Retail and Consumer Products Law Roundup

Cyber Security Risk: What You Need to Know in 2017

As part of Manatt's continuing Retail Webinar Series, we will co-host a Cyber Security Education Webinar with professionals from Moss Adams LLP and EPIC Insurance Brokers & Consultants on February 16, 2017. Please join us to hear about the latest trends in cyber risk and how to mitigate them.

This complimentary webinar will be held at 10:00 a.m.–11:00 a.m. PST (1:00 p.m.–2:00 p.m. EST).

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False Ad Suit Survives When Consumers "Swept Into" Purchase

By Adrianne Marshack, Partner, Class Actions

Why It Matters

A California Court of Appeal found that plaintiff consumers had raised triable issues of fact on whether they suffered damages in reliance on allegedly misleading advertising about the extent of a 40%-off sale, despite plaintiffs' knowledge—before going through with the purchase—that the items plaintiffs bought were not part of the sale.

The Court's decision, which reversed the trial court's grant of summary judgment in favor of defendant retailer Banana Republic, confirms the difficulty retailers face in obtaining summary judgment where plaintiffs can show even a minimal connection between the allegedly false or misleading advertising and the plaintiffs' purchase. If a plaintiff can demonstrate that the advertising lured the plaintiff to consider purchasing items, and she likely would not have made a purchase but for being lured, this may be enough to defeat summary judgment even if the plaintiff learned the true facts prior to actually making the purchase.

Detailed Discussion

Plaintiffs and putative class representatives alleged that they entered Banana Republic stores after seeing signs in the store windows advertising a discount of 40% off purchases. There was evidence that some of the signs included a caveat that the discount applied to "selected styles," while other signs did not.

After shopping, trying on clothes, and making the decision to purchase certain items, plaintiffs waited in line to make their purchases. Once the cashier had rung up plaintiffs' items, but before plaintiffs actually completed the transactions, the plaintiffs learned that the 40% discount did not apply to any of the items plaintiffs had selected.

None of the plaintiffs went through with the entire purchase. Instead, one of the plaintiffs decided not to purchase anything other than the clothes that her daughter was wearing. Another plaintiff purchased only one sweater, electing not to buy any of the other items he and his wife had brought to the counter.

The plaintiffs contended that, after having been lured into the store by the 40%-off sale sign, selecting items to purchase, and then waiting in line, which was growing behind them, they felt embarrassed, humiliated, annoyed, and angry, and ultimately decided to purchase some (but not all) of the items at full price so as not to further embarrass themselves or their companions, and to salvage their shopping excursion from being a complete waste of time. They asserted causes of action against Banana Republic for false and misleading advertising under California's Unfair Competition Law (Bus. & Prof. Code §§ 17200 et seq.) (UCL), False Advertising Law (Bus. & Prof. Code §§ 17500 et seq.) (FAL), and the Consumers Legal Remedies Act (Civ. Code §§ 1750 et seq.) (CLRA).

The trial court granted summary judgment in favor of Banana Republic, finding that the plaintiffs lacked standing to assert their claims because they had failed to establish any economic injury (i.e., loss of money or property) as a result of the allegedly false and misleading advertising, since plaintiffs made their purchases after learning that the items were not discounted.

In reversing the trial court's decision, the Court of Appeal held that plaintiffs had raised triable issues of fact regarding whether they suffered injury in fact and whether such injury was a result of the allegedly misleading advertising—e.g., damages and causation.

On the issue of whether the plaintiffs suffered an injury in fact, the Court of Appeal stated that the UCL, FAL, and CLRA were intended in part to protect consumers "by requiring businesses to disclose the actual prices of items offered for sale, and prohibiting businesses from using false and deceptive advertising to lure consumers to shop. In short, plaintiffs had a legally protected interest in knowing from the outset, when they started to shop, the true prices of the items they chose to buy." The economic harm to plaintiffs, the Court of Appeal found, was the difference between the full price the plaintiffs actually paid and the price less the 40% discount they should have paid, assuming the allegations of false advertising were true.

