FTC Cracks Down On "Greenwashing"

Law 360 reported recently that that the FTC is taking decisive action against companies that make deceptive environmental marketing claims. “Greenwashing” involves misleading consumers concerning the environmental benefits of a product or service. In an earlier article, we discussed the “Six Sins of Greenwashing.”

If you do not have the time or inclination to review the FTC’s newly revised (October 2012) Guides for the Use of Environmental Marketing Claims (the “Green Guides”), a review of the “Six Sins of Greenwashing” will tell you almost all you need to know to stay out of trouble with the FTC. 

To test your "Greenwashing" prowess, you can go on the UL site called the "Sins of Greenwashing: Home and Family Edition" and play "Name that Sin", which is thought provoking and challening. 

Recent FTC enforcement actions fall under the “sin of fibbing” or, if you take a more charitable view of the manufacturers’ alleged actions, the lesser “sin of no proof.” Committing either sin, however, lands you in FTC purgatory. In November 2013, FTC announced settlements with three mattress companies that were marketing products as having no volatile organic compounds (“VOCs”) or chemicals. 

The mattress companies distributed advertising claiming that the products were VOC-free and chemical-free. The only problem with these claims was that they did not comply with the Green Guides which specifically address “free of” and “non-toxic” claims. The Green Guides set forth what steps a company must take to make such an environmentally friendly claim without running afoul of the regulations.

 In the case of one mattress manufacturer, EcoBaby, the FTC claimed that the company’s use of an environmental certification was false and misleading. Remarkably, over four hundred eco-labels and green certifications are used globally. The revised Green Guides advise industry that it is deceptive to represent that a product has been endorsed or certified by an independent third-party, or to give that impression, when that is not the case.

EcoBaby’s promotional materials included a seal of approval from the National Association of Organic Mattress Industry (“NAOMI”). According to the FTC’s complaint, however, NAOMI is simply an alter ego of EcoBaby, which awards seals to its own products. Thus, NAOMI is not an independent third-party, although a consumer might reasonably believe it is. Who has the time to research whether an environmental certification is legitimate or not?  The Pure Rest Organics site, which advertises (among others) Ecobaby products, boast no less than twelves environmental certifications on its website. 

In October 2013, FTC announced six enforcement actions addressing marketing claims that certain plastic products or additives were biodegradable. The Green Guides establish what is required to make a “biodegradable” advertising claim. Reviewing the FTC's complaints, it is fairly clear that the companies involved either didn’t read the Green Guides or chose to ignore them.
 

Commensurate with the increase in FTC enforcement claims may be claims by companies against their own suppliers. A manufacturer who advertises to consumers should exercise reasonable caution before relying on its supplier’s representations concerning the environmental attributes of ingredients that they incorporate in their products. The Green Guides apply not only to the environmental attributes of a product, but to the environmental attributes of packaging as well as service provided in connection with marketing as well.
 

From a corporate perspective, in-house counsel should review environmental marketing claims to avoid running afoul of FTC regulators. An important first step in that due diligence process is to ensure that “good science” supports environmental advertising claims. 

Koch Rattles Wine Auction World: GBL § 350 "Game Changer"

To successfully assert a claim under New York General Business Law § 349 (h) or § 350, "a plaintiff must allege that a defendant has engaged in (1) consumer-oriented conduct that is (2) materially misleading and that (3) plaintiff suffered injury as a result of the allegedly deceptive act or practice" 

A claim is brought under GBL § 349 to allege misleading and deceptive trade practices and under GBL § 350 to allege false advertising.  Typically, these two sections are pled in tandem, both in single plaintiff cases and in class action litigation seeking relief from consumer fraud. 

In their NYLJ article (12/28/12) looking back at the significant New York State class action decisions that were handed down during 2012, authors Thomas A. Dickerson, Jeffrey A. Cohen (both Second Department judges) and Kenneth A. Manning devote special attention to the Court of Appeals decision in Koch v. Acker, Merrall & Condit, in which the court clarified that justifiable reliance is not an element of a GBL § 350 claim. Prior decisions had already done away with any reliance requirement on a GBL § 349 claim

The element of reliance had always seeming been an important defense weapon in deceptive trade practice class action litigation. In Koch, plaintiff alleged that the auction house described its wines as "extraordinary, " "absolutely stunning," and among the "greatest wines...ever experienced"  when, in fact, these wines were undeniably nothing of the kind. But the First Department made short shrift of plaintiff's claims.  The court gave considerable deference to the disclaimer language in the auction house's brochure which provided an "as is" disclaimer.

