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Nov 16, 2016

Merchants Beware: Ingredient List Is Not Necessarily a Defense and Losing the Benefit-Of-The-Bargain Counts as an Ascertainable Loss Under the MMPA

In a recent decision, a unanimous three-judge panel of the Missouri Court of Appeals sided with consumers asserting deceptive labeling practice claims against merchants under the Missouri Merchandising Practices Act (MMPA). In Daniel Murphy v. Stonewall Kitchen, LLC, the Court rejected the notion that clearly identifying an ingredient on a product label automatically defeats a claim under the MMPA. In doing so, the Court settled a split of opinion about the efficacy of the so-called “ingredient list” defense used by food merchandisers to defeat a fraud claim under the MMPA. The Court also confirmed that consumers can establish damages by pleading that the deceptive labeling made it possible for the product to be sold for more than what it was really worth.

The “ingredient list” defense has arisen in the context of challenges to the integrity of food labels containing the words “all natural” where one or more ingredients are alleged to be anything but natural.  The issue is whether a food label bearing the words “all natural” is deceptive even if the ingredient list clearly discloses all of the ingredients, including the “unnatural” ones. Federal district courts in Missouri considering the issue have rendered conflicting opinions which Murphy resolved. Murphy involved a class action against a high-end specialty foods merchandiser known for its homemade food items. The plaintiffs alleged that the label on Stonewall Kitchen’s cupcake mix was false, deceptive, and misleading because it stated “all natural” but listed sodium acid pyrophosphate (“SAPP”) as an ingredient. SAPP is an artificial chemical leavening agent found in commercial baking powders.  The merchandiser moved to dismiss the petition for failure to state a claim because the label clearly disclosed SAPP as one of the ingredients, citing the Western District of Missouri’s decision in Kelly v. Cape Cod Potato Chip Co., 81 F. Supp. 3d 745 (W.D. Mo. 2015). The trial court adopted Kelly and dismissed the petition, reasoning that the disclosure of SAPP on the label made it unlikely that a consumer would be tricked into thinking that the cupcake mix was “all natural”, and that the terms “natural” and “all natural” were inherently ambiguous and not subject to a generally accepted meaning.

The Court of Appeals reversed the trial court, rejecting Kelly and instead adopting the Eastern District of Missouri’s decision in Thornton v. Pinnacle Foods Group LLC, No. 4:16-CV-00158 JAR, 206 WL 4073713 (E.D. Mo. Aug. 1, 2016). The Court acknowledged that the term “all natural” is subjective and ambiguous but decided that a deceptive labeling claim could not be dismissed before discovery could be conducted because a reasonable consumer’s understanding of whether a food label is misleading or deceptive is a question of fact and cannot be determined as a matter of law. The Court explained that the ingredient list could be relevant to the merchandiser’s defense, but its presence cannot automatically defeat an MMPA claim, especially since the FDA requires an ingredient list anyway, manufacturers are in a superior position to know the ingredients, and a reasonable consumer can expect that representations on the packaging accurately reflect the ingredients. Accordingly, an ingredient list will not prevent a deceptive labeling claim from moving forward through discovery to summary judgment or trial.

In reversing the trial court’s dismissal, the Court also upheld state court precedent suggesting that an MMPA claimant’s “actual damages” are not the purchase price paid for the item, but instead are a measure of diminished value.  To satisfy the actual damages element under the MMPA, a plaintiff must show that it has suffered an “ascertainable loss” as a result of the defendant’s unlawful conduct. The Court recognized the applicability of the “benefit of the bargain rule” to assessing actual damages under the MMPA.  The “benefit of the bargain” rule compares the value of the item received to its worth as represented at the time of the transaction. It is a measure of damages used in common law fraud cases which the Court found applicable to MMPA claims as well. The Court agreed with prior case law that the “benefit of the bargain” is an ascertainable loss under the MMPA. This means that a plaintiff adequately pleads the damages element of an MMPA claim by stating facts showing that the deceptive labelling made it possible for the product to be sold for more than its actual value at the time of sale.