Legal/Regulatory Update

Patrick J. McNamara, Esq., Scarinci & Hollenbeck

BIMBO BAKERIES WINS JURY AWARD OVER TRADE SECRET THEFT.

In Federal Court in Utah, Bimbo Bakeries was able to convince a jury that another bakery company misappropriated its trade secrets, duplicated its packaging and engaged in false advertising when it reintroduced impeding bread product. Bimbo Bakeries was awarded 2.1 million dollars by a jury in Federal Court in Utah. The jury determined that US Bakery, the distributor of Grandma Emilie’s Bread, was able to generate more than Eight Million Dollars ($8,000,000.00) in profits from false advertising its product that allowed it to compete with Bimbo Bakeries, Grandma Sycamore’s Bread. Moreover, the jury held that Leland Sycamore Family Bakery Inc., an affiliate of a bakery business hired by US Bakery, knowingly used the trade secret recipe in the production of the reintroduced Grandma Emilie’s product for US Bakery, despite previously selling Grandma Sycamore’s Brand to Bimbo. The lawsuit, which was filed back in 2013, alleged that US Bakery hired Sycamore’s Bakery Business to produce a revamp version of Grandma Emilie’s Bread, employing Bimbo Bakery’s trade secret method of preparing it and using similar packaging to confuse consumers into purchasing their product. The lawsuit also claimed that US Bakery began marketing its Grandma Emilie’s product as “freshly baked in Utah” in July of 2014 which they alleged was a false representation of the product, given that the company had no production sites in the State of Utah. Sycamore had sold the popular Grandma Sycamore’s Brand, which had been in his family since the 1970’s to a predecessor entity at Bimbo Bakery’s in 1998. As part of that sale, they agreed to maintain the confidentiality of all associated manufacturing and assembly procedures, recipes and trade secrets, according to various papers filed throughout the legal proceedings. Nonetheless, the company continued to use the “Sycamore” name in relation to the bakery business. Consequently, Bimbo went to court in April of 2011 seeking an injunction preventing Leland Sycamore from “in any way suggesting to actual or prospective customers that his products derived from the same source or as otherwise related to Grandma Sycamore’s, as part of prior lawsuit in Utah Federal Court. In that case Mr. Sycamore was found to be in contempt of the injunction. Then Bimbo’s subsidiary sued both Sycamore personally and US Bakery in August of 2013 before Bimbo itself was substituted in as the plaintiff in the case in December of 2014. The jury ultimately determined that US Bakery not only willfully and falsely advertised its product, but together with Sycamore, also willfully and maliciously misappropriated Bimbo’s trade secrets. They decided that US Bakery was liable for nearly $1.6 million in damages and Sycamore more than $500,000.00 in damages for the misappropriation.

SODA TAXES

As I noted in last years’ presentation the City of Philadelphia had introduced and adopted an ordinance effective January 1, 2017 to add a 1.5 cent per ounce soda tax to the cost of most sugary and diet beverages. At the time the City projected it would generate approximately $92,000,000.00 in revenue annually. It was the intention of the City to use these funds for expanded pre-kindergarten and other health and issues. However, a study released by Philadelphia’s controller, Alan Butkovitz, noted that of the 741 businesses that responded, 88% of them reported at least some revenue loss, and nearly 60% reported a decline of more than 10% since the tax went into effect on January 1, 2017. Butkovitz, who lost a primary for reelection, has been an opponent of the Mayor, whose office criticized the study as being biased toward industry. On a related note, Cook County, Illinois repealed the County’s soda tax which had only gone into effect on August 2, 2017. The effective date had been postponed because of a lawsuit that had been brought by the Illinois Retail Merchants Association. The tax ceased to exist on December 1, 2017. Lawmakers had claimed that it was introduced to protect public health, but in realty its purpose was to plug a $1.8 billion dollar hole in the county budget. An earlier version of the soda tax had to be revised because it was interpreted to be an additional sales tax, which was considered illegal under State Law in Illinois. Cook County then proposed to make the tax a line item at the point of sale, but local governments are not allowed to tax purchases paid with food stamps, which meant that more 870,000 people would be exempt from the tax. Moreover, the taxes were being levied on diet soft drinks, and not on fruit juices that are high in sugar. Surveys of Cook County residence showed that up to 90% of the residents were opposed to the tax. Restaurants were reporting a drop in almost of 50% in restaurant consumption of various types of sodas and related beverages.

CONNECTICUT LITIAGION OVER ALLEDGED “COLLASAL FRAUD” BY NESTLE WATERS.