In addition to the "as is" caveat, the "Conditions of Sale/Purchaser's Agreement" made "no express or implied representation, warranty, or guarantee regarding the origin, physical condition, quality, rarity, authenticity, value or estimated value" of the wine.  Should not a  reasonable consumer, the appellate court reasoned, been alerted by these disclaimers, would not have relied, and thus would not have been misled, by defendant's alleged misrepresentations concerning the vintage and provenance of the wine it sells?  In this instance, according to Decanter.com, the plaintiff was Florida billionaire, William "Bill" Koch, who apparently believed that the auction house had sold him the proverbial "bill of goods".  If anyone was to read and understand the "fine print" in the disclaimer, surely a sophisticated investor like Mr. Koch would.

In answer, the  Court of Appeals held that the "as is" provision does not bar the claim (at least at the pleading stage) and does not establish a defense as a matter of law. 

As Messrs. Dickerson and  Cohen explained in an earlier NYLJ article (4/19/12), the Koch ruling may be a "game changer" in deceptive and misleading business practices class action litigation.  They cite a long series of prior appellate cases, which had established reliance as a basis for obtaining a recovery under GBL § 350, which clearly is no longer good law. In the past, New York courts were reluctant to certify GBL § 350 claims because they found that reliance was not subject to class wide proof. 

When the Appellate Division issued its decision, wine industry attorney Brian Pedigo in Irvine California expressed concern to Decanter.com that it would set bad precedent if all prospective bidders had to satisfy themselves by inspection rather than to trust in the auction house's represenations.  In pertinent part, he commented, "A regular Joe consumer is not going to fly overseas [or across the country] to inspect wine. A reasonable consumer will rely on the representation of the seller, and will not read or understand the fine print disclaimers".  An adverse decision for the auction house, he believed, would be "horrible for consumer trust in the online auction environment; it could possibly destroy this niche market sector".  Would  internet commerce be adversely affected if the e-consumer was not able to trust the e-seller?

The Court of Appeals apparently agreed with Mr. Pedigo that the risk of authenticity should not entirely shift to the consumer, regardless of whether the consumer is Joe consumer or Bill Koch. 

The claim against Acker Merrall is not Mr. Koch's only wine-related lawsuit.  He previously brought a RICO claim against Christie's, another auction house, after purchasing four bottles of wine that he believed were connected to Thomas Jefferson, but turned out were not really that old.  That Koch wine auction case ended up in the Second Circuit; but that's a story for another time. 

At the end of the day, Koch serves to harmonize GBL § 349 and GBL § 350; there is no reliance pleading requirement under either statute. 

However, all is far from lost for the defendants in these cases.  As discussed at the outset of this article, plaintiffs must prove  (1) consumer-oriented conduct that is (2) materially misleading and that (3) plaintiff suffered injury as a result of the allegedly deceptive act or practice".  Accordingly, although reliance need not be shown, the plaintiff must still prove causation.  Proof of causation remains plaintiff's critical hurdle in succeeding in these claims.  

Genetically Modified Food Can Feed The Planet

The publication of “Diet for a Small Planet” in 1971 by Francis Moore Lappé was a conscious-raising event for many Americans. The book makes the case that grain-fed meat production is wasteful and a contributor to global food scarcity. The author argues that eating a planet-centered diet means choosing what is best for the Earth and our bodies – a daily action that reminds us of our power to create a more rational world. The book’s most significant conclusion is that world hunger is not caused by a lack of food but by ineffective food policy. A vegetarian diet can  produce sufficient protein for one’s nutrition, according to the book.

Fast forward some forty years to today. The organic food movement has transformed the way many Americans think about food and has had a significant impact on food shopping. Organic food has become a multi-billion dollar industry with significant influence in education and public policy, and on law makers. We have certainly become more educated consumers by understanding how food products are manufactured and processed, which is an important part of the organic food industry's message. But as Business Week put it, the organic food industry is a "far cry from the old food co-ops, wheatgrass, tofu, and alfalfa sprouts options, organic food and the industry supporting it has grown up".

