Supplement Purchasers Allowed to Proceed with Unfair Competition Class Action

This posting was written by Jody Coultas, Editor of CCH State Unfair Trade Practices Law.

An order denying certification in a consumer’s California Unfair Competition Law (UCL) and Consumer Legal Remedies Act (CLRA) class action against the nutritional supplement retailer GNC was reversed because the trial court’s opinion was based on improper legal criteria and incorrect legal assumptions, according to a California appellate court.

Sale of a Controlled Substance

The consumer purchased an over-the-counter nutritional supplement containing androstenediol, a Schedule III controlled substance, from GNC. It is illegal to sell or possess a Schedule III controlled substance without a prescription, but the retailer failed to disclose that its product contained androstenediol.

The consumer (1) alleged that the retailer violated the UCL by selling the supplement in violation of the California Health and Safety Code and other state statutes and (2) sought restitution and injunctive relief. In June 2004, the action was coordinated with five other class actions in Los Angeles Superior Court.

According to the court, the UCL class action claim presented two predominant issues—whether the retailer’s sales were unlawful and whether the profits from those sales must be restored to the class.

Individualized Proof

In a UCL class action, once the named plaintiff shows that he suffered an injury-in-fact and lost money or property as a result of the unfair competition, no further individualized proof of injury or causation is required to impose liability against the defendant in favor of absent class members.

The trial court had erroneously assumed that individualized issues predominated because the court would need to determine whether the legality of the sale was material to each class member.

Misrepresentations

The consumer also alleged that GNC violated the CLRA by misrepresenting the source, sponsorship, approval, or certification of supplement and by misrepresenting that the supplements were of a particular standard, quality, or grade.

The consumer sufficiently alleged that a reasonable consumer would find the legality of a product important when deciding whether to purchase that product, according to the court. To state a CLRA class action, the consumer needed to show that all class members suffered some damage as a result of the alleged misrepresentation that the supplement was legal. Because these misrepresentations were made to class members, an inference of reliance arose as to the entire class.

The decision—Steroid Hormone Product Cases—appears at CCH State Unfair Trade Practices Law ¶31,995.

Cruise Passengers' State Unfair Trade Practices Act Claims Preempted by Admiralty Law

This posting was written by Jody Coultas, Editor of CCH State Unfair Trade Practices Law.

Art purchasers could not maintain Washington Consumer Protection Act, Connecticut Unfair Trade Practices Act, and Florida Deceptive and Unfair Trade Practices Act claims against a seller of art at auctions on cruise ships that were governed by admiralty law, according to the federal district court in Seattle.

The purchasers contended that the art dealer made misrepresentations regarding the value and authenticity of works being sold at auctions conducted on cruise ships in international waters. However, claims brought under state unfair trade practices laws were preempted by admiralty law.

The purchaser argued that admiralty jurisdiction was inapplicable because the conduct at issue occurred on both land and sea. However, the location and connection tests for admiralty jurisdiction were satisfied.

Location Test

The location test was satisfied because the tort giving rise to the claims occurred on navigable waters, the court held. The purchasers claimed that the dealer made misrepresentations about the works being sold at auction and that they relied on these misrepresentations to their detriment. The auctions were held, the misrepresentations were allegedly made, and the purchasers contracted to pay for the artworks on cruise ships in international waters. I was immaterial whether the misrepresentations were repeated on land and where the artwork was delivered.

Connection Test

Applying the connection test, the court held (1) that the activity alleged by the purchasers had a substantial relationship to traditional maritime activities and (2) that the tort at issue had a potentially disruptive impact on maritime commerce. The fact that auctions are commonly part of the “cruise ship experience” satisfied the first part of the test. The conduct alleged had a potentially disruptive impact on maritime commerce since public knowledge of fraudulent conduct on cruise ships could harm the industry.

Because the damages provisions o0f the Washington, Connecticut, and Florida unfair trade practices laws provide for the recovery of attorneys fees and trebled damages, they conflicted with established admiralty law and were therefore preempted.

Conduct Occurring Wholly Outside State

The purchasers could not state a Florida Deceptive and Unfair Trade Practices Act (DUTPA) claim because the statute was preempted by the Commerce Clause, the court ruled. The dealer argued that the DUTPA was preempted by the Commerce Clause because the conduct occurred in international waters. The Commerce Clause precludes the application of a state statute to commerce that takes place wholly outside of a state’s borders, whether or not the commerce has effects within the state.