In a complaint that runs over 300 pages, a class action lawsuit was filed in Federal Court in Connecticut in mid-August by a group of plaintiffs making various allegations that various types of bottled water do not meet the FDA identity standard, are not from Spring water sources, and are in violation of the various regulations at the State and Federal level. The lawsuit also alleges fraud and breach of the contract, as well as violations of various consumer fraud laws in New Jersey, New York, Connecticut, Massachutes, Rhode Island, Vermont, New Hampshire and Maine. In response, Nestle Water North America filed a motion to throw out the complaint. It centers its argument on an August 28, 2017 letter from the Maine Drinking Water Program that said all 8 springs in the State that supply Poland Spring constitute spring water sources. The lawsuit, according to a statement issued by Nestle Waters, is based on “allegations of opportunist attorneys” and their baseless lawsuits. The statement issued by Nestle states that “this most recent letter verifies that all 8 of the spring water sources are approved in the State of Maine”, and that quote consumers can be confident in the accuracy of the labels on every bottle of Poland Spring and that Poland Spring is just what it says it is – 100% natural spring water”. According to the USFDA website, water that is “derived from an underground formation from which water flows naturally to the surface of the earth may be “spring water”. The FDA website goes on to state that “spring water shall be collected only at the spring or through ore hole taping the underground formation feeding the spring”. In response to inquiries from the media the FDA has stated it has not issued any warning letters to Nestle Waters.

IBM AND BlOCKCHAIN TECHNOLOGY.

Blockchain technology is an electric ledger under various types of control and can be traced by the transactions and assets. It can digitally track food products from suppliers to store shelves and consumers. IBM has plans to introduce a food safety tool built on IBM block chain technology that the supply chain participants around the world can interconnect into. Companies such as Walmart, Unilever, Tyson Foods, Nestle and Dell are part of a consortium that working with IBM to identify areas where the food supply chain can benefit from block chain technology. Part of the concern is that food safety cross contamination and the spread of food borne illnesses are often magnified by the lack of access of information and traceability. It can often take weeks if not months to identify the source and/or form of contamination, causing further injury and illness, loss of product, lost revenue, and potential fines and litigation. Other companies that are looking to participate in the consortium include Golden State Foods, Kroger, McCormick & Co. and McLane Company. In trials in both the United States and China, IBM and Walmart demonstrated that block chain technology can track a product from the farm through the supply chain to the retail shelve in a matter of minutes instead of days or weeks.

FORMER EXECUTIVES OF TRANSMAR COCOA FACE CRIMINIAL FRAUD CHARGES.

Peter Johnson, former President, Chairman and CEO, and Peter B. Johnson and Thomas Reich were indicted in Federal Court in New York in August, accused of conspiracy to commit bank fraud and wire fraud by misrepresentation of information to secure a $400,000,000.00 line of credit with banks. Transmar has over 350 customer worldwide and supplied major chocolate firms including Mars, Hersey, Nestle and Barry Callebaut. The company has since initiated bankruptcy proceedings. The indictment alleges that the executives claim previously sold assets and fake accounts as collateral from 2014 through 2016. This allegedly help the family run Cocoa Commodity Trading Company, Transmar Commodity Group secure a credit line between Two Hundred Fifty and Four Hundred Million Dollars. If convicted they each face up to 30 years in prison.

ALLEGATION OF PHTHALATES IN MACRONI AND CHESSE CONTAINERS.

An organization called the Coalition for Safer Food Products Processing and Packaging issued a report claiming the test results generated information showing high concentrations of phthalates in macaroni and cheese. This chemical has been linked to health risks when consumed by pregnant women and young children according to this organization. A personal injury law firm based in New Jersey took note of these findings and posted a summary of the report on its’ website and Facebook page. The law firm subsequently took down the solicitation. Most experts commenting on the study state that bringing such a claim would be difficult because of the challenge in establishing causation of any harm. According to defense lawyers for the industry, cases of this nature would be very difficult to prove causation since any harm resulting from the consumption of phthalates which take years to develop. Proving causation as well as dealing with statute of limitation issues would be a further challenge to people bringing such types of litigation. Interestingly, numerous brand names of products tested in this study were redacted from the lab report were studied but the coalition only publically identified Kraft. In a response statement Kraft stated that the “trace amounts were reported in this limited study are more than 1,000 times lower than levels that scientific authorities have identified as acceptable and that our products are safe for consumers to enjoy.

ELECTRONIC CIGARETTES AND YOUTH.

In August the FDA announced a new campaign to discourage the use of electronic cigarettes amount teenagers. The plan follows the agency’s proposal issued over the summer to lower nicotine and combustible cigarettes, and to extend by four years the date by which E-Cigarette Manufactures would be required to apply for authorization to sell their products. This extension does mean that E-Cigarette makers can continue to sell their products for four more years before having to apply for permission to sell them. According to a statement issued by the FDA’s new commissioner, the policy “aims to strike a careful balance between the regulation of all tobacco products, and the opportunity to encourage development of innovated tobacco products that may be less dangerous than “combustible cigarettes”. According to various information released from different agencies more than two million middle school and high school students are current users of E-Cigarettes or other vaping devices, and half of all middle and high school students who have used a tobacco product of some sort use two or more. The education campaign began in the fall of 2017 and will continue into 2018.

