January 8, 2014
This year is sure to bring a number of significant changes to the food and beverage industry, as many states attempt to implement food safety legislation and the Obama administration renews its focus on ‘beefing’ up food safety regulations. However, with the Department of Justice’s interest in pursuing criminal sanctions against food manufacturing executives and the continued onslaught of consumer class action labeling cases, many of the changes may be driven by litigation rather than through legislation. These “hot topics” from 2013 continue to attract the attention of government officials, agencies, consumer advocacy groups and the general public. Possible areas where changes may occur include food labeling, regulatory and statutory developments, revival of the Park Doctrine and imposition of criminal sanctions against individuals, environmental, European Union regulations, and immigration compliance.
The following are potential food and beverage industry issues to follow in 2014:
Food Labeling Litigation
In 2012 we observed an explosive uptick in suits targeting labeling practices of food manufacturers. That trend accelerated in 2013, as this litigation went from hot to white-hot. A year ago, we projected that in 2013, “there should be more clarity on whether these suits will remain a legitimate threat to the food industry or whether they are merely a passing fad that courts will eventually shut down.” Though there is still no final answer on this question, it certainly appears these suits pose a legitimate threat to the food industry. Food manufacturers are unquestionably spending more time, energy and money defending these suits than they were even a year ago. We expect the trend to continue throughout 2014.
A few observations about labeling litigation in 2013 are instructive for the outlook as to 2014. First, 2013 saw a huge number of labeling suits filed, seemingly a new suit every day. In 2013, the chief targets were “all natural” claims, see, e.g., Garrison v. Whole Food Market Inc., No. 13-05333 (N.D. Cal. Nov. 8, 2013), and evaporated cane juice claims, see, e.g., Figy v. Lifeway Foods Inc., No. 13-04828 (N.D. Cal. Oct. 17, 2013); Miller v. Living Harvest Foods, Inc., No. 1:13-cv-23926 (S.D. Fla. Oct. 29, 2013), although food labels were challenged on a wide variety of claims. Like in most litigation, the plaintiffs’ bar initially attacked labels with a variety of legal theories, but as the litigation began to mature, so have their claims. The plaintiffs’ bar has learned from their mistakes in past cases and are constantly revising and improving their playbook.
We are now in the midst of the “second wave” of labeling suits, which are exemplified by narrower claims that focus on theories that the plaintiff’s bar has learned through experience are more likely to survive a motion to dismiss. See, e.g., Lilly v. Jamba Juice Co., No. 13-02998 (N.D. Calif. Nov. 18, 2013); Rojas v. General Mills Inc., No. 12-05099 (N.D. Calif. Oct. 9, 2013); Reilly v. Amy’s Kitchen Inc., No. 1:13-cv-21525 (S.D. Fla. Dec. 9, 2013). Accordingly, more and more labeling suits are surviving motions to dismiss and moving toward discovery, class certification and even trial. However, courts are still granting motions to dismiss, especially on primary jurisdiction and preemption grounds, see, e.g., Fisher v. Monster Beverage Corp., No. 12-2188 (C.D. Calif. Nov. 12, 2013); Pelayo v. Nestle USA Inc., No. 13-5213 (C.D. Calif. Oct. 25, 2013); Burke v. Weight Watchers Int’l Inc., No. 12-06742 (D. N.J. Oct. 15, 2013), but defendants can no longer count on getting these cases completely dismissed at the pleading stage. In fact, in many instances, even when a court dismisses a claim, it gives the plaintiff an opportunity to replead the claim in such a way as to avoid dismissal. See, e.g., Brazil v. Dole Food Co., No. 12-01831 (N.D. Calif. March 25, 2013).
