Snapple may have to pay up for claiming iced tea is 'all natural'

Talk about a mixed bag. On the same day that Dr. Pepper Snapple Group (DPS) reported much better-than-expected earnings, gave a great raised outlook, and saw its share jump more than 5 percent, it had to contend with a consumer-fraud suit, revived yesterday by the U.S. Court of Appeals in Philadelphia, alleging that Snapple fraudulently promoted its product as "all natural" at a time when it contained an artificial sweetener.

Stacy Holk sued the company in state court in New Jersey, and the case was shifted to federal court in 2007 as a class-action suit. Last year, a judge threw it out, ruling that Holk's claims in state court were preempted by FDA regulation of food and beverage labeling -- meaning that because the product is regulated federally, the company cannot face litigation in state court.
Yesterday, the Third Circuit's three-judge panel revived the class action against Snapple, finding that federal regulation does not pre-empt consumer-fraud claims in state court.

Why the reversal? Several reasons. One is the recent precedent set in a case against Wyeth (WYE), in which the preemption argument was rejected. Many drug companies had been protected by the argument that a company marketing a product that's fedearlly regulated, like food and prescription drugs, cannot face lawsuits over those products in state court, because there's no regulatory role for state officials to play. But the Supreme Court's rejection of that argument in the Wyeth case changed that. (I suggested the ruling could make the FDA less risk-averse in approving new drugs.)

There was also an issue with the phrase "all-natural." The AmLaw Litigation Daily reports the court "also concluded that the FDA's informal policy on the use of the phrase 'all natural' did not preempt Holk's claims." Holk's lawyer says that the use of the phrase "all-natural" is significant since these products generally command premium prices. So now the Dr. Pepper Snapple Group faces allegations that it violated consumer-fraud laws by marketing Snapple as "all-natural" although the drink contained an artificial sweetener.

AmLaw also reports that the company stands to lose far more if Holk wins, as the class action "also seeks disgorgement of Snapple's profits from its allegedly false labeling."

Not surprisingly, Bloomberg reports that the company argues that "Snapple is all-natural" and is confident it will prevail -- although the drink's ingredients changed last year, when Snapple replaced the artificial sweetener with sugar.

Regardless, companies often use tricky labeling. Some olive oil brands trumpet that they contain "no cholesterol" -- like all olive oil. What's next -- "all-vegetarian" tomatoes? The question may come down to education about nutrition and how detailed government regulation should be. And even if we rely on the government for regulation, should we let go of our common sense?
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