UNITED STATES AND CANADA DISAGREE OVER DIARY ELEMENTS AND AFTA.

United States and Canada are at logger heads over the demand by the United States to end Canada supply chain management system for diary products within the next ten years. The US has been pushing for an end in these trade barriers, as it considers them, particularly for milk classification since its implementation in Canada in April of 2016. The system has resulted in a significant cutback in US exports of ultra-filtered milk by allowing Canadian diary producers to purchase a similar product for a competitive price within Canada. The US diary industry is also looking to protect its export market in Mexico going into NAFTA renegotiation meetings. It is also anticipated that these discussions will also include the review of the attempts by the European Union to restrict the use of common food names in Canada and Mexico.

GOVERNMENT OVERSITE OF FDA DOMESTIC FOOD FACILITY INSPECTION PROGRAM.

A recent report by the Office of Inspector General and the Government Accountability Office (“GAO”) stated that both the FDA and USDA Food Safety and Inspection Services could do more to prevent unsafe residues in seafood. The report labelled the facilities where the FDA had designated them as high risk and non-high risk and whether they were being inspected as required. What the review found that the FDA was meeting its goal for inspecting high risk facilities within the 2011 to 2015 time period, but had only inspected about two-thirds of the non-high risk facilities in the same time period. The report also noted a number of sites that the FDA had inspected and decreased from 19,000 in 2011 to 16,000 by 2015. The report also noted that while spending for FDA Domestic Facility Inspections increased by 80% from about $78 million in 2004 to $140 million to 2011, the first year of the implementation of FSMA, the spending decreased in fiscal year 2015 to $130 million dollars. The report also claimed that FDA was not conducting enough timely follow up inspections to insure plans that corrected significant violations in the 2011 to 2015 time period. The report also recommended FDA look at agreements with other countries to test seafood exported to the United States. It also advised that the agency should be visiting a sample of fish farms as part of foreign country onsite audits. From 2010 to 2015 the FDA refused entry for over 1,700 seafood products for drug related violations. The majority of exports were from China, Malaysia, Indonesia and Vietnam. According to reinspection data from May 2016 to July 2017 the agency tested 382 samples from 195 shipments of imported cat fish and found unsafe drugs in 20 shipments and refused entry.

USEPA ADMINISTRATOR MOVES TO “END” SUE AND SETTLE” PRACTICE

On October 16 EPA administrator Scott Pruett announced new measures intended to prevent lawsuit settlements that various critics claimed was being allowed to circumvent the normal regulatory introduction and adoption process. The policy aims directly at what are called “sue and settle tactic” that he and other critics claimed environmental groups in the Obama administration relied upon to make policy changes without the need for going through the traditional administrative rule making process under federal law. Administrator Pruett said that these groups had used lawsuits to force the EPA to issue regulations that have advanced their narrow interests. Pruett said in a statement that “we will no long go behind closed doors and use consent decrees and settlement agreements to resolve lawsuits filed against the agency by special interest groups when doing so would circumvent the regulatory process set forth by Congress”. There has always been a dispute between environmental groups and regulated industries as to whether these types of lawsuits have any significant impact on actual EPA policy making. In response Administrator Pruett stated “taken to its extreme, the sue and settle strategy can allow executive branch officials to avoid political accountability by voluntarily yielding their discretionary authority to the courts, thereby insulating agency officials from criticisms among popular actions”. Pruett said including the steps that are being taken, the EPA will now publish notices of the intent to sue online and post consent decrees in the Federal Register. Other actions would be new, such as seeking to avoid paying attorney fees if the agency does enter into a consent decree or settlement, contacting states and regulated entities that might be affected by such an agreement to solicite their input, in holding public hearings about such agreements. Various environmental groups immediately attacked the issuance of this new policy by Administrator Pruett. Some objections found that ironic that Mr. Pruett, when he was the attorney general of the State of Arkansas, often filed actions along with other attorneys general to challenge various EPA regulations that were issued during the Obama Administration.

NATIONAL CONFECTIONARY ASSOCIATION CALLS FOR IDENTICAL COMPLIANCE DATES FROM NUTRITION FACT LABELS AND GMO LABELING

The FDA recently proposed to extend the compliance dates for the nutrition facts labeled to January 1, 2020 from manufacturers with 10 million dollars or more in annual food sales. Companies with less than that amount would receive an additional year to comply. The National Confectioners Association has stated that the bigger challenge for the industry is the harmonization of these labeling requirements and GMO labeling. Congress adopted the national bioengineered foods disclosure standard in 2016, which requires food companies to label GMO ingredients on their products. The USDA’s agriculture marketing service is expected to implement the law by July 29, 2018, but has yet to determine a compliance date. The association also pointed out that the two laws also have slightly different definitions of some label terms, such as “dietary fibers” “added sugars”. The sugar association, which represents the US Sugar Beat and Sugar Cane growers and processors and refiners, has submitted comments through the labeling rule making process the FDA to try and address this concern.