Second, class certification is quickly becoming the central battlefield in this litigation rather than motions to dismiss. While the trend favors denial of class certification, courts certified classes in a few food labeling cases in 2013. See, e.g., Ebin v. Kangadis Food Inc., No. 1:13-cv-02311 (S.D. N.Y. Dec. 11, 2013); Astiana v. Kashi Co., No. 11-01967 (S.D. Cal. July 30, 2013); Thurston v. Bear Naked Inc., No. 3:11-CV-02890-H (S.D. Calif. July 30, 2013); cf. Ackerman v. Coca-Cola Co., No. 09-00395 (E.D. N.Y. Jul 18, 2013) (magistrate judge recommended certification of New York and California classes as to injunctive relief and recommended denial of certification as to monetary damages). However, courts that are granting class certification are rejecting national classes and instead only certifying narrower classes. See, e.g., Astiana v. Kashi Co., No. 11-01967 (S.D. Cal. July 30, 2013); Thurston v. Bear Naked Inc., No. 3:11-CV-02890-H (S.D. Calif. July 30, 2013). The trend remains in favor of denying class certification. . See, e.g., McManus v. Sturm Foods, Inc., No. 3:11-cv-00565 (S.D. Ill. Aug. 26, 2013); Hernandez v. Chipotle Mexican Grill Inc., No. 12-5543 (C.D. Cal. Dec. 2, 2013); Ries v. Arizona Beverages USA LLC, No. 10-011139 (N.D. Cal. March 28, 2013). Many labeling suits are just now maturing to the point where class certification decisions are ripe. 2014 should be a determinative year as to whether the tide turns in one direction or the other on the issue of class certification.
Third, some labeling suits paid dividends for plaintiffs in 2013. There were several large settlements, including a $9 million settlement in Pappas v. Naked Juice Co. of Glendora Inc., No. 11-08276 (C.D. Cal.); a $8.5 million settlement in Johnson v. General Mills, No. 8:10-cv-00061 (C.D. Cal.); and two settlements worth approximately $4 million each, see Dennis v. Kellogg Co., No. 3:09-cv-01786-IEG-WMC (S.D. Cal. Sept. 10, 2013) and Trammell v. Barbara’s Bakery Inc., No. 12-02664 (N.D. Cal. June 21, 2013). As more suits are filed, it will bear watching in 2014 whether more such settlements are agreed to or whether food companies instead fight class certification.
Regulatory and Statutory Developments
There continued to be a push in 2013 by various state legislatures to expand laws requiring accurate labeling of food products, despite the fact proponents of such laws suffered a crushing defeat at the ballot box on Proposition 37 in California in November 2012. Similarly, Washington state voters narrowly rejected such a law in November 2013. The New Mexico legislature also rejected such a law in 2013, and it appears as though the New Hampshire legislature will likely do so as well. However, Connecticut and Maine both passed GMO-labeling laws in 2013, though they do not actually take effect unless neighboring/nearby states pass similar laws.
On Sept. 19, 2013, Democratic lawmakers introduced the Food Labeling Modernization Act of 2013, which proposes a sweeping overhaul of food labeling requirements addressing front-of-package labeling and allegedly misleading claims about what foods are “healthy,” “natural” or “made with whole grain.” Though this bill is unlikely to get out of committee, it is yet another sign that food labeling is on the minds of both state and federal legislators. The food industry will no doubt be watching legislative developments on food labeling very closely in 2014.
As for regulatory developments, in August 2013 the FDA issued a final rule to define the term “gluten-free” when voluntarily used in food labeling. It is defined as less than 20 parts per million of gluten. More importantly, in November 2013, the FDA reached a preliminary determination that partially hydrogenated oils (PHOs), or trans fats as they are generally known, are not “generally recognized as safe.” If this decision is made final, “it could, in effect, mean the end of artificial, industrially produced trans fat in foods,” said Dr. Dennis Keefe, director of FDA’s Office of Food Additive Safety. Other priorities identified by the FDA in 2014 include energy drinks, arsenic, nanotechnology and dietary supplements.
Moreover, federal, state and local governmental authorities were very active in 2013 in enforcement related to food labeling. The FTC upheld a key decision requiring POM to have two randomized and human-controlled trials to substantiate claims that a product treats, prevents or reduces the risk of diseases. The FDA and FTC have joined forces to issue warning letters to a number of companies and there is no indication this collaboration will stop any time soon. In addition, the San Francisco city attorney filed suit against the manufacturer of Monster energy drinks due to its alleged marketing to children. The New York attorney general and the FDA are both reportedly investigating the manufacturers of energy drinks. These developments in 2013 demonstrate that the federal, state and local governmental bodies have identified food and food labeling as a priority, and that further aggressive regulatory and enforcement actions can be expected in 2014.