With respect to causation, the Court of Appeal noted that an alleged misleading advertisement need not be the only cause of a plaintiff's economic loss under the consumer protection statutes. "It is enough that the representation has played a substantial part, and so has been a substantial factor, in influencing his decision." For this reason, the Court held, the question of reliance and causation did not rest on whether plaintiffs knew the actual price of the items they purchased at the moment the money was exchanged. The entire chain of events had to be taken into account to determine whether the alleged misleading advertising was a substantial factor in causing plaintiffs' decisions to buy. The Court went on:

Here, in plaintiffs' version of events, the advertising led them to enter the store, to shop, to select items, to decide to purchase them, and to stand in line to make the purchases. Their reliance on the advertising informed their decision to buy, which culminated in the embarrassment and frustration they felt when, as the items were being rung up, they learned that discount did not apply. And it was the temporal proximity of that chain of events, and the pressure the events brought to bear on plaintiffs' judgment, that played a substantial role in leading them to purchase the items they did, even though they knew the discount did not apply. On this reasoning, there is a triable issue whether plaintiffs' reliance on the allegedly misleading advertising was a cause, though not the only cause, of their economic harm.

Although this decision may be a bit of an eye-roller for retailers because it seems to remove, in the summary judgment context, the issue of consumers' free will and suggests there could be liability for a retailer when consumers get "swept up in the momentum to" buy, the Court of Appeal's decision actually is not surprising. California's consumer protection statutes were intended to operate more protectively than simply shielding consumers from actual fraud. As the Court of Appeal recognized, a contrary holding would essentially sanction "bait and switch" schemes, barring consumers from having any recourse against a retailer for misleading activities unless the retailer surreptitiously charged an inflated price that the consumer does not realize she paid until after the money actually changed hands. This result would be at odds with the purposes of the consumer protection statutes, which were intended to curb deceptive business practices and ensure transparency throughout a consumer transaction, not just at the very last moment before purchase.

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EPA's First Regulation of Nanomaterials May Impact Supply Chains

By James Votaw, Partner, Environment

Why It Matters

On January 12, 2017, the U.S. Environmental Protection Agency (EPA) issued a controversial rule requiring all persons who propose to commence importing, manufacturing or processing certain nanoscale materials, or who have done so in the past three years, to prepare and submit a comprehensive report for each material, including all information known or reasonably ascertainable relevant to assessing its risk under the intended circumstances of use. Additional reports must be submitted for the same material if production changes are made that intentionally change the shape, size or certain physicochemical properties of the material (referred to as a "discrete form"). EPA has not concluded that all nanoscale materials present special risks. There is no particular risk associated with nanoscale particle size alone. Rather, the collected information will be used by EPA to assess, on a case-by-case basis, whether individual nanoscale materials may present risks warranting further investigation or, ultimately, individual regulation of safe use and handling under the Toxic Substances Control Act (TSCA). The rule becomes effective on May 12, 2017.

The rule is applicable to materials with a significant nanoscale fraction made to take advantage of size-dependent properties that vary from those found in larger scale materials. This covers true nanotechnology products such as quantum dot semiconductor materials used in televisions that can be tuned to emit light at specific frequencies by changing their particle size and shape. But it also appears to include other, less exotic materials, purposefully produced in ultrafine or colloidal particle size ranges to take advantage of very ordinary size-dependent properties, such as increased surface area. Consumer product manufacturers that import, manufacture or process with ultrafine materials should assess potential applicability to current materials and set a screening procedure to identify future materials that trigger pre-manufacture reporting requirements.

Detailed Discussion

Reporting Deadlines for Future and Past Activities

For proposed new nanoscale material manufacturing, importing or processing activity (or producing a discrete form of a previously reported material), a report is due either 135 days before commencement of the new activity, or, where a shorter start-up period is planned, 30 days after forming the intent to commence the activity. The 135/30-day reporting obligation for new activities becomes effective on May 12, 2017. Reports for nanomaterial activities that commenced prior to that date are not due until May 2018. Reporting must be done electronically through EPA's secure data collection system.

Controversial Rule

The reporting rule has been in development for more than six years, including four years on hold at the Office of Management and Budget. There, an initial draft was scaled back significantly during interagency review to remove terms that would have required all companies in the future to notify EPA and wait 90 or more days before they could start manufacturing or processing particular nanomaterials, which EPA then could authorize on a case-by-case basis (a "significant new use rule" or SNUR). The final rule maintains vestiges of that approach reflected in the permanent 135/30-day reporting obligation for new manufacturers and processors. The 30-day reporting option was added to the final rule, without prior proposal or public comment, in response to vigorous industry objections that the 135-day reporting arrangement was an unwarranted and illegal prior restraint on manufacturing not authorized by TSCA. Although EPA correctly states in the preamble to the final rule that the 135-day reporting obligation does not expressly prohibit the start of manufacture or processing until the end of that period, the inhibitory effect is the same if a company can be penalized for "late" reports submitted less than 135 days before commencement. The newly added 30-day reporting option provides additional flexibility, but may be impractical given uncertainty about exactly when a company forms a specific manufacturing intent, and because the period is much too short. Based on EPA's estimate of the average time needed to complete a submission, it would require an individual to work on the report nearly six hours/day every day in the 30-day reporting period to meet the regulatory deadline.

