Courts are far from uniform in applying state safe harbor doctrines, particularly when it comes to alcohol labeling.

Reproduced with permission from Antitrust & Trade Regulation Report, 110 ATRR 708 (June 10, 2016). Copyright 2016 by The Bureau of National Affairs, Inc. (800.372.1033) http://www.bna.com.

Food and beverage companies, beset by lawsuits about their product labels, struggle to find consistent application of consumer protection laws across the country. The experience of one distiller and its use of one word on its vodka bottle—‘‘handmade’’— highlight the difficulties any nationwide distributor faces in creating a label and later defending it in different courts. Although federal courts in Illinois and Florida dismissed claims of deceptive labeling brought under state consumer protection laws, another federal court in California cleared the way for a virtually identical lawsuit against the makers of Tito’s Handmade Vodka. At issue: Whether Tito’s label enjoyed the ‘‘safe harbor’’ provisions of the states’ false advertising laws that bar lawsuits about labels when those labels have been approved by state or federal regulators.

Because the vodka label had passed regulatory scrutiny, Tito’s figured it had clear sailing ahead—until it faced four lawsuits in three federal jurisdictions. All plaintiffs alleged that the Tito’s label falsely stated that the beverage was ‘‘handmade’’ in ‘‘an old fashioned pot still’’ when, in reality, the company manufactured its vodka in a highly mechanized process. The California court gave no weight to the label’s approval and let the lawsuit proceed. But, for the courts in Illinois and Florida, the approval process provided a basis for throwing out the lawsuits.

This article explores the success of the safe harbor doctrine in the context of false advertising claims brought against alcohol manufacturers, and the reasoning underlying these inconsistent decisions. This discussion focuses on California’s approach as many false advertising cases are brought there, alleging violations of California’s consumer protection laws.

California Safe Harbor and Cel-Tech

The California Supreme Court first recognized a safe harbor doctrine in Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co., 973 P.2d 527 (Cal. 1999). Here, the defendant, a cellular service provider, enjoyed a government-protected duopoly that sold phones at a loss but recouped those losses with the sale of cellular services. Id. at 532. Plaintiffs—companies who sold cellular phones, but not services—sued under California’s Unfair Competition Law (UCL), claiming they could not fairly compete with defendant’s artificially low phone prices. Id. In affirming the judgment against plaintiffs, the Court created a safe harbor that protected defendants from UCL claims if legislation ‘‘actually bar[red] or clearly permit[ted] the conduct’’ at issue. Id. at 562. The Court reasoned that while the UCL’s scope was purposely broad to allow regulation of a wide range of unfair business practices, the legislature did not give plaintiffs carte blanche: The Court explained, ‘‘If the Legislature has permitted certain conduct or considered a situation and concluded no action should lie, courts may not override that determination.’’ Id. at 541.

Courts have applied the California Safe Harbor Doctrine in Many Scenarios

Since Cel-Tech, federal courts have applied the California safe harbor doctrine to a variety of products – from drugs to food to credit cards. For example, some courts have applied this doctrine to bar consumer protection suits involving FDA-approved labels for prescription medications. In Marcus v. Forest Labs, an MDL judge in the District of Massachusetts held that California’s safe harbor doctrine barred a claim under the California False Advertising Law (FAL) based on allegations that the label for the prescription antidepressant Lexapro was misleading. Earlier FDA approval provided the basis for this victory. Marcus v. Forest Labs., Inc., MDL No. 09-2067, 2014 BL 60265, *4 (D. Mass. 2014), aff’d on other grounds, 779 F.3d 34 (1st Cir. 2015). The Court, recognizing that ‘‘the prescription drug industry is subject to comprehensive regulations promulgated by the FDA,’’ held:

Where, as here, Congress has entrusted the FDA to determine 1) whether there is a substantial evidence of efficacy for a particular indication and 2) whether a proposed label is false or misleading in any way, and the FDA approves a label for a certain indication, the safe harbor provision applies to bar a claim that the label was false or misleading.

Id. at *15-16; see 21 U.S.C. § 355(d) (requiring FDA to reject approval of a new drug if its ‘‘labeling is false or misleading in any particular’’); see also 21 C.F.R. § § 201.56, 201.57 (describing FDA labeling requirements with respect to efficacy information, safety information and approved uses).

These same principles have led the courts to apply the safe harbor doctrine in cases involving nonalcoholic beverages and foods as well. In Pom Wonderful LLC v. The Coca Cola Co., No. CV 08-06237, 2013 BL 383876, *5-6 (C.D. Cal. 2013), the Court held that California’s safe harbor doctrine barred plaintiffs’ state law consumer protection claims regarding allegedly misleading labeling for juice products because the labeling complied with FDA regulations:

Congress has explicitly allowed labeling that is not misleading, and granted FDA the authority to make such a  determination. Defendant has complied with the relevant FDA regulations, and so, per the discussion above, is also compliant by extension with the FDCA. The Court therefore finds that California’s Safe Harbor Statute [sic] provides a separate and independent basis for granting the Motion.

Id. at 15.

Courts have analyzed the doctrine in connection with other regulated products well. See, e.g., Davis v. HSBC Bank Nev., N.A., 691 F.3d 1152, 1165–66 & n.3, 2012 BL 223195 (9th Cir. 2012) (credit cards); Alvarez v. Chevron Corp., 656 F.3d 925, 933–34, 2011 BL 225138 (9th Cir. 2011) (gasoline pumps); Lopez v. Nissan N. Am. Inc., 135 Cal. Rptr. 3d 116, 120, 131–33, 2011 BL 306778 (Cal. Ct. App. 2011) (odometers).

