Prepare for Product Labeling Class Action Now , Part II

This article is part two of a two-part examination of product labeling class actions.

In part one of this article, we discussed a recent explosion in the number of consumer product class action filings under state consumer protection statutes. The defense costs associated with these lawsuits, along with the financial pressure to settle if plaintiffs achieve class certification, are confronting consumer goods manufacturers nationwide. Part one detailed a few of the top areas that in-house counsel should think about now to better position the organization, should it become a defendant in one of these class actions. Don’t overlook the following preparatory measures, either.

The risks to consumer goods companies of being a target make the consumer fraud product labeling class action trend reminiscent of Titanic Captain Edward J. Smith’s chilling words: “I cannot imagine any condition which would cause a ship to founder. I cannot conceive of any vital disaster happening to this vessel.” Product labeling litigation can be the unexpected iceberg to any company.

The defense costs associated with these lawsuits, along with the financial pressure to settle if plaintiffs achieve class certification (in order to avoid the risk of juries’ damages awards), are forcefully hitting the wallets of consumer goods manufacturers nationwide. In-house counsel should prepare the lifeboats now to better position the organization should it become a defendant in one of these class actions by considering the following issues.

Obtaining Insurance Coverage For Defense Costs And/Or Liability Judgments In Labeling Litigation

In most consumer product companies’ coverage action cases against their insurers, courts have denied coverage because:

• “Advertising injury” coverage does not encompass the claims: “Advertising injury” insurance in general liability policies covers publication of material that disparages another’s products or wrongful use of another’s advertising ideas in one’s own marketing. However, product labeling consumer fraud class actions allege: (i) that companies misrepresented their own product, not another’s goods; or (ii) that defendants made false claims or misused terms in their own advertising to promote their own products, not that they misappropriated another’s advertising or business ideas.
  
  There is generally no advertising injury coverage in these scenarios. Giovanni Cosmetics Inc. v. Arch Ins. Co., CV 09-5548 GAF (C.D. Cal. Feb. 5, 2010). But cases’ specific facts are what ultimately control the issue. E.piphany Inc. v. St. Paul Fire & Marine Insurance Co., 590 F. Supp. 2d 1244 (N.D. Cal. 2008) (claims of “superiority” over competitors was within advertising injury coverage); Vector Products, Inc. v. Hartford Fire Ins. Co., 397 F.3d 1316 (11th Cir. 2005) (claims of superiority over the “leading brand” was within advertising injury coverage).
• Media policies do not cover the claims: Media or professional services wrongful act coverage in media policies covers disparagement or misappropriation of competitors’ ideas. However, product labeling class actions challenge the allegedly fraudulent, false, or misleading content of companies’ own labels. Thus, these class action complaints do not fall within the scope of media policies. Courts have also found that professional services coverage is not intended to cover claims by competitors. Welch Foods Inc. v. National Union Fire Ins. Co., Civ. A. No. 09-12087-RWZ, 2010 WL 3928704 (D. Mass. Oct. 1, 2010).
• D&O insurance does not cover the claims: Exclusions in D&O policies often preclude coverage for claims arising out of “unfair competition or deceptive trade practices.” Consumer fraud class actions alleging fraudulent, misleading, or deceptive product labels fall squarely within the plain language of this exclusion. Again, there is usually no coverage under D&O policies.