In This Issue:

CA Attorney General Makes Egg-xample of Retailer for Price Gouging During Pandemic

California Attorney General Rob Bonta settled his office's recent lawsuit with grocery retailer Smart & Final, imposing a penalty of $175,000 for practices he called "unacceptable."

AG Bonta filed the complaint against Smart & Final, alleging that the company violated California's unfair competition laws, along with the state's consumer protection and anti-price gouging laws, by marking up the price of premium egg products after Governor Gavin Newsom declared a state of emergency in response to COVID-19.

According to the allegations, Smart & Final violated emergency price gouging protections initiated by Gov. Newsom, which made it illegal to sell goods and necessities, including food items, at more than 10 percent over their listed purchase price immediately after declaration of an emergency—unless the price increase was caused by legitimate increases in the cost of supply, labor and/or production, which AG Bonta alleged was not the case here.

Instead, AG Bonta alleged that between March 4 and April 2, 2020, Smart & Final unlawfully raised the price on four of its premium egg products' over 10 percent, effectively price gouging consumers during the state of emergency caused by the COVID-19 pandemic and thus violating the emergency order and California law. The press release announcing the settlement also noted that AG Bonta's office received a "large number of price-gouging complaints reporting dramatic increases" in the price of eggs, many of which were about Smart & Final.

In addition to imposing a monetary fine, the settlement enjoins Smart & Final from ever price gouging consumers again during a future state of emergency or from violating California's Unfair Competition Law and Penal Code Section 396, which Smart & Final is alleged to have violated in this case.

Key Takeaways

AG Bonta stated that businesses cannot be allowed to "take advantage of hardworking California families during times of crisis." He said that the settlement should "serve as a warning to grocers and other sellers of essential supplies: Follow state price gouging laws, or you will be held accountable."

But there's an argument to be made that a puny $175,000 doesn't do much to deter large grocers, for whom the amount is just a drop in the egg basket (now on sale in aisle five).

FTC Powers Up Suit Alleging Battery-Maker Lied About "Made in USA" Claims

A Florida-based maker of battery systems that's been advertising its products as "MADE in U.S.A." is facing legal action from the Federal Trade Commission (FTC) as the agency alleges the company's batteries are actually mostly imported, in violation of the new Made in USA Labeling Rule.

The rule, enacted just last year, codifies longstanding FTC enforcement policy on U.S. origin claims and officially empowers the FTC to take action when a company falsely makes unqualified Made in USA claims. In this case, Lithionics and its principal Steven Tartaglia are accused of deceiving consumers about the U.S. origin of their batteries since at least 2018, in violation of the FTC Act, which prohibits companies from misrepresenting their goods and services, as well as the Made in USA Labeling Rule.

According to the complaint, the defendants repeatedly and widely promoted the claim that the brand's products are made in the United States. Defendants did this by slapping a graphic of an American flag surrounded by the words "MADE in U.S.A." on packaging and online.

Images of product packaging with the "Made in U.S.A" graphic prominently displayed were featured on the company's website, its general advertising (often in conjunction with a "MADE in U.S.A" narrative claim), and on social media, including in YouTube videos showing employees printing and applying the labels on products. The company also published a chart comparing its batteries with "imported" competitor batteries.

The problem, said the FTC, was that the company's claims were false. In fact, the agency says that Lithionics' batteries are, quite contrary to the representations, mostly made of imported parts. The complaint alleges that all Lithionics battery products incorporate imported lithium-ion cells and that the company's battery management systems use other significant imported components.

In tandem with the complaint, the FTC proposed an order to settle the claims that would require Lithionics and Tartaglia to cease making any Made in USA claims unless they can show that the products' "final assembly or processing—and all significant processing—takes place in the United States, and that all or virtually all ingredients or components of the product are made and sourced in the United States." The order would further require the company to pay three times its profits from the illegal activity, which the FTC alleges amounts to $100,000.

Key Takeaways

The FTC has made it a priority to pursue companies falsely claiming their products are made in the United States, and the new Made in USA Labeling Rule gives the agency additional leverage in seeking to halt false Made in USA labeling claims.

Oatly Contests "Greenwashing" Claims That It Milked Investors

Swedish oat milk company Oatly has hit back at investor claims it misled them into purchasing shares by inflating company finances and engaging in "greenwashing." Oatly disagrees, blaming its share price differences on supply chain disruptions caused by the pandemic.

