter’s regular or prevailing price. In fact, Carter’s is the manufacturer of the clothes it sells, Aguilar added, and the MSRP is not set by the market or a third party.

Instead, “Carter’s intentionally sets the MSRP at an inflated dollar amount which Carter’s knows with certainty is grossly above the true market price for the product,” according to the complaint. “Meanwhile, Carter’s policy, as the manufacturer, is to give each product a price tag with this self-created, inflated MSRP which is the same regardless of whether the product is offered direct by Carter’s in its stores or on its website, or offered by its resellers.”

Carter’s also has a policy of “rarely if ever” offering its products in its retail stores or on its website at the purported MSRP, Aguilar alleged. Resellers of Carter’s products—retailers such as Kohl’s—similarly do not rely on the MSRP for pricing.

“In sum, neither Ms. Aguilar nor an ordinary Washington consumer did or would understand the words ‘50-70% OFF’ in the email’s subject line to refer to a discount from a self-created MSRP which Carter’s created in bad faith and which neither Carter’s nor its resellers treat as a real, bona fide price,” the plaintiff alleged.

Aguilar’s complaint, which was filed in the U.S. District Court for the Eastern District of Washington, requests injunctive relief as well as monetary damages.

To read the complaint in Aguilar v. Carter’s, Inc., click here.

Why it matters: Lawsuits questioning the use of MSRPs as the basis for sale or outlet pricing have been a frequent target for consumer class actions in recent years. In her new Washington federal court complaint, the plaintiff tacked on a claim based on the email she received from Carter’s, which she alleged violated state law by containing false or misleading information in its subject line.

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CCPA Update: Reform Measures on the Precipice?

By Thomas R. McMorrow, Partner, Government and Regulatory | Delilah L. Clay, Legislative & Regulatory Advisor, Government and Regulatory

California’s sweeping consumer privacy and data security law, the California Consumer Privacy Act, is set to take effect in 2020 despite concerns that big problems with the new law remain unresolved.

The primary legislative backers of the CCPA recognized there were flaws when they negotiated and successfully lobbied for its fast-track, high-pressure enactment last year, committing to come back in 2019 to address the problems. A principal author of the CCPA, Assembly Member Ed Chau (D-Monterey Park), spoke to the issue in Roll Call, noting that “we’re cleaning up the law” because it “may not be perfect.”

California legislators have already given preliminary consideration to more than a score of bills from both business and privacy advocates intended to amend the CCPA to address the problems they perceive with the law before it takes effect next year. Many of these bills passed their house of origin last week and are now awaiting hearings in the second house. Yet most of the discussion heading into this week focuses on the failure of SB 561 (Jackson), because its failure may jeopardize the remaining CCPA reform bills.

Powerful State Senator Hannah-Beth Jackson (D-Santa Barbara) raised the prospect of blocking proposed legislative changes to the CCPA in response to the failure of SB 561. SB 561 would have expanded the CCPA’s private right of action and eliminated the ability of businesses to cure violations of the law. The bill would also have eliminated the provision in the CCPA requiring the attorney general to issue compliance opinions.

These carefully negotiated provisions are intended to strike a balance between the interests of consumers and businesses in how the CCPA will be enforced. The private right of action ensures that consumers can directly enforce their rights under the CCPA against a business in the event of a data breach, but the cure provision ensures businesses receive notice of and a 30-day period to cure alleged violations. Better balance was also a consideration in the provision permitting the attorney general to issue CCPA compliance opinions at the request of businesses or individuals. Business interests argue this guidance is essential to ensure their efforts to comply with the CCPA align with the attorney general’s interpretation of the law.

Senator Jackson spoke to this balance in explaining her view to The New York Times: that the CCPA should not be amended at all if her proposed changes in SB 561 will not also be made. “If my bill to try to make [the CCPA] enforceable failed because we have to stick to the deal that was made last year, [other legislative] efforts to undermine it, to give exclusions and exemptions—all sorts of excuses for not enforcing it—then those have to fail as well.”