Covered Materials

Reports are required only for nanoscale materials that are solids at ambient temperatures and have a particle size less than or equal to 100 nm. In addition, to be reportable, the material must be made or processed in the nanoscale form with the specific intent to produce "unique and novel," size-dependent properties in the material.

In response to criticism of the highly subjective and undefined "unique and novel" applicability criterion in the proposed rule, EPA adopted a definition in the final rule. Without prior proposal or public comment, EPA has defined "unique and novel" properties as "those that vary from [properties] associated with other forms or sizes of the same substance." This definition would have benefited from public comment, as it appears to have the unintended effect of triggering reporting for a wide range of common materials for very ordinary and predictable properties associated with smaller-sized particles, such as increased surface area. And it also arguably may have the unintended effect of exempting from reporting relatively exotic nanoscale materials, such as carbon nanotubes and buckyballs, that exist only in the nanoscale size range and therefore do not have properties that vary from those of a larger form of the same substance (because there is no larger form). In addition, like the many exempt nanoscale biological materials, the special properties of these materials often are not a function of their particle size per se but of their chemical structure and shape.

Excluded Materials

In the final rule, EPA has narrowed some exclusions and broadened others. Reporting is not required for those handling aggregates and agglomerates that are greater than 100 nm, even if they are made up of primary particles less than 100 nm. Reporting generally is not required for unintentionally present nanoscale fractions of larger-sized materials, or where the nanoscale fraction is 1% or less by weight. Nor is reporting required for a wide range of biological materials (e.g., DNA, proteins, enzymes), substances that form in films to be less than 100 nm, and substances that dissociate completely in water to form ions less than 100 nm. Substances that release ions but do not completely dissociate are not exempt. Many nanoscale substances are incorporated into formulated products or matrices. The preamble to the rule clarifies that otherwise covered nanomaterials are not reportable by processors after they have been incorporated into a formulated product, a polymer matrix or an article, but processors that prepare these mixtures are not exempt. In a significant break from the proposal, the final rule omits an express exemption for nanoclays and nanoscale zinc oxide materials. EPA had proposed to exempt them because it already had sufficient information. These materials are reportable in particular cases if they otherwise meet the size and "unique and novel" applicability criteria. The rule does not apply to "new chemicals" that are not yet on the TSCA inventory. Nor does it apply to materials subject to the TSCA R&D exemption, and materials not subject to TSCA, such as pesticides, foods, drugs, and cosmetics.

Exempt Persons

Small business entities with total sales (together with those of their parent companies) of less than $11 million are exempt. Also exempt are companies that submitted a pre-manufacture notice or other TSCA Section 5 notice for the particular nanoscale substance after 2004. This exemption applies only to the Section 5 notice submitter and not to others making or processing the same substance. On the other hand, a person potentially subject to 135/30-day reporting for a new nanomaterial activity or discrete form may be exempt from reporting in some circumstances if another person has already reported the substance to EPA. The rule provides that new manufacturers and processors have to report only for materials that were not reported during the initial reporting period for nanomaterial activities commenced prior to the effective date. While uncertainty remains, this construction may make it possible for current reportable material manufacturers and importers to shield their new downstream customers from reporting obligations by submitting their own reports as early as possible.

Extent of Respondents' Duty to Investigate Facts

Respondents need only supply information that is "known or reasonably ascertainable." This standard requires reporting companies to conduct careful investigation and review of available facts, including, according to EPA, asking material suppliers and customers for information to fill gaps in knowledge. But it does not include the obligation to conduct any testing on a material to determine whether it triggers any of the applicability criteria. This may be particularly significant in respect of determining whether a process change has produced a reportable "discrete form," which may turn on whether there is an intentional change in size, zeta potential, surface area, dispersion stability or surface reactivity that is greater than seven times the standard deviation of the measured value. New testing is not required to make these judgments and, in the absence of data, new reporting may not be required unless the person reasonably knows that the criteria have been met even without specific test data. EPA has committed to provide further guidance concerning which information it believes is "reasonably ascertainable."