In July of 2021, a few months after Oatly's Initial Public Offering (IPO), an investor filed a class action lawsuit accusing the company and a number of its principals of making materially false and misleading claims about Oatly's finances and its environmentally friendly practices.

Plaintiff Kai Jochims filed his complaint less than two weeks after publication of a short-seller report, which, he alleges in the complaint, "brought to light a number of improprieties at Oatly, including improper accounting practices and greenwashing" (making the company appear more sustainable than it actually is). The report also accused Oatly of overstating its finances and its growth in the Chinese market. Plaintiffs allege that the report resulted in a drop of almost 9 percent in Oatly's share price in the two days following its publication.

According to the complaint, the report claimed that—contrary to Oatly's representation to investors that it is sustainably focused and that "[s]ustainability is at the core of our business and actionable in our products,"—the company overstated its environmental impacts, including its mismanagement of wastewater and hiring of companies with a record of damaging environmental practices. The complaint accused Oatly, among other things, of engaging in fraud against investors by making false statements, failing to disclose adverse facts, and deceiving the investing public about the company's business.

In response, Oatly's motion to dismiss argues that Jochims' lawsuit is nothing but a "manufactured" attempt to make up for stock price losses due to the pandemic. The company asserts that it repeatedly disclosed that its supply chain issues could lead to lower profits and distribution issues, and that the stock price loss was part of an established "downward trend" that had begun prior to the release of the report.

"But the fact that Oatly's stock price fell does not mean that Defendants engaged in a fraudulent scheme to defraud investors or that any representations in Oatly's offering documents were materially false or misleading," said Oatly in its motion to dismiss. Oatly also argues that contrary to plaintiff's allegations, Oatly's statements are not actionable because they are puffery or what is known as "corporate optimism." Oatly noted that the investment group which issued the report had a "short position" and therefore had much to gain from a decline in Oatly's stock price.

On the "greenwashing" claims, Oatly argues that plaintiff's complaint does not allege that the company "was not committed to sustainability," but makes only an "inferential leap" that because Oatly had one "isolated" environmental incident involving wastewater, that "all of Defendants' statements" about its environmental practices must be false.

Key Takeaways

This case shows that the sustainability-related litigation trend isn't limited to false advertising litigation. Consumers AND investors are being wooed with sustainability claims—and sometimes those same stakeholders allege the claims are false and/or misleading. Oatly has had some other run-ins with advertising enforcers on the "greenwashing" issue, for example, with the U.K.'s Advertising Standards Authority ruling that an Oatly ad campaign touting its green claims was misleading.

Contact Lens Advertiser SWIFT(ly) Sees the Light and Changes Course at NAD

Following a challenge at the National Advertising Division (NAD), online contact lens purveyor Vision Direct agreed to take down a claim on its website.

The matter came before NAD when the American Optometric Association (AOA) challenged claims made by Vision Direct on its website. AOA used NAD's Fast-Track SWIFT program that allows expedited resolution of disputes regarding express ad claims presenting a single issue.

The claim challenged by AOA, which appeared on the Vision Direct website, was that the company "operate[s] in line with the Fairness to Contact Lens Consumers Act (FCLCA)." The problem, argued AOA, is that Vision Direct does not comply with the Contact Lens Rule, which was promulgated by the FTC pursuant to the FCLCA.

Specifically, the rule requires retailers to make efforts to verify contact lens prescriptions with doctors if a patient doesn't provide a complete copy of the prescription. But the Vision Direct website also claims that it doesn't need to verify contact lens prescriptions as part of the purchase: "Having a valid prescription when buying contacts is essential—we just don't have to verify it."

AOA argued that Vision Direct can't have it both ways, claiming compliance with the FCLCA and operating in direct contravention of a rule authorized by the statute. In response to the challenge, Vision Direct removed the claim about FCLCA compliance and affirmed that it would permanently discontinue its use.

As for the jurisdictional issue, NAD agreed with AOA that the matter was appropriate for SWIFT because it presented the single issue of Vision Direct's compliance with the FCLCA.

Key Takeaways

Advertisers should remember that compliance with a law also means compliance with the rules authorized by such law. You can't have it both ways: claiming compliance with the law but not complying with the related rule(s).