As chair of the Senate Judiciary Committee, Senator Jackson is positioned to carry out her threat if she chooses to. Most of the proposed amendments to the CCPA sought by business interests are included in bills that originated in the Assembly. As these bills come to the Senate, they will be referred to the Judiciary Committee for a hearing and vote. As chair of the committee, Senator Jackson can block further action on the bills referred to her committee.

Senator Jackson’s tactic is not a surprise. It is common for committee chairs to protect the interests of their house, their caucus and even their personal policy views by holding up other legislation until their legislative priorities are addressed. The only unknowns are whether Senator Jackson will act on her threat and, if so, what policy or other concessions she may require before she releases CCPA reform bills for full Senate consideration.

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Arbitration: Supreme Court Deals a Near Death Blow to Class Action Arbitration

By Richard E. Gottlieb, Partner, Manatt Financial Services | Esra A. Hudson, Partner, Employment and Labor | Alma PiƱan, Associate, Litigation

The Supreme Court, in a sharply-divided 5-4 ruling issued on April 24, ruled that nothing in the Federal Arbitration Act allows courts to compel class action arbitration even if the contract is ambiguous in that regard, and notwithstanding rules that direct courts to interpret such ambiguities most strongly against the drafter.

What happened

The Federal Arbitration Act (FAA) broadly favors arbitration and the parties’ ability to contract away their litigation rights through this alternate dispute resolution process. That said, back in 2010, the Supreme Court ruled in Stolt-Nielsen v. AnimalFeeds Int’l that a court may not compel arbitration on a classwide basis when an agreement is “silent” on the availability of such arbitration. Because class arbitration fundamentally changes the nature of the “traditional individualized arbitration” envisioned by federal law, the Court concluded in ­Stolt-Nielsen that a party may not be compelled to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so. In its April 24 ruling, the Court now concludes that federal law likewise prevents class arbitration, even when the arbitration agreement is ambiguous on the issue, because the Federal Arbitration Act requires courts to enforce covered arbitration agreements according to the terms of those agreements, and an ambiguous provision cannot be interpreted to compel class action arbitration.

As a general rule, when a contract is ambiguous, courts will apply, as a last resort, the rule of contract interpretation known as contra proferentem, which means that the ambiguous contract provision at issue will be interpreted against the drafter. In the decision below, the U.S. Court of Appeals for the Ninth Circuit did precisely that, concluding that the arbitration agreement at issue was ambiguous on the question of class action arbitration, and must be resolved in favor of ordering such arbitration. Indeed, this appeared to be consistent with Supreme Court precedent such as Mitsubishi Motors v. Soler Chrysler-Plymouth (1985) and Moses H. Cone Memorial Hospital v. Mercury Construction (1983), holding that any ambiguities about the scope of an arbitration agreement must be resolved in favor of arbitration.

But here, the Supreme Court draws the line on class action arbitration. Citing AT&T Mobility v. Concepcion (2011), the Court concludes that individual parties cannot force class action arbitration on other similarly situated parties without the parties’ consent because it is inconsistent with the FAA to apply the more general contra proferentem rule to impose class arbitration in the absence of the parties’ clear consent.

In addition, in one of three dissents, Justice Kagan wrote the primary opinion and largely agreed with a concurring opinion by Justice Thomas on the core principle that the dispute should have been resolved by applying common law contract principles. Those well-established principles, she wrote, ought to have resolved the case against Lamps Plus’s request for individual arbitration because, based on those rules of contract interpretation and Supreme Court precedent requiring contracts to be enforced in accordance with their terms, the arbitration agreement Lamps Plus wrote would be “best understood to authorize arbitration on a classwide basis.” Moreover, she wrote, “a plain-vanilla rule of contract interpretation, applied in California as in every other State, requires reading it against the drafter—and so likewise permits a class proceeding here.”

Ultimately, however, that view did not carry the day. The Court noted the importance of recognizing the fundamental difference between class arbitration and the individualized form of arbitration. Class arbitration is slower, more costly and more likely to generate procedural morass than is individual arbitration. Thus, silence and ambiguity are not enough to compel class arbitration. This decision should ensure that parties to an arbitration agreement are not forced into inefficient class arbitration proceedings unless the parties expressly agreed to such proceedings.

To read the Supreme Court’s opinion, concurrence and dissents, click here.