As exemplified by the discussion above, food labeling has quickly become one of the most active areas of litigation, regulation and governmental enforcement. The scene is rapidly changing, and even the most vigilant can have trouble keeping up with all the developments. Given the flurry of activity on food labeling in 2013, 2014 is shaping up to be an even more active year as more suits, regulations and enforcement actions are filed.
Uptick in Criminal Prosecutions For Food Safety Violations
For the last several years, there have been signs federal prosecutors planned to increasingly target food industry executives for criminal prosecution. In 2013, this became a reality as the federal government brought high-profile criminal charges against food company executives on at least two occasions.
On Feb. 20, 2013, the United States Department of Justice (DOJ) announced criminal charges against five former officials and employees of Peanut Corporation of America (PCA), a peanut processor and manufacturer. The government charged four individuals, including PCA’s president and owner, in a 76-count indictment, and another employee plead guilty to similar charges. The charges stem from a 2009 salmonella outbreak that the FDA traced to a PCA roasting plant in Georgia. The FDA alleges that at least nine people died due to consumption of the tainted peanut products, which were recalled. The indictment is broad in scope, setting forth a detailed and lengthy six-year conspiracy to deliver adulterated and misbranded food. The charges also included nine instances of attempts to obstruct the government investigation of the PCA facility.
Significant enforcement activity in the food industry is not limited to PCA. In September 2013, misdemeanor criminal charges were filed against executives Eric and Ryan Jensen, who owned a melon farm on which listeria monocytogenes contaminated fruit and allegedly led to 33 deaths. These charges did not allege criminal “intent,” but such intent is not necessary for misdemeanor charges. The Food, Drug, and Cosmetic Act criminalizes the distribution or sale of adulterated food even without knowledge of that adulteration. Both executives face up to six years in jail and a combined $1.5 million fine if found guilty. Arrest warrants were issued for both defendants, which is atypical in misdemeanor cases, and the executives were brought to their arraignments in shackles.
Revival of Park Doctrine
Criminal charges against individuals historically have been an unusual step for the government in cases involving food safety violations. Although both civil and criminal statutes and penalties against a company and individuals are available, the government has rarely used criminal provisions to charge individual food industry executives and employees. This remained true even though the U.S. Supreme Court specifically held in the seminal 1975 case of United States v. Park, 421 U.S. 658 (1975) — now known as the Park Doctrine — that corporate executives could be prosecuted criminally for unintentional violations of food and drug laws by their companies.
It now seems clear that federal prosecutors have revived the Park Doctrine. For instance, in 2010, FDA Commissioner Dr. Margaret Hamburg told Congress that an internal committee had recommended “increas[ing] the appropriate use of misdemeanor prosecutions, a valuable enforcement tool, to hold responsible corporate officials accountable.” Letter from Margaret A. Hamburg, commissioner of Food and Drugs, to Sen. Charles E. Grassley (March 4, 2010) at 2. Soon thereafter, in January 2011, that recommendation was followed as the FDA changed its internal regulatory procedures to authorize Park Doctrine prosecutions against corporate executives under some circumstances. See U.S. Food and Drug Administration, Regulatory Procedures Manual at Section 6-5-3. 3. U.S. Department of Justice Press Release, April 24, 2012.
This renewed emphasis on the Park Doctrine was reaffirmed recently in the prosecution of Gary Osborn, the owner of the compounding pharmacy ApothéCure, Inc., who was charged with and pled guilty to two misdemeanor criminal violations of the Food, Drug, and Cosmetic Act, despite having no direct or personal involvement in the misbranding or labeling of the adulterated drug. The acting assistant attorney general of the Civil Division of the Department of Justice, Stuart Delery, said about this prosecution: “This plea shows that the Department of Justice will enforce the Food, Drug, and Cosmetic Act against responsible corporate officers of companies that fail to control the quality of their products.” See U.S. Department of Justice Press Release, April 24, 2012.
Moreover, in 2011, the FDA’s enforcement authority was increased with passage of the Food Safety Modernization Act, including the ability to issue mandatory recalls and revoke the registration of food facilities. The FDA used its increased powers, for example, in November 2012 to shut down a peanut butter plant in New Mexico associated with another salmonella outbreak.
It is clear that federal prosecutors, as a deterrence strategy, are more aggressively pursuing criminal charges against the food industry. Given the apparent revival of the Park Doctrine and the PCA and Jensen Farm prosecutions, all signs point toward this trend of criminal enforcement increasing even more in 2014.
