Welcome
Securities Law News

INSIGHT: Defenses for CBD Companies Sued for False Labeling, Advertising

March 9, 2020, 8:00 AM

As products containing cannabidiol (CBD) continue to gain popularity, CBD manufacturers and retailers have seen a significant uptick in consumer class action lawsuits alleging their products’ labels and advertisements contain false and/or misleading information.

A number of these lawsuits allege that the CBD product labels or advertisements misstate the amount of CBD in the product. Other lawsuits allege the product was advertised as being free of tetrahydrocannabinol (THC), when, in reality, the product allegedly did contain THC.

Other allegations mirror those that have plagued the food industry for years, including allegations the products were improperly advertised as “all natural,” “pure,” and/or “organic.”

Fortunately for companies faced with these lawsuits, there are a number of defenses available to them.

The Truth

Any company facing a lawsuit alleging false or misleading product labeling or advertisement should try to establish that the statements are true. Even at the pleading stage, a plaintiff must be able to establish that a “reasonable consumer” would view the statement as false or misleading.

If the court can conclude that a reasonable consumer would not believe the statements are false or deceptive, then the defendant may have success with a motion to dismiss at the outset.

Allegations Not Properly Pled

A complaint must allege sufficient facts in support of all claims in order to survive a motion to dismiss. In the CBD product context, where plaintiffs contend that the products do not contain the stated amount of CBD or that those products improperly contained THC, the plaintiffs must provide specific facts to support those allegations.

Similarly, where plaintiffs assert claims for breach of warranty based on representations found on CBD product labels, they must allege that the plaintiffs read the labels before purchasing the products and establish that the actual label-content creates the warranty claimed.

Putative Class Action Considerations

Given that many of the CBD products at issue are sold for a relatively small amount of money, most of these lawsuits are brought as putative class actions. A plaintiff can proceed as a representative on behalf of members of a class only if the plaintiff satisfies the requirements of Federal Rule of Civil Procedure 23.

Additionally, in cases alleging false or deceptive advertising, plaintiffs are often required to establish through common evidence that:

  1. each class member was exposed to the same advertisement;
  2. each class member relied upon the representations in the advertisement; and
  3. the product did not work as advertised.

Plaintiffs often have difficulty demonstrating that common evidence exists to prove that each proposed class member was exposed to the same advertisement, because product advertisements regularly appear in a variety of locations and the content is often not identical. Further, even if a plaintiff can demonstrate that each proposed class member saw the same advertisement, they may not have relied on the statements in the advertisement.

In refusing to certify labeling/advertising classes, courts have recognized that consumers purchase products for a number of reasons—not just because of statements made in connection with product advertisements.

In addition to the above defenses, defendants should also evaluate plaintiff’s damages theory. Plaintiffs in false advertising/labeling lawsuits often argue that the damages should be equal to the amount paid by the consumer.

Many courts have rejected that approach, holding instead that unless the product is “worthless,” the calculation should be the difference between the value of the product and the actual price paid. This approach requires a fact-intensive consumer-by-consumer analysis to determine why each consumer purchased the product (i.e., the consumer’s specific preference) and how much each consumer paid.

Because this is an individualized analysis, class certification may not be warranted.

Preemption and the FDA

The CBD industry is subject to many state and federal laws and regulations, including the federal Food Drug & Cosmetic Act (FDCA). However, many of those laws and regulations are either not fully developed or were not designed with CBD products in mind.

The Food and Drug Administration, for instance, is currently working on proposed regulations for CBD products, including the “manufacturing, product quality, marketing, labeling, and sale of products containing cannabis or cannabis-derived products.” It is unclear at this point what regulations the FDA may implement concerning CBD product labeling and advertising.

Nevertheless, because the FDA is currently working on possible CBD regulations, defendants can argue that the court should stay the lawsuit until the FDA releases its rules and regulations. That argument has been successful in at least one CBD labeling/advertising case so far. The stay halts the litigation while the FDA completes its rulemaking process, which may provide defendants with further defenses, including possible preemption arguments.

In fact, even without FDA regulations, many CBD companies have already attempted to argue that the FDCA, as amended by the Nutrition Labeling and Education Act, preempts plaintiff’s labeling claims.

Labeling and advertising lawsuits against CBD companies are often vulnerable to motions to dismiss for pleading and proof deficiencies. That said, CBD companies should be proactive in evaluating their current labeling and advertising material to ensure the accuracy of the content in order to minimize their risk of being named as a defendant in the first place.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Zane Gilmer is a partner with Stinson LLP in Denver. He represents clients from a variety of industries in complex litigation, including class action defense, and compliance.

To read more articles log in. To learn more about a subscription click here.