A federal district court recently dismissed with prejudice a putative class action against the cryptocurrency exchange Coinbase, where the plaintiffs sought to hold the exchange liable for the sale of unregistered securities on behalf a nationwide class. The court held that Coinbase neither directly sold the accused tokens to plaintiffs nor actively solicited their sale, and thus plaintiffs’ federal claims must be dismissed. This decision has important implications for digital asset exchanges, which have faced a significant increase in class actions alleging the exchanges are themselves liable for the sale of unregistered securities.
Two Federal Courts Arrive at Opposite Conclusions in Suits Claiming “Natural Flavor with Other Natural Flavors” Is Misleading
A court in the Northern District of Illinois and a court in the Middle District of Florida recently arrived at opposite conclusions in two very similar putative class actions, both of which alleged that the claim “natural flavor with other natural flavors” on drink labels was misleading because synthetic malic acid was present in the product.
Leaving a Bitter Taste: Class Action Lawsuits Alleging Lead and Cadmium in Dark Chocolate
Dark chocolate manufacturers have recently been hit with a wave of putative class action complaints in New York and California federal courts, alleging that the confectioners breached an implied warranty of merchantability and engaged in misleading advertising by failing to disclose the levels of lead and cadmium in their dark chocolate products. According to the complaints filed against The Hershey Company, Trader Joe’s, Mars, Inc., and most recently Godiva Chocolatier, Inc. and Lindt & Sprüngli, Inc., the plaintiffs allege that the products contain lead and cadmium in excess California’s Maximum Allowable Dose Level (“MADL”)—a “safe harbor” level established under California’s “Prop. 65” law, the Safe Drinking Water and Toxic Enforcement Act of 1986.
The class action mechanism and the claims of false and deceptive advertising are a more novel approach to lead-in-chocolate lawsuits, which have traditionally been litigated in California state court as a violation of Prop. 65. That law requires manufacturers, distributors, suppliers, and retailers of a consumer product containing certain listed chemicals to provide consumers with a “clear and reasonable” warning if exposure to that listed chemical poses a significant risk of cancer, or reproductive or developmental harm. Mars, Hershey, Lindt, and Trader Joe’s previously entered into a settlement in 2018 to resolve Prop. 65 claims against the chocolatiers brought by the organization As You Sow.
“100% Recyclable” Labels Are Not False Just Because Not All Plastic Bottles Are Recycled
A court in the Northern District of California recently dismissed a complaint brought against several beverage companies, including Coca-Cola, on behalf of a putative class of consumers and the Sierra Club. Swartz v. Coca-Cola Co., No. 21-cv-04643-JD, 2022 U.S. Dist. LEXIS 209641 (N.D. Cal. Nov. 18, 2022). Asserting claims under California and common law, plaintiffs alleged that the “100% recyclable” representation on single-use plastic bottles supplied by defendants is false and misleading because not all plastic bottles discarded into recycling bins are processed into reusable material. Plaintiffs’ complaint cited to studies showing that recycling facilities in the U.S. lack the capacity to process most of the plastic waste generated, and not all plastic processed turns into material for reuse. Resolving defendants’ motion to dismiss, the court acknowledged that “the question of consumer deception may be a factual matter unsuitable for resolution in a motion to dismiss,” but concluded that plaintiffs here failed to meet “the initial burden of pleading factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged as informed by judicial experience and common sense.”
Aspirational Statements of “Sustainability” Not Actionable Under D.C. Consumer Protection Statute
As plaintiffs continue to rely on the District of Columbia Consumer Protection Procedures Act (“CPPA”) to bring greenwashing suits, a recent D.C. Superior Court decision imposes limits on their ability to allege that a company’s general commitments to “sustainability” can constitute actionable misrepresentations.
S.E.C. Wins Summary Judgment Determination That Cryptocurrency Token Qualifies as a Security
In a recent decision, a federal judge granted summary judgment for the Securities and Exchange Commission (SEC) finding that the LBC cryptocurrency token qualifies as a security. While the ruling is confined to this specific token, it represents a victory for the SEC’s assertions that many cryptocurrencies, including so called “utility tokens,” represent securities that need to be registered with the agency. The Court also held that the makers of the LBC token, LBRY, Inc., had fair notice that the token was subject to the securities laws. Considering the ongoing class actions and enforcement proceedings litigating this issue across several cases, companies operating in the cryptocurrency space, including cryptocurrency exchanges, should follow this development to assess any possible impact on their businesses.
District of New Jersey Continues Third Circuit Trend of Finding Mere Exposure to Toxic Substances in Consumer Products Insufficient for Standing
The District Court for the District of New Jersey recently dismissed a putative class action alleging that defendants sold baby foods with high levels of heavy metals, holding that plaintiffs failed to plead an injury sufficient to support standing. In re Plum Baby Food Litigation, No. 1:21-cv-02417-NLH-SAK, 2022 WL 16552786 (D.N.J. Oct. 31, 2022). This decision adds to the list of cases in the Third Circuit holding that merely alleging exposure to toxic substances in consumer products, without more, is insufficient to establish Article III standing. See Covington’s prior blog post on the trend in the Third Circuit here.
California Court Applies “Substance Over Form,” Allows True Lender Claim to Proceed
May courts look beyond the face of a loan transaction to identify the “true lender”? In a lawsuit filed by California’s financial regulator, a California state court recently answered yes, finding that a fact-intensive inquiry into the “substance” of a loan transaction was necessary to determine who the “true lender” is and declining to dismiss a lawsuit. See Opportunity Fin., LLC v. Hewlett, No. 22STCV08163 (Cal. Super. Ct. Sept. 30, 2022).
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California Court of Appeal Allows “White Baking” Chips Claims to Proceed
The California Court of Appeal recently reversed trial court judgments sustaining demurrers in two class action cases involving false advertising claims. In both cases the plaintiff alleged that he was misled to believe that “White Baking Morsels” or “White Baking Chips” contain white chocolate.
The defendants demurred on the ground that no reasonable consumer would believe that “White Baking” chips or morsels contain real white chocolate. The trial court agreed and entered judgment for the defendants. In both cases, the California Court of Appeal disagreed, holding that the plaintiff stated viable claims, and reversed.
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Litigation Between FinTech Companies Follows Class Action Over Cryptocurrency Theft
This past week, co-defendants in a class action related to the theft of cryptocurrency engaged in their own lawsuit over alleged security failures. IRA Financial Trust, a retirement account provider offering crypto-assets, sued class action co-defendant Gemini Trust Company, LLC, a crypto-asset exchange owned by the Winklevoss twins, following a breach of IRA customer accounts. IRA claims that Gemini failed to secure a “master key” to IRA’s accounts, and that hackers were able to exploit this alleged security flaw to steal tens of millions of dollars of cryptocurrency. This lawsuit demonstrates the growing trend of cryptocurrency thefts resulting from cyber breaches, and ensuing litigation activity.
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