Why it matters

This is a major development in arbitration law because courts have applied the rule of contra proferentem to force class action arbitration on the parties based on purported ambiguity in arbitration agreements, even when none exists. With the ruling, the Supreme Court has made clear that the FAA prohibits the use of state-law rules of contract interpretation to the extent they seek to impose classwide arbitration in the absence of an express agreement to that effect.

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‘Made in USA’ Settlement Divides FTC

By Po Yi, Partner, Advertising, Marketing and Media

Siding with the government, a California appellate panel held that section 17501 of the Business & Professions Code was not unconstitutionally vague on its face or as applied to national retailers accused of deceptive pricing.

In 2017, the Los Angeles city attorney sued several retailers, including J.C. Penney, Kohl’s and Sears, alleging that they violated the statute by selling products online using deceptive or untrue statements about the former prices of those products. According to the complaint, the defendants offered their goods at “reference prices” that falsely purported to reflect their own former prices.

The complaints alleged that for significant percentages of the advertised items, the actual prices were always below the claimed former prices during the 90-day period, and that for the vast majority of the advertised items, the actual prices were below the claimed former prices on all but 30 days (or fewer) during the 90-day period.

The defendants “deliberately and artificially set the false reference prices higher than [their] actual former sales prices so that customers are deceived into believing that they are getting a bargain when purchasing products,” the city attorney alleged.

In a demurrer, the defendants argued that the statute was unconstitutionally vague on its face and as applied. A trial court sustained the demurrer but the appellate panel reversed.

Even though the statute’s impact on protected speech triggered a higher standard for clarity, it was not inherently unworkable or devoid of guidance to retailers, the court found. With respect to the as-applied challenge, the record was insufficient to support the defendants’ demurrer, the court said.

The court first discussed the extent to which the statute restricts free speech rights. The defendants were correct that the law restricts protected commercial speech because it “forbids any advertisement of the former price of an ‘advertised thing’ that does not express the market price information regarding former worth or value,” the court said. Nothing, however, suggested the existence of a legislative intent to focus the statute exclusively on false, misleading and deceptive commercial speech, the panel wrote.

“In view of the allegations, under any reasonable specification of a requisite three-month market price for the in-house goods … it is clear that the three-month market prices were often—and perhaps always—less than the claimed former prices,” the panel wrote. “The allegations thus suffice to establish that real parties routinely advertised former price claims for in-house goods not coinciding with the three-month market prices. For that reason, much or all of real parties’ alleged conduct ‘readily fall[s]’ within the scope of the statute.”

As for whether the statute’s prohibition was an invalid regulation of commercial speech, “the meager record permits no evaluation of the validity of … section 17501 under the Central Hudson test,” the panel said. “In view of the broad sweep of the prohibition in the statute, we question whether an adequate justification exists for the prohibition. Nonetheless, the record before us does not establish that the requisite justification does not exist. For that reason, [the defendants’] ‘free speech’ challenge necessarily fails on demurrer.”

Turning to the void for vagueness contention, the appellate panel rejected both of the defendants’ arguments.

“Their facial challenge to section 17501 fails in its entirety because the statute clearly prohibits some of the misconduct alleged in the complaints; furthermore, the as-applied challenge relating to the remaining misconduct fails on demurrer for want of factual allegations sufficient to support the challenge.”

Vacating the trial court’s order sustaining the defendants’ demurrer, the appellate panel remanded the case.

To read the opinion in People v. J.C. Penney Corp., click here.

Why it matters: By vacating the trial court’s grant of demurrer on grounds the statute was void for vagueness, the appellate panel’s decision reaffirms the validity of Section 17501. It also puts retailers on notice that additional enforcement actions may be in their future.

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INSIGHT: Transforming Your Legal Department Into A High-Performing Organization

Manatt’s Suzanne Rich Folsom and Robert Garretson lend decades of executive experience in strategic leadership, corporate governance and legal department/regulatory compliance management. In an article discussing structured change management for Bloomberg Law, the pair prepares forward-looking legal departments to redesign and optimize business operations by limiting inefficiencies, refreshing protocols and reinvigorating performance. Read more.

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