There is a certain romanticism about the organic farming, which leads some to ask why can’t we just go back to the way we farmed in the 19th century? From a societal standpoint, what are the pros and cons of organic food vs. “genetically modified” food? How can we differentiate between the myths about the food we eat and the facts? In an article in the Wall Street Journal on December 24, 2012, John R. Block, the former secretary of the Department of Agriculture (1981-1985) tackles this issue head on.

Food Safety  According to Mr. Block, there has never been a single instance in which genetically modified food has caused an illness or contributed to a contaminated product. Nevertheless, you can open a newspaper or a website on any given day and be barraged by scientific-sounding warnings that gene-altered substances can enter our bodies and wreak genetic havoc.  One such article is titled, "Is Genetically Modified Food Killing Us?" or another simply "Genetic Roulette".  

 In fact, America’s farmers and ranchers have built a sophisticated food-safety infrastructure to improve the health of their animals and deliver fresh, clean produce. There is no evidence that organic food is “better for you” from a safety perspective. As a result of the use of biotechnology in agriculture, genetically modified crops taste better, take less time to mature, provide increased nutrients, yields and stress tolerance, and have improved resistance to disease, pests, and herbicides.  According to the Human Genome Project, on the horizon are bananas that produce human vaccines against infectious diseases such as hepatitis B and cows that are resistant to Mad Cow Disease. 

Crops from biotech seeds are identical to those from non-biotech seeds. In addition, organic foods are identical in nutritional value to non-organic foods.   Numerous studies have shown no nutritional difference between commercially available GMO (short hand for "genetically modified organisms") and non-GMO foods.

Food Choices  Not that long ago, what Americans ate depended on the farmer’s skill, the weather and other unpredictable variables. Pre-industrial agricultural yields were low before the introduction of machines, fertilizers, plant and animal breeding, pesticides and genetic engineering. We are no longer limited to a small variety of local and seasonal food. Modern agriculture is simply more productive, providing more variety at lower prices. As romantic as it would be to only eat food grown on a farm where two horses pulled a two-row corn planter, it probably wouldn’t feed the world's population for all that long.

Environmental Stewardship  Today’s farmers use agricultural practices that improve the sustainability of the land and limits the use of herbicides, pesticides and fertilizers. The goal of the much of the research into genetically engineered crops is higher yield with less water and chemical use.

Sustainability  Most significantly, the large scale sophisticated farming of today is better equipped to sustain the world’s growing population.

According to Mr. Block, America’s farmers grow five times as much corn as they did in the 1930’s on 20% less land. To meet the goal of helping to feed a global population of what the United Nations estimates will be eight billion people in 2030, our farmers and ranchers will have to use the latest and most effective technologies to produce more with less.  

I support organic and conventional farming. I love shopping at Whole Foods. I shop at every Farmer's Market I come across.  Thanks to the organic farming movement, our collective consciousness about food  has been heightened.  However, a higher consciousness alone cannot meet the world’s food demands. The underlying assumptions are different than they were forty years ago, but the basic premise holds true today.  Effective food policy remains the key to feeding the planet. A strong first step in developing effective food policy is separating fact from fiction when it comes to biotechnology and American agriculture.
 

No Duty To Disclose To Prospective Homeowners

What is the duty of a real estate developer to disclose to prospective residential purchasers information about the neighborhood that may adversely impact property values? Apparently none if the developer is not in privity with the homeowners, according to the Eleventh Circuit.

 On May 21, 2012, Law 360 reported on the Eleventh Circuit’s decision in Luis Virgilio v. Terrabrook Vista Lakes L.P., et al. , Case No. 11-11027 (5/18/12).  We have discussed in a past article the circumstances under which a commercial  real estate broker may be found have a duty to disclose environmental liabilities to a prospective purchaser.  Here, the court was clearly troubled by the question of how far the developer's potential liablity to disclose "inside information" would extend and how an obligation to disclose this information could be satisfied.. 

By way of background, class action plaintiffs purchased their homes from a builder, The Ryland Group, Inc. (“Ryland”), in a subdivision in Vista Lakes, a residential development in Orlando, Florida. Unbeknownst to the Virgilios (and other members of the class), the homes they purchased from Ryland were located adjacent to Pinecastle,  a World War II bombing range that, to this day, remains laden with unexploded bombs, ammunition, ordinance and related chemicals. Once Pinecastle’s existence became public, the homes in the subdivision lost considerable market value and the Virgilios brought this lawsuit to compensate for their loss.