Benne C. Hutson, Charlotte
Product Packaging Bans
With a string of court decisions in 2013 upholding local ordinances banning or imposing a charge for the use of plastic bags, municipalities are now looking to expand the reach of such laws. San Jose has voted to ban restaurants from using plastic foam containers, while New York Mayor Michael Bloomberg, in one of his last acts before leaving office, signed into a law a bill banning the use of food packaging made from polystyrene foam unless it can be shown that the material can be recycled. Citizen initiatives and referendums promoting these and other bans will likely be more prevalent in the 2014 elections.
Much attention will be focused on the EPA and environmental groups’ appeal of the Alt v. EPA decision in which a court, for the first time, ruled that the Clean Water Act’s “agricultural stormwater” permitting exemption applies to not only releases of manure and litter from poultry houses but also airborne emissions of pollutants from ventilation fans that end up in stormwater runoff that reaches streams and rivers. Historically, the EPA had applied the exemption only to land application of animal waste.
While nutrient pollution from agricultural waste will continue to be an issue, there will be a new focus on pathogens, antimicrobials and hormones, which a recent EPA study identified as “contaminants of emerging concern.”
The coal ash rulemaking roller coaster may go down its final hair-raising plunge and reach the end of its ride in 2014. A tentative settlement between the EPA and environmentalists in a pending lawsuit in the District of Columbia (Appalachian Voices v. McCarthy) would require the agency to complete the coal ash rule by the end of the year. However, the rulemaking process may yet come to another screeching halt because House Republicans are planning to propose legislation that would eliminate the mandatory requirement that the EPA review and revise its waste rules every three years, which was the basis for the environmentalists’ lawsuit.
EU Regulatory Issues
Unfair Trading Practices
During 2013, the European Commission (EC) carried out a consultation on the problems posed by unfair trading practices in business-to-business relationships along the food (and non-food) supply chain. A summary of the responses has been published. The EC also launched an impact assessment analyzing several possible options to address these issues, ranging from self-regulation to legislation. The EC is in the final stages of its analysis and the conclusions from this impact assessment are expected to be published in early 2014. Based on comments by EC officials, it appears likely that only the food sector will be covered and that the EC will seek to build upon the voluntary, private sector-led Supply Chain Initiative, which was launched on Sept. 16, 2013. A proposal to introduce legislation is not expected, in particular since European Parliament (EP) elections in May 2014 would delay implementation.
Choice and Innovation in the Food Sector
The antitrust directorate of the EC has been carrying out a study examining, in particular, whether increased concentration and the use of “own brand” (private label) products have hampered choice and innovation in the EU food sector by giving retailers bargaining power sufficient to impose unfair trading practices on their suppliers. The final report of the study is expected in early 2014.
The High Level Forum for a Better Functioning Food Supply Chain
The High Level Forum for a Better Functioning Food Supply Chain, comprising representatives of various stakeholders, has extended its mandate until the end of 2014. In addition to its existing projects such as helping to improve the European Food Prices Monitoring Tool, the forum is expected to focus on new issues, including food taxes and e-commerce. The forum is also going to be carrying out initial preparations for sector initiatives at Expo Milano 2015, the theme of which is “Feeding the Planet, Energy for Life.” This is seen as a significant opportunity for the EU food industry.
New Rules Governing the Agri-Food Sector
On May 6, 2013, the EC proposed a “landmark package” that would update the rules governing the agri-food sector in the EU. The reform would cut almost 70 pieces of current legislation down to five and reduce the red-tape covering processes and procedures for farmers, breeders and food business operators (including producers, processors and distributors). Summarizing the proposal, the EC said that it would provide “smarter rules for safer food” in the EU. The main elements of the proposal can be divided into four sections, dealing with official controls, animal health, plant health and plant reproductive material. The legislation needs to be considered by the EP and the European Council. The EC estimates that, assuming the legislation is adopted, it will enter into force in 2016. The package is currently being considered within the committees of the EP, and EP votes on it are expected to take place in early 2014.