Tito’s Vodka and the Safe Harbor Doctrine

FDA approval might help a drug company, but will an alcohol manufacturer get the same respect? A California federal court said no, refusing to invoke the doctrine in the Tito’s litigation, which involved a beverage label approved by the federal Alcohol and Tobacco Tax and Trade Bureau (TTB) under the Federal Alcohol Administration Act (FAAA). Finding the TTB’s process less rigorous than the FDA’s the court refused to dismiss the consumers’ lawsuit.

In Hofmann v. Fifth Generation, Inc., plaintiffs sued under California consumer protection statutes (the UCL and Consumer Legal Remedies Act) claiming that the product label was false and misled purchasers because it said that the vodka was ‘‘handmade’’ when, in truth, it is made by means of a highly mechanized process. After failing on a motion to dismiss based on California’s safe harbor doctrine, Tito’s resurrected the argument in the context of a motion for summary judgment. Tito’s argued that the consumer protection claims were barred by the California safe harbor doctrine because the product labeling was approved by the TTB pursuant to FAAA regulations, which prohibit false and misleading labeling and require preapproval of alcohol-beverage labels. Hofmann v. Fifth Generation, Inc., No. 14-cv-2569, 2015 BL 383794 (S.D. Cal. 2015). Tito’s bolstered this argument by presenting a Certificate of Label Approval (COLA) from the TTB, which, it argued, proved regulatory approval of Tito’s compliance with federal law. Id. at *15. Tito’s further argued, contrary to the court’s prior decision on its motion dismiss, that the TTB’s approval was not based on self-reporting because the TTB had determined that the word ‘‘handmade’’ was not misleading. Id. at *22-23. The court was not impressed: it again refused to grant the label a safe harbor. Id. at *21-22. Likening the safe harbor doctrine to preemption, the court determined that ‘‘a federal regulator’s actions create a safe harbor only. . . [when they are] the result of a formal, deliberative process akin to notice and comment rulemaking or an adjudicative enforcement action.’’ Id. at *21. Because the COLA procedures lacked such formality, they did not trigger the safe harbor doctrine. Id. at *22. Moreover the court identified a genuine issue of fact as to whether or not the TTB had approved the term ‘‘handmade,’’ when plaintiff presented evidence that the term was puffery and therefore not verified by the TTB. Id. at *24-26.

Tito’s enjoyed better receptions from federal courts in Florida and Illinois when they analyzed those states’ safe harbor laws. For example, in Pye, plaintiffs alleged that Tito’s ‘‘handmade’’ claims violated the Florida Deceptive and Unfair Trade Practices Act (FDUTPA). Pye v. Fifth Generation, Inc., No. 4:14-cv-493, 2015 BL 310589 (N.D. Fla. 2015). Similar to the California scheme, FDUPTA contains a safe harbor for ‘‘an act or practice required or specifically permitted by federal or state law.’’ Florida Statutes § 501.212(1). The court found that the safe harbor provision barred plaintiffs’ claims, finding persuasive the same arguments Tito’s made, without success, in the Hofmann case. The Court explained that the FAAA forbids false or misleading labels on alcoholic beverages and that the TTB, charged with enforcing the FAAA, ‘‘evaluates and preapproves an alcohol label to ensure it contains all mandatory information and contains no prohibiting information.’’ Id. at *9. Because the TTB had evaluated Tito’s label and COLA, the court found the TTB had ‘‘expressly approved Tito’s label.’’ Id. at *9. This was sufficient to trigger the safe harbor doctrine.

An Illinois court came to the same result in Aliano, where the plaintiff claimed similar violations of the Illinois Consumer Fraud and Deceptive Trade Practices Act. Aliano v. Fifth Generation, Inc., No. 14 C 10086, 2015 BL 309805, *1-2 (N.D. Ill. 2015). The Act also contains a safe harbor provision for actions ‘‘specifically authorized by federal law.’’ Id. at *5 (emphasis omitted). The court, relying on the multiple COLAs the TTB had issued for Tito’s, found that ‘‘the TTB has consistently approved its applications for the precise labeling and language on each bottle of Tito’s.’’ Id. at *11-12. Accordingly, ‘‘Tito’s use of the label is specifically authorized by the TTB,’’ triggering the safe harbor provision and barring plaintiff’s claims. Id. at *5.

The Illinois and Florida courts in Tito’s held that when a government agency is empowered to decide whether a label is false or misleading and approves the labeling complained of, the safe harbor doctrine should apply. And this makes sense. The agency has already concluded that the label is not false and misleading. Allowing a case to proceed that now challenges the approved language would necessarily second guess that judgment. This result violates the intent of the safe harbor doctrine, which seeks to protect legislative judgments and should be construed broadly to prevent the overbroad application of consumer protection laws.

As the Tito’s litigation demonstrates, courts are far from uniform in applying state safe harbor doctrines, particularly when it comes to alcohol labeling. And although it’s impossible to reconcile the results, one thing is clear: California will continue to thrive as a plaintiff-friendly venue for false advertising claims so long as decisions like Hoffman stand. This is an unfortunate result for both manufacturers and their customers, who will ultimately bear the cost of fending off these cases.