Plaintiffs entered into a $1,200,000 settlement with Ryland and then turned their attention to the four other defendants involved in the development and marketing of the subdivision. However, on the same day that the district court certified the plaintiff class and approved the Ryland settlement, it dismissed plaintiffs’ claims against the remaining defendants as legally insufficient. On appeal, the Eleventh Circuit affirmed the trial court ruling in all respects.

Plaintiffs pursued four legal theories against the developer defendants, all based on their failure to inform plaintiffs about Pinecastle before they purchased their homes. One developer/defendant, Terrabrook, sold Ryland the undeveloped land that became the subdivision. At the time of the sale, Terrabrook informed Ryland of Pinecastle’s existence. Terrabrook actively marketed Vista Lakes to prospective buyers and received a commission for each home or lot sold.

Count 1 of the Complaint attributed the defendants’ duty to disclose to the Florida Supreme Court’s landmark decision in Johnson v. Davis, which holds that “when a seller of a home knows the facts materially affecting the value of the property which are not readily observable and are not known to the buyer, the seller is under a duty to disclose them to the buyer.”

In Johnson v. Davis, the court overturned the old rule that  “where the parties are dealing at arms length and facts lie equally open to both parties, with equal opportunity of examination, mere non-disclosure does not constitute fraudulent concealment.” The Florida Supreme Court concluded, however, that this rule was “not in tune with the times and did not conform with current notions of justice, equity and fair dealing.” Thus, Florida’s high court held that the law required “full disclosure of all material facts” whenever “elementary fair conduct demands it.”

In rejecting plaintiffs’ argument that Johnson v. Davis should be applied to uphold their claims, the Eleventh Circuit found no facts to support the plaintiffs’ conclusory allegation that the defendants were acting as Ryland’s agent in promoting homes in the development. As the Court noted, “Count 1 is missing an essential allegation – the critical element of an agency relationship – that the principal exercised, or had the ability to exercise, control over the agent.”

Count 2 is silent as to the source of the duty, but suggests that it lies in equity since it is a claim for unjust enrichment. Count 2 alleges that because defendants failed to inform plaintiffs about Pinecastle, it would be inequitable for defendants to retain the benefits. Count 3 locates the duty in the Florida Deceptive and Unfair Trade Practices Act (“FDUTPA”), FLA Stat. §§ 501.201 et seq., asserting that defendants’ failure to inform plaintiffs about Pinecastle constituted a “deceptive, misleading and unfair trade practice.” Count 4 locates the duty to disclose in common law negligence.

The heart of the Eleventh Circuit's decision is its refusal to extend Johnson v. Davis.  The court found that the case did not apply because: (1) the defendants were not in privity with the buyer or acting as an agent in privity with the buyer (such as the seller’s real estate broker); and (2) there was no allegation in Count 1 that defendants’ “marketing efforts were at the behest or direction of Ryland, that Ryland exercised any control over [the] marketing efforts, or that [defendants] actually listed any of the homes… on behalf of Ryland.”

Applying the same logic to Count 2, the court held that even assuming the plaintiffs conferred a benefit on defendants, Johnson’s duty to disclose did not extend to defendants. Thus, since defendants did not breach a duty to plaintiffs, plaintiffs had not been wronged and defendants were not unjustly enriched. The trial court dismissed Count 3 because the alleged FDUTPA “deceptive or unfair trade practice” was the breach of an affirmative duty of disclosure. Since the Court determined in dismissing Count 1 that there was no such duty, the FDUTPA claim was dismissed as well.

In essence, the Eleventh Circuit found plaintiffs’ "argument – that because defendants developed and marketed Vista Lakes, they had a duty to warn prospective purchasers of Pinecastle’s existence – without merit."  Rejecting plaintiffs’ logic, the Court observed:

What about those to whom Ryland’s home buyers sold their houses? Would Terrabrook have a duty to them as well? Since Terrabrook was not a party to Ryland’s contracts with the buyers, and thus did not know the buyers’ identities, under Plaintiffs’ approach the only way Defendants could discharge their duty of care would be through marketing: Defendants could not escape liability unless they saturated the market place with the negative information

Would  the case have turned out differently if the developer had prepared brochures that affirmatively misrepresented the environmental condition of the neighborhood?  In granting summary judgment, the district court said that while it was foreseeable that the defendants' general marketing campaign could lead some members of the public to consider purchasing a home in Vista Lakes, the general marketing had nothing to do with any particular home in Vista Lakes and simply put plaintiffs in face-to-face discussions with Ryland.