The EU’s Common Agricultural Policy (CAP) has been reformed and most of the new rules took effect on Jan. 1, 2014. The reforms (including those that will come into force in January 2015 or are subject to transitional rules during 2014) are intended to put more emphasis on environmental protection, ensure fairer distribution of EU funds and help farmers to cope better with market challenges. In particular, a new system of payments to farmers is being introduced.
UK Bribery Act
Vivian Robinson QC, London
Prosecutions brought under the UK Bribery Act have become a serious and costly concern for companies across industries, including food and beverage manufacturers and distributors, that operate or associate with business partners in the UK.
Deferred Prosecution Agreements
The UK Serious Fraud Office (SFO) has a number of matters under consideration, including some to which the UK Bribery Act would apply. It seems likely that the SFO may be holding off on some decisions regarding disposal until Deferred Prosecution Agreements (DPAs) become an available option in the UK.
The SFO will be able to agree to the disposal of appropriate cases by way of DPAs from early 2014. The process will be similar to that which applies in the U.S., with the important exception that the process will be the subject of judicial scrutiny from the outset. In approaching DPAs, the SFO has indicated that it will look at each individual case in the round, taking full account of the strength of the evidence and considering all relevant public interest factors.
Proposed Guidance on Sentencing and Rewards
No official guidance currently exists on how courts or enforcement agencies in the UK should assess the scale of financial penalties on corporate offenders. Following a public consultation process, it is expected that in early 2014 guidelines will be issued by the UK Sentencing Council regarding sentencing of both individual and corporate offenders in cases of fraud, bribery and money laundering.
Likewise, there is currently no legislative framework in the UK that provides for the compensating of whistleblowers. The UK Home Office has recently published a document that indicates that it is considering proposals that those who come forward with information on financial crimes should be rewarded.
In a number of statements during 2013, the SFO has indicated a tougher stance with regard to corporate offending. In particular, it has indicated that a self-report of discovered unlawful activity by a corporation will not guarantee protection against prosecution. It would, however, always be a factor that weighed heavily in the public interest against prosecution.
Foreign Corrupt Practices Act
J. Patrick Rowan, Washington, D.C.
Vigorous Enforcement Continues
The Department of Justice (DOJ) and the Securities Exchange Commission (SEC) continue to vigorously enforce the Foreign Corrupt Practices Act (FCPA). During the last year, the agencies brought enforcement actions against a number of U.S. and foreign companies, including companies in the oil and oilfield services businesses, a medical device manufacturer, a pharmaceutical company, an electronics company and a clothing manufacturer. In addition to the settled cases, it is believed that there are at least 100 companies that are currently under investigation by the DOJ and SEC for FCPA violations.
The DOJ has also continued to pursue criminal prosecutions of executives and others actively involved in bribery schemes, with 14 individuals charged during the last year. These prosecutions are consistent with the DOJ’s stated goal to ensure that business leaders understand that a bribery prosecution against their business could lead to a prison sentence and should not be regarded as a mere cost of doing business.
Prosecution of a Food Processor
In one of the most recent settlements, on Dec. 20, 2013, the DOJ and SEC announced a settlement with global food processor Archer-Daniels Midland Company (ADM) for FCPA violations involving bribes to government officials in Ukraine to speed up tax refunds. The government’s settlement documents indicate that ADM subsidiaries in Germany and Ukraine paid $21 million in bribes through intermediaries to secure the release of value-added tax refunds. The ADM businesses then sought to conceal the payments by falsely recording them as insurance premiums and other business transactions, according to the SEC. ADM’s Ukrainian subsidiary plead guilty to a criminal violation of the FCPA and paid a criminal fine of $17.8 million while ADM signed a non-prosecution agreement admitting it failed to have adequate internal controls needed to prevent bribery in Ukraine. ADM paid an additional $36.5 million to resolve SEC charges for failing to prevent the illicit payments.
The DOJ and SEC said they took into account ADM’s cooperation and “significant remedial measures, including self-reporting, implementing a comprehensive new compliance program, and terminating employees involved in the misconduct.” The agencies have repeatedly emphasized that a company discovering misconduct should self-report the misconduct and take real steps to prevent a recurrence if they hope for leniency from the agencies.