USDA ANNOUNCES UPDATES TO ITS POPULAR FOOD KEEPER FOOD KEEPER APP

The USDA announced an update to this Food Keeper Application to provide users with new information on food safety recalls. The app has been updated so users can, at their choice, get automatic notifications when food safety recalls are announced by either the USDA’s food safety service and the food and drug administration. The app was developed by the USDA in partnership with Cornell University in the Food and Marketing Institute as a tool to help reduce food waste and improve public safety by exchanging information on storage methods to extend the shelf life of foods and beverages in the American household. They now offer specific storage timelines for the refrigerator, freezer and pantry for more than 500 products. Since its launch in April of 2015 it has downloaded approximately 150,000 times. More information about it can also be found at the USDA website.

FDA PRONOUNCEMENT REGARDING THE USE OF THE WORD “LOVE” IN LABELING

Earlier this month the FDA released a warning letter to the Massachusetts based Nashoba Brook Bakery about a number of infractions on their labeling, including food safety and mislabeled ingredients. One of these allegations first reported upon by Bloomberg, is the FDA stance on the use of the word “love” and an ingredient. To quote from the letter: under misbranding of foods, to quote from the letter “Nashoba granola label list ingredient “love”. Ingredients required to be declared on the label or labeling of food must be listed by their common or usual name pursuant to 21CFR101.4 (a) (1). “Love” is not a common or usual name of an ingredient, and is considered to be intervening material because it is not part of the common or usual name of the ingredient.

9TH CIRCUIT COURT OF APPEALS REVERSES DISTRICT COURT RULING ON CHALLENGE TO SAN FRANCISCO ORDINANCE MANDATING HEALTH WARNINGS ON SODA AND SUGAR SWEETENED BEVERAGES

Back in 2015 San Francisco adopted an ordinance to require that advertising for soda include a warning that beverages with added sugars “contribute to obesity, diabetes and tooth decay”. A lawsuit was then filed by the American Beverage Association, California Retailers Association and the California State Outdoor Advertisement Association seeking a preliminary restraining order. That request was denied by the US District Court where the lawsuit had been filed in California. In late September, a panel of Judges in the 9th Circuit Court of Appeals ruled that San Francisco’s ordinance unfairly targets one group of products. The Court added the plaintiffs were likely to succeed with their claim that the ordinance violated their commercial speech rights under the First Amendment. The Court held that the ordinance should not go into effect until the underlying lawsuit filed by the plaintiffs is resolved back in District Court. In the Court’s majority decision, the Court held that warning people that drinking beverages with added sugars implied that sugar sweetened beverages contribute to health conditions such as diabetes and obesity regardless of the quantity consumed or other lifestyle choices. The Court held that “this is contrary to statements by the FDA that added sugars are generally recognized as safe and can be part of a healthy dietary pattern when not consumed in excess amounts. The Court also held that “The warning is required exclusively in advertisements for sugar sweetened beverages and not on advertisements for other products with equal or greater amounts of added sugars and calories. By focusing on a single product, the warning conveys a message that sugar sweetened beverages are less healthy than other sources of added sugars and calories and are more likely to contribute to obesity, diabetes, and tooth decay in other foods. In a concurring opinion Judge Dorothy Nelson concurred in the judgement since she believed the ordinance in its current form likely violated the First Amendment, by mandating a warning requirement so large that it probably violates constitutionally protected commercial speech.

APPEAL TO CHALLENGE DISMISSAL BY FEDERAL JUDGE OF LAWSUIT AGAINST QUAKER OATS REGARDING TRACE LEVELS OF PESTICIDES

In this particular case, Illinois based Judge Charles Norgle caught the attention of people throughout the food industry when he dismissed the lawsuit against Quaker Oats on the grounds of federal preemption. In a case like this, the judge held that the plaintiffs can’t sue under state law, an argument that various other attorneys in the food industry have said is flat out wrong. In court documents filed in September, plaintiff’s counsel has asked the Seventh Circuit Court of Appeals to review this decision. In other cases of this nature, lawsuits have been thrown out on the grounds that reasonable consumers would not expect the product labeled as natural if it contained absolutely zero pesticide residence. It is anticipated that the briefing schedule will run through the next 9 to 12 months, with a final decision being rendered once the court sets oral argument and there is a timeframe for a potential decision.

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