Applying the DUTPA to conduct that occurred in international waters would result in the regulation of commerce wholly outside Florida’s boundaries and would impose inconsistent regulatory schemes on trading partners.

The decision is In re: Park West Galleries, Inc. Litigation, CCH State Unfair Trade Practices Law ¶31,976.

FTC Challenges Privacy Safe Harbor Certification Claims

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

Six U.S. businesses have agreed to refrain from misrepresenting the extent to which they participate in any privacy, security, or other compliance program sponsored by a government or any third party, under the terms of proposed Federal Trade Commission consent orders.

The consent orders would settle the first FTC challenges to deceptive claims regarding certification under an international privacy safe harbor program administered by the U.S. Department of Commerce in consultation with the European Commission.

The cases were brought with the assistance of the Department of Commerce. The Department of Commerce maintains a public website where it posts the names of companies that have self-certified to the safe harbor.

The companies claimed that they were current participants in the safe harbor, even though their certifications had lapsed, according to the agency.

The safe harbor provides a mechanism for U.S. companies to transfer data outside the European Union consistent with European law. To join the safe harbor, a company must self-certify to the U.S. Department of Commerce that it complies with seven principles and related requirements.

Companies are required to recertify every yearin order to retain their status as “current” members of the safe harbor framework, the FTC explained.

The FTC announced the complaint and proposed consent orders on October 6, which are available in the CCH Trade Regulation Reporter and here on the FTC website.

Aspiring Monk Could Base RICO Action on Monastery’s Affiliation Claims

This posting was written by Mark Engstrom, Editor of CCH RICO Business Disputes Guide.

An individual who sought to become a Benedictine monk could amend his complaint to add federal RICO claims against a monastery and two monks who allegedly misrepresented the monastery's affiliation with the Order of St. Benedict, the federal district court in Buffalo, New York, has ruled.

In doing research on the Internet, the individual discovered the Most Holy Family Monastery in Fillmore, New York. He spoke with the supervising monk, who allegedly represented himself as a member of the Benedictine order.

In September 2005, the individual entered the monastery with the intention of becoming a Benedictine monk. He allegedly made cash contributions of nearly $66,000 and transferred stock valued at $1.2 million to the monastery in reliance on the claim that it was affiliated with the Order of St. Benedict. In the late spring/early summer of 2006, he executed a document specifying that he would receive $750,000 if he left the monastery.

Subsequently, the individual learned that the supervisor was not a Benedictine monk and the monastery was neither founded nor operated by the Order of St. Benedict. He left the monastery on December 31, 2007. Although he demanded that funds he transferred to the monastery be returned, the defendants refused to do so.

RICO Conspiracy Claim

The individual filed an action against the defendants for fraud, negligent misrepresentation, and unjust enrichment. He later filed a motion to amend the complaint to add counts of deceptive trade practices, false advertising, false accounting, and civil RICO. The defendants filed a motion to dismiss the action and to deny amendment of the complaint.

Although the defendants argued that the plaintiff failed to adequately assert a claim for RICO conspiracy, the court found that the plaintiff stated "in specific detail" the acts that the defendants allegedly committed (1) in making false representations to the public through the monastery's website; (2) in the sale and distribution of publications and other media; (3) in the solicitation of donations while representing themselves as members of the order of St. Benedict; and (4) in inviting the plaintiff to join the monastery—and to donate personal property—based on the representation that the monastery was a Benedictine community. These statements were sufficient to allege an agreement between the defendants to commit at least two predicate acts, the court held.

First Amendment

The defendants argued that the First Amendment precluded subject matter jurisdiction in matters that required a court to interpret religious doctrine. The court, however, characterized the defendants' purported affiliation with the recognized Order of St. Benedict as a "neutral" factual issue that did not require the interpretation of religious doctrine. Therefore, the First Amendment was not implicated and the court had subject matter jurisdiction to adjudicate the plaintiff's claim.

Undue Delay

The motion to amend was not precluded by undue delay, according to the court, even though the individual had filed it two months after his complaint. Discovery had not commenced and the proposed amendment would not have resulted in prejudice to the defendants, the court held.

The decision is Hoyle v. Diamond, CCH RICO Business Disputes Guide ¶11,656.