David Z. Izakowitz, Charlottesville
At the close of 2013, it remained unclear whether the implementation of long-awaited immigration reform was on the horizon. On June 27, 2013, the Senate passed by a 68 to 32 vote, including 14 Republicans, a comprehensive immigration reform bill. However, it now seems that if any immigration bill emerges from the House, it will be piecemeal legislation. The House Judiciary Committee has passed four bills, each addressing a single issue: the Agricultural Guestworker Act would create up to 500,000 visas for temporary agricultural workers; the Strengthen and Fortify Enforcement (SAFE) Act would require a national strategy for improving border control; the Legal Workforce Act would repeal the current paper-based I-9 system and replace it with an electronic work eligibility check (mandatory E-verify for all); and the Supplying Knowledge-Based Immigrants and Lifting Levels of STEM Visas (SKILLS) Act would provide immigration reform for some foreign nationals educated in the United States. The House Committee on Homeland Security also passed the Border Security Results Act.
At this point, it is hard to predict whether these or any other immigration bills will make it to the House floor in 2014 and even harder to speculate about passage in that chamber. To date, Speaker Boehner has been unable to assemble a majority within the Republican caucus to support any immigration legislation. In addition, none of the bills that have been passed addresses the legal status of 11 million undocumented immigrants, the minimum requirement for most Democratic support.
The year 2014 will bring continued vigorous enforcement of prohibitions on unauthorized employment, mostly by Homeland Security Investigations (HSI), a part of U.S. Immigrations and Customs Enforcement (ICE). In April 2009, ICE announced a renewed focus on “targeting criminal aliens and employers who cultivate illegal workplaces by breaking the country’s laws and knowingly hiring illegal workers.” ICE has made good on its promise. In federal fiscal year 2012, the last year for which statistics were released, HSI initiated over 3,000 I-9 inspections and made 520 criminal arrests, including arrests of 240 owners, managers, supervisors or human resources employees.
The enforcement program focuses on critical infrastructure facilities. Based on HSI’s recent activities, this seems to include food processing plants, and so expect such investigations in the coming year. Employers would be well advised to review and improve their current I-9 compliance program, or, if they do not have one, to implement one as soon as possible. In addition, internal audits of I-9 documentation are strongly recommended.
Green Card Backlogs and Visa Quotas
Without immigration reform, 2014 will no doubt see the continuance of several disturbing trends in temporary work authorization and green cards for foreign workers. The cap or quota for all new employment of foreign professionals in H-1B visa status is set at 65,000 per federal fiscal year, with an additional 20,000 set aside for individuals who have earned graduate degrees in the United States. More applications for new employment in federal fiscal year 2014 were filed in the first week that such applications were accepted than allowed under the cap. The government, therefore, closed applications for the year and conducted a lottery to determine which of the submitted applications would be processed. Expect the same for fiscal year 2015 and plan to file on April 1, 2014.
The situation for temporary workers in positions requiring less than a four-year college education is even worse. The cap for such H-2B workers is only 66,000 and this visa category is generally restricted to seasonal work.
There have also been unfavorable trends with green cards. Over the last year, the processing of PERM labor certification applications (the first step in obtaining most employer-sponsored green cards) by the Department of Labor (DOL) has become far slower and the denial rate far higher. By the end of 2013, the DOL was taking eight months or more to take any initial action on an application. The rate of cases selected for audits was approaching 40 percent, and audits resulted in further delays of six months or more.
As fiscal year 2013 moved on, the DOL’s rate of denial of PERM cases increased dramatically. According to statistics recently released by the DOL, in the first quarter of the fiscal year, approximately six cases were approved or certified to every case denied. By the second quarter, that rate worsened to five to one, and by the third quarter, to 3.5 to one.
Quotas also adversely affected employment-based green card applications to the Department of Homeland Security, the last step in the process. Quotas imposed on individual countries have particularly hurt Chinese- and Indian-born applicants. In January 2014, the government will only process green card applications for Indian-born applicants for professionals or highly skilled positions if the PERM labor certification process was started before Sept. 1, 2003. For Indians in positions requiring advanced degrees, the cut-off date is slightly later, Nov. 15, 2004. For China, the waits are not quite as long. For professional positions, the cut-off date for China and all other countries (other than India and the Philippines) will be April 1, 2012. Chinese advanced degree professionals have a cut-off date of prior to Dec. 8, 2008. These cut-off dates are updated on a monthly basis.
Once more, without some immigration reform, there is no reason to expect improvement in these processing times.