Minimizing Impact on Product Supply and Distribution Chains

Companies potentially subject to reporting should start now to assess how reporting may affect their product development process and supply and product distribution chains. Reporting for static products may represent only a one-time inconvenience for nanomaterial manufacturers and importers. But as a commercial matter, manufacturers should start to plan now for means to limit the potential burden on their current and future direct and indirect customers, who may have their own reporting obligations. This might include providing clear guidance on the extent of the customer's reporting obligations with, for example, prepackaged product information, product stewardship guidance to ensure safer handling, and potentially regulatory form assembly and submission services. Manufacturers that continually modify or improve their nanoscale material products will need to build checks into their own systems to know when they've made a new "discrete material" triggering new reporting obligations.

Special Compliance Risks

Companies also need to prepare for two other possible contingencies. First, as part of inventorying a company's nanomaterial handling activities that must be reported, it may discover potential violations of TSCA, such as past failure to recognize and provide EPA with pre-manufacture notification of new chemicals being made or imported, failure to provide required TSCA import certifications, noncompliance with applicable significant use rules for certain nanoscale materials, or previously undisclosed studies subject to disclosure under TSCA § 8(e). To prepare for these risks, companies may decide to couple the nanomaterial product inquiry with a TSCA compliance audit. This would give the company the opportunity to promptly disclose and correct any violations discovered without incurring gravity-based penalties using EPA's audit policy. The second concern is the potential discovery of previously unknown hazard information and/or inadequate material handling practices that may result in, for example, unnecessary chemical exposures to workers, or adverse environmental impacts. The long lead time allowed for current manufacturers and processors to assemble and submit their initial reports provides an ideal opportunity for companies to audit and improve these systems before reporting, where warranted, so that the final report submitted to EPA effectively demonstrates that no further regulation or testing is warranted for the particular nanomaterial under the circumstances of use.

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Employers Halt On-Call Scheduling After AGs Send Letters

Why It Matters

More employers have agreed to halt the practice of "on-call scheduling" after receiving warning letters from a coalition of state Attorneys General. Led by New York Attorney General Eric T. Schneiderman, the AGs of seven other states and the District of Columbia sent missives to 15 national retailers arguing the practice—where employees call their employer an hour or two before a scheduled shift to see if they will work that day—"take[s] a toll on employees," resulting in "higher incidences of adverse health effects, overall stress, and strain on family life."

Six of the recipients agreed to stop the practice, Schneiderman announced, which will impact an estimated 50,000 employees nationwide. Four of those companies also promised to provide work schedules at least one week in advance to workers. The other nine employers responded that they either did not use the practice or had already stopped it. The focus on the practice began in 2015, when both regulators and employees challenged on-call scheduling in investigations and class actions.

Detailed Discussion

In 2015, New York Attorney General Eric T. Schneiderman launched a campaign against the practice of "on-call scheduling," expressing concern about the impact of such a practice on the workforce. After sending a series of letters to employers operating in the state, Schneiderman announced that several retailers—including Abercrombie & Fitch, Gap, J.Crew, Urban Outfitters, and Pier 1 Imports—agreed to halt the use of such scheduling, which requires employees to call their employer, typically a few hours before their shift, to confirm whether they will be working that day.

Joined by the Attorneys General of California, Connecticut, the District of Columbia, Illinois, Maryland, Massachusetts, Minnesota, and Rhode Island, Schneiderman sent another round of letters to national retailers last April.

"Unpredictable work schedules take a toll on employees," the AGs wrote. "Without the security of a definite work schedule, workers who must be 'on call' have difficulty making reliable childcare and elder-care arrangements, encounter obstacles in pursuing an education, and in general experience higher incidences of adverse health effects, overall stress, and strain on family life than workers who enjoy the stability of knowing their schedules reasonably in advance."

The letter was triggered by these concerns as well as the fact that certain states have laws regarding reporting or call-in pay laws, the AGs added. For example, New York has a "call-in pay" regulation that provides: "An employee who by request or permission of the employer reports for work on any day shall be paid for at least four hours, or the number of hours in the regularly scheduled shift, whichever is less, at the basic minimum hourly wage."

