United States: Supreme Court Decision Alert - June 12, 2014

Keywords: Lanham Act, private right of action, labels, Food, Drug, Cosmetic Act, IRAs, retirement funds, bankruptcy code

Yesterday, the Supreme Court issued two decisions, described below, of interest to the business community.

Lanham Act—Private Right Of Action To Challenge Labels Regulated Under Federal Food, Drug, And Cosmetic Act

Pom Wonderful LLC v. Coca-Cola Co, No. 12-761 (described in the January 13, 2014, Docket Report)

In POM Wonderful LLC v. Coca-Cola Co., No. 12-761, the Supreme Court unanimously held today that the Federal Food, Drug and Cosmetic Act does not preclude a Lanham Act lawsuit alleging that food or beverage labels are misleading, even if the labels comply with FDA food-labeling regulations. The POM decision broadens the legal remedies for false advertising available to competing food or beverage producers but does not affect consumer lawsuits.

As relevant here, the Lanham Act permits one competitor to sue another for using "false or misleading" advertising that "misrepresents the nature, characteristics, qualities, or geographic origin of his or her or another person's goods, services, or commercial activities." 15 U.S.C. § 1125. The Food, Drug, and Cosmetic Act, 21 U.S.C. § 301 et seq., prohibits the misbranding of food and beverages, and imposes comprehensive food-labeling requirements. The FDCA does not authorize private actions, but provides the United States with nearly exclusive authority to enforce the food-labeling provisions. In addition, the FDCA preempts state-law food-labeling requirements that are not identical to those in the FDCA.

POM Wonderful markets a juice labeled "Pomegranate Blueberry 100% Juice," which consists entirely of pomegranate and blueberry juices. Coca-Cola (under the Minute Maid brand) markets a juice labeled "Pomegranate Blueberry Flavored Blend of 5 Juices"; that product contains 99.4% apple and grape juices, with pomegranate, blueberry, and raspberry juices accounting for the remaining 0.6%. The Minute Maid product's label features a picture of all five fruits and the words "Pomegranate Blueberry" in a larger font than the words "Flavored Blend of 5 Juices."

POM sued Coca-Cola, claiming that Minute Maid's product name and label violate the Lanham Act's false-advertising provision. The district court granted summary judgment to Coca-Cola, holding the Lanham Act claim precluded by FDA regulations for labels on flavored-juice blends (with which the Minute Maid label complies). The Ninth Circuit affirmed, holding that "the FDCA and its regulations bar pursuit of both the name and labeling aspect" of that claim because allowing the claim would "undermine the FDA's regulations and expert judgments" about how juices may and should be labeled. POM Wonderful LLC v. Coca-Cola Co., 679 F.3d 1170, 1176-77 (9th Cir. 2012).

The Supreme Court unanimously reversed in an opinion by Justice Kennedy (with Justice Breyer recused). The Court first distinguished between federal preemption of state law and preclusion by one federal statute of a remedy available under another, but noted that preemption precedents may shed light on the interaction of laws addressing the same subject. The Court left open the legal standard that determines when one federal statute precludes another, however, declining to decide whether the statutes should be construed in a way that reconciles or harmonizes them, or whether instead both statutes must be enforced in full except to the extent that they are in irreconcilable conflict.

Because the Court determined that there was no conflict between the statutes, it held that POM's Lanham Act claim could proceed. The Court explained that the FDCA is designed primarily to protect consumers' health and safety while the Lanham Act is designed to protect competitors and competition. Thus, the Court concluded, the laws are "complementary and have separate scopes and purposes." Slip op. 15. The Court determined that neither statute "discloses a purpose" by Congress to bar competitor suits like POM's. Id. at 9.

The Court also rejected the contention that private suits under the Latham Act would undermine the interest in uniformity reflected in the FDCA's federal-enforcement and preemption provisions. If Congress had meant to preclude suits under other federal statutes such as the Lanham Act, the Court reasoned, it would have said so, just as it did for state requirements. Id. at 13. As the Court noted, "Congress not infrequently permits a certain amount of variability" in the enforcement of federal law "by authorizing a federal cause of action even in areas of law where national uniformity is important," while at the same time preempting state-law requirements on the same subject. Id. at 14.

The Court also rejected the Solicitor General's middle-ground position that would have precluded Lanham Act claims only to the extent that the FDCA or FDA regulations specifically require or permit particular language on a product label. (That rule would have precluded POM's challenge to the name of the Minute Maid product, which complied with FDA regulations, but would have permitted other challenges to go forward.) Setting aside the practical difficulties in applying that approach, the Court declined to permit agency regulations to preclude remedies under other federal statutes in the absence of congressional authorization. Here, in contrast, Congress intended that competitor actions under the Lanham Act and governmental enforcement of the FDCA would "complement each other with respect to food and beverage labeling." Id. at 15.

This decision is important to all businesses subject to food- and beverage-labeling requirements under the FDCA because it allows for private claims by competitors under the Lanham Act to challenge product labels that are permissible (and perhaps even required) under the FDCA. It may also affect businesses subject to other federal labeling requirements that do not expressly bar Lanham Act claims. The decision does not affect consumer lawsuits.

Inherited Individual Retirement Accounts (IRAs)—Bankruptcy—Exemptions

Clark v. Rameker, No. 13-299 (described in the November 26, 2013, Docket Report)

The Supreme Court held unanimously today that inherited IRAs are not "retirement funds" as that term is used in § 522 of the Bankruptcy Code, and therefore are not exempt from a debtor's bankruptcy estate.

In 2000, Ruth Heffron established a traditional IRA and named her daughter, Heidi Heffron-Clark, as the beneficiary. After Ms. Heffron died, her $450,000 IRA passed to her daughter. In 2010, Ms. Heffron-Clark and her husband filed for relief under Chapter 7 of the Bankruptcy Code, and identified the inherited IRA as property exempt from the bankruptcy estate. The exemption issue was litigated up to the Seventh Circuit, which held that "inherited IRAs represent an opportunity for current consumption, not a fund of retirement savings," and were therefore not exempt from the bankruptcy estate. In re Clark, 714 F.3d 559, 562 (7th Cir. 2013).

In a unanimous opinion by Justice Sotomayor, the Supreme Court affirmed. The Court concluded that the term "retirement funds," which is not defined in the Bankruptcy Code, is inapplicable to inherited IRAs for three reasons. First, because the Internal Revenue Code prohibits contributions to inherited IRAs, they operate in a fundamentally different manner from traditional and Roth IRAs, which "provide tax incentives for accountholders to contribute regularly and over time to their retirement savings." Slip op. 6. Second, holders of inherited IRAs are legally required to withdraw money from those accounts "regardless of their holders' proximity to retirement"—"hardly a feature one would expect of an account set aside for retirement." Id. Finally, unlike a Roth or traditional IRA, the holder of an inherited IRA may withdraw the entire amount at any time, without penalty.  Id.

The Court also reasoned that its interpretation of the term "retirement funds" is consistent with the purposes of the Bankruptcy Code's exemption provisions, which "effectuate a careful balance between the interests of the creditors and debtors." Id. Exempting traditional and Roth IRAs helps to "ensure that debtors will be able to meet their basic needs during their retirement years." Slip op. 7. Allowing an exemption for inherited IRAs, by contrast, "would convert the Bankruptcy Code's purposes of preserving debtors' ability to meet their basic needs and ensuring that they have a fresh start, into a free pass." Id. (internal quotation marks and citation omitted).

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