  For more on the lower court's decision and a discussion of developments built on former bombing ranges, see Larry Schnapf's informative discussion titled "Home on the Bombing Range" and his more recent discussion about the Eleventh Circuit's decision.

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FTC's Revised Green Guides

On October 6, 2010, the Federal Trade Commission proposed revised “Green Guides”, the guidance provided to corporate marketers to help them avoid making misleading environmental claims. The Green Guides were first issued in 1992 and revised in 1996 and 1998. The proposed Guides issued last week are designed to significantly strengthen the FTC’s prior guidance and provide new guidance on marketing claims that were not commonly asserted in the 1990’s before the “Green Revolution”. Although the FTC is seeking public comments on the proposed revisions through December 10, 2010, the guidance issued last week is not likely to be significantly modified.

Based upon a review of the new Green Guides, there are some basic rules of the road that, if followed, will help companies avoid “Greenwashing” claims and the consumer class action suits which are likely to become increasingly common: (1) Avoid unqualified general environmental marketing claims that are difficult, if not impossible, to substantiate; (2) General claims of environmental benefit should be accompanied by qualifiers that are clear, specific and accurate; (3) When using a certification or a seal of approval to promote the green nature of a product, use clear and prominent language to clarify that the certification or seal relates to a particular environmental attribute, which the company can substantiate; (4) If the company is endorsing a product with its own seal of approval, use clear prominent and qualifying language to alert consumers that the company created the certifying program, not an independent third-party; and (5) If only a portion of the product is made with recycled or renewable material, clearly and prominently clarify which portion of the product is made from a recycled or renewable source.

Perhaps surprisingly, FTC’s consumer revealed research found that the public overestimates the significance of “Green” claims, which suggests that “greenwashing” is common and probably profitable. Despite consumers’ increasing cynicism, there must be some deep-seated need to believe that you are a buying an “eco-friendly” product. Going forward, companie seeking to comply with the new guidelines may want to rethink their marketing strategies and avoid making general claims of “environmental friendliness” and focus instead on advertising claims that can be are based on scientific research. 

The FTC’s Green Guides are largely devoid of regulatory jargon often found regulations and are easy to read and understand. The Green Guides provide helpful examples of which kind of claims are acceptable and which are not. Following the adoption of the Green Guides, should we expect that FTC will initiate a spate of enforcement actions to emphasize to industry that the new Green Guides should be taken seriously?  You bet!.

"Greenwashing" and the Rise of Deceptive Trade Practice/False Advertising Class Action Claims

Greenwashing” involves misleading consumers concerning the environmental benefits of a product or service. In the “Six Sins of Greenwashing,” TerraChoice a marketing firm, studied over one thousand consumer products and concluded that all but one made claims that were demonstrably false or misled consumers. TerraChoice found that eco-marketers were guilty of what it described as the “Six Sins of Greenwashing,” which include:

  1. Sin of the Hidden Tradeoff
  2. Sin of No Proof
  3. Sin of Vagueness
  4. Sin of Irrelevance
  5. Sin of Fibbing
  6. Sin of the Lesser of Two Evils

Are companies that mislead well-intentioned customers into making purchases that do not deliver their promise subjecting themselves to class action claims alleging deceptive trade practice and false advertising? More than ever before, sellers of consumer goods are committing the “Sin of Vagueness” (for example) by claiming that their products are “chemical free,” “non-toxic,” “all natural,” or “environmentally friendly.” If a purchaser is induced to purchase a pesticide product because it claimed in advertising to be “chemical free” or “non-toxic,” and becomes ill, would a product liability claim be less difficult to prosecute?  More significantly, will the “Six Sins of Greenwashing” give rise to false advertising and deceptive trade practice class action suits?  In the absence of regulation concerning eco-marketing, what standard will courts hold consumer product sellers to in evaluating these claims. In general, product sellers can obtain guidance from:  (1) standards established by multiple private certification groups; (2) “Green Guides” issued by the United States Federal Trade Commission; and (3) ISO 14021 and ISO 14024, which provide standards on how best to communicate environmental product information. Voluntary adherence to any of these standards or guidelines will certainly not preempt a class action, but may provide credible defenses to these claims.