Of the 15 recipients, 9 (American Eagle, BCBG Max Azria, Coach, Forever 21, Justice: Just for Girls, Payless, Tilly's, Inc., Uniqlo, and Vans) replied that they either did not engage in on-call scheduling or recently stopped the practice. Six more promised to stop, an agreement that will impact an estimated 50,000 employees nationwide, Schneiderman said. In addition, four of the companies also committed to providing their workers with schedules at least one week in advance of the workweek.

"On-call shifts are not a business necessity and should be a thing of the past," Schneiderman said in a statement. "People should not have to keep the day open, arrange for child care, and give up other opportunities without being compensated for their time. I am pleased that these companies have stepped up to the plate and agreed to stop using this unfair method of scheduling."

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OK to Decrease Commissions Based on Negative Growth, Seventh Circuit Affirms

Why It Matters

Interpreting California and New York law, the Seventh Circuit Court of Appeals ruled that negative sales growth is a permissible way to decrease an employee's commissions. A pair of sales reps sued Medline Industries, Inc. over the employer's method of calculating commissions, which included year-to-year sales declines as a factor. The plaintiffs argued that instead of being reduced, their commissions should be zeroed out for such years, especially because the decline could be due to factors outside their control.

But the federal appellate panel sided with the employer, finding that Medline's calculation was "a valid means of incentivizing their salespeople to grow business year over year in their assigned territories" pursuant to both California and New York law, where the two plaintiffs were located. The parties had contractually agreed Medline "could use both the carrot and the stick in promoting growth," the court noted, affirming summary judgment for the employer.

Detailed Discussion

David Cohan and Susan Schardt worked as sales representatives for Medline Industries, a national manufacturer and distributor of healthcare supplies, in New York and California, respectively. Both received a base salary as well as commissions on sales of products to accounts within their assigned territory pursuant to the terms of written employment agreements.

Medline calculated commissions by starting with the salesperson's invoiced sales for the current month and subtracting their sales from the same month in the prior year. Depending on whether the salesperson sold more or less than in the year prior, that calculation could result in a positive or negative sales growth number. Medline then multiplied the salesperson's growth or decline by a commission percentage. The calculation always included all of the sales rep's business, including accounts with positive and negative sales growth.

Cohan and Schardt filed a putative class action against their employer, claiming that Medline's practice of accounting for year-to-year sales declines in calculating and paying commissions was impermissible under the terms of their employment agreements and state wage laws. Employees should simply not have earned commissions when they failed to grow sales year over year, the plaintiffs contended, with negative growth zeroed out. A district court judge disagreed, granting Medline's motion for summary judgment. A panel of the Seventh Circuit Court of Appeals affirmed.

The court rejected the plaintiffs' argument that the term "negative growth" is an oxymoron inconsistent with the plain language of the employment agreements and that the term "growth" should have been interpreted in the light most favorable to them at the summary judgment stage. The compensation plans provided by Medline as part of the employment agreements "clearly and unambiguously" explained how commissions were to be calculated and the positive examples used did not mean negative growth was not included, the panel said.

As for state law, the Seventh Circuit found that Medline's accounting for negative growth was not a deduction from earned commissions—which would have run afoul of both California and New York law—but "rather the contracted-to means of calculating commissions."

New York's highest court has held that state law does not bar employers from structuring payment arrangements that include a "downward adjustment" in calculating commissions, the panel said, while California courts "have long recognized, and enforced, commission plans agreed to between employer and employee, applying fundamental contract principles to determine whether a salesperson has, or has not, earned a commission."

The court considered the plaintiffs' position that Medline's commission structure violated state law because it impermissibly recouped business losses from sales reps even when the losses are outside employees' control, such as natural disasters or if sales had already been in decline before the employee was assigned to the territory. But "the agreement between the parties specifies that commissions are earned in the first instance based on sales growth, including negative growth," the panel wrote. Moreover, the employment agreement also provided for the flip side: sales representatives received commissions from sales in their territory "irrespective" of whether they made the sale—meaning they could earn money even where they didn't make a sale.

Affirming summary judgment for Medline, the Seventh Circuit concluded the employer's commission calculation was "a valid means of incentivizing their salespeople to grow business year over year in their assigned territories."

To read the decision in Cohan v. Medline Industries, Inc., click here.

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