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FALSE ADVERTISING OR LABELING: THE REMEDIES AND RISKS
INTRODUCTION:
Any party that sells or distributes any product which falsely
characterizes or mislabels the content, character, origin or utility of
the product faces significant liability both in the civil and criminal
arenas.
Further, if one is in the chain of distribution and knew or should have
known that the false labeling or characterization of the product
occurred and still participated in the distribution, one is as “guilty”
as the originator of the falsehood.
Both international, federal and state law have significant penalties and
liabilities imposed upon the party guilty of such conduct and it is
noteworthy that a victim of such actions may have remedies available in
court and may, itself, be the guilty party to those further down the
distribution line.
THE BASIC LAW:
At both the federal and state level, there are regulations and laws, the
violation of which includes criminal sanctions, which the party risks
violating if it is selling falsely labeled goods. In addition, the
party may be liable to anyone who is “harmed” by purchasing falsely
labeled products. In selling falsely labeled goods, the party runs the
risk of violation of Federal origin labeling laws, Federal and State
false advertising laws, and liability to the purchaser of the products
under theories of fraud and violations of California Civil Code.
FEDERAL LAW – COUNTRY OF ORIGIN LABELING
The country of origin of goods sold in the United States is regulated
under 19 USC
§ 1304, which regulates the marking of imported articles and
containers. It requires goods imported into the United States to be
marked in writing on the goods which states the origin of the article.
Violation of this statute is criminally punishable upon conviction for
the first violation with fines up to $100,000, and imprisonment of up to
1 year.
19 USC
§ 1304(l). If a party becomes aware that the origin markings on a
product are false, or wrong, although the party is not part of the fraud
in the first place, their complicity would implicate them under this
statute.
FEDERAL LAW – FALSE ADVERTISING
Congress originally
enacted the Lanham Act, including § 43(a) (which is codified at
15 U.S.C. § 1125(a), in 1946 and amended it in 1988. This provision
prohibits any use of a false or misleading description or representation
in commercial advertising or promotion that "misrepresents the nature,
characteristics, qualities, or geographic origin of. . . goods,
services, or commercial activities." Courts have formulated the
following elements for a claim under § 43(a):
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The defendant
must have made a false or misleading statement of fact in
advertising.
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That statement
must have actually deceived or had the capacity to deceive a
substantial segment of the audience.
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The deception
must have been material, in that it was likely to influence the
purchasing decision.
-
The defendant must have caused its goods to enter interstate
commerce.
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The plaintiff
must have been or is likely to be injured as a result.
United Industries
Corp. v. Clorox Co.,
140 F.3d 1175, 1180 (8th Cir. 1998).
There also may be
some liability under Federal Trade Commission regulation, but the FTC
has far less effective enforcement tools.
CALIFORNIA LAW – FALSE ADVERTISING
Independent liability may also exist under California Law, Business and
Professions Code § 17500, which prohibits false or misleading statements
generally. It is a broadly written, liberally interpreted statute that
makes individuals and companies liable for an unlimited manner of false
or misleading statements. Violation is criminal. “Any
violation of the provisions of this section is a misdemeanor punishable
by imprisonment in the county jail not exceeding six months, or by a
fine not exceeding two thousand five hundred dollars ($2,500), or by
both that imprisonment and fine.”
In addition to possible criminal liability, the party may be liable
under the California Civil Code, and common law, for fraud.
LIABILITY TO THIRD PARTIES - FRAUD
One who willfully deceives another with intent to induce him or her to
alter his or her position to his or her injury or risk, is liable for
any damages that the injured party thereby suffers. Civ. Code § 1709 (Fraudulent
deceit). See our article on
Fraud.
Additionally, for the breach of an obligation not arising from a
contract, the measure of damages, unless otherwise expressly provided by
the Civil Code, is the amount that will compensate for all the detriment
proximately caused thereby, whether it could have been anticipated or
not. Civ. Code § 3333 (Damages)
A
cause of action for fraud does not have to prove actual knowledge
of the facts. The party could be liable under a theory of negligent
misrepresentation. "Negligent misrepresentation" is a basis of
tort
recovery separate and distinct from the tort of negligence; it is a form
of the tort of deceit [ Bily v. Arthur Young & Co. (1992) 3 Cal. 4th
370, 407, 11 Cal. Rptr. 2d 51, 834 P.2d 745 ; see Civ. Code §
1710(2)]. A cause of action for deceit may be based on a
misrepresentation that was not known to be false, but that was made by
one who had no reasonable ground for believing it to be true [Civ. Code
§§ 1709,
1710(2); Gagne v. Bertran (1954) 43 Cal. 2d 481, 487-488, 275 P.2d
15 ; Wilke v. Coinway, Inc. (1967) 257 Cal. App. 2d 126, 136, 64 Cal.
Rptr. 845 ; see Bily v. Arthur Young & Co. (1992) 3 Cal. 4th 370,
407-408, 11 Cal. Rptr. 2d 51, 834 P.2d 745] .
DUTY TO ADVISE OF DISCOVERED FACTS:
A
party who was not part of the original deceit but who later discovers it
faces liability as well. One cannot simply pass on the fraudulently
labeled or manufactured product or service, making a profit, and blame
the originator of the fraud. One has a duty to inform customers of any
facts that come into one’s possession that would relate to the false
advertising or labeling. Fraud and deceit may consist of the
suppression of a fact by one who is bound to disclose it or who gives
information of other facts that are likely to mislead for want of
communication of that fact. The duty to disclose facts arises if a
person undertakes to speak, so that the speaker is bound not only to
tell the truth but also not to suppress or conceal facts within
speaker's knowledge that materially qualify those stated, because one
who speaks at all must make a full and fair disclosure [ Brownlee v.
Vang (1965) 235 Cal. App. 2d 465, 477, 45 Cal. Rptr. 458] .
There is also the danger of “constructive
fraud.”
Constructive fraud is (1) any breach of duty by which a person, without
an actually fraudulent intent, gains an advantage by misleading another
to his or her prejudice, or to the prejudice of anyone claiming under
him or her; or (2) any act or omission that the law specially declares
to be fraudulent, without respect to actual fraud. Civ. Code § 1573.
In its generic sense, constructive fraud comprises all acts, omissions,
and concealments involving a breach of legal or equitable duty, trust,
or confidence, and resulting in damage to another person. Constructive
fraud exists in cases in which conduct, although not actually
fraudulent, ought to be treated as fraud. That is, it exists in
situations in which the conduct is a constructive or quasi fraud, and
has all the actual consequences and legal effects of actual fraud.
Constructive fraud occurs if there is a breach of duty arising from a
confidential relationship, that is, a relationship in which trust and
confidence is reposed by one person in the integrity and fidelity of
another [ Barrett v. Bank of Am. (1986) 183 Cal. App. 3d 1362,
1368-1369, 229 Cal. Rptr. 16 (criticized in Price v. Wells Fargo Bank
(1989) 213 Cal. App. 3d 465, 476, 261 Cal. Rptr. 735 to extent it
suggests that relationship between bank and loan customer is
quasi-fiduciary); Estate of Arbuckle (1950) 98 Cal. App. 2d 562, 568,
220 P.2d 950 ; see also Feeney v. Howard (1889) 79 Cal. 525, 529,
21 P. 984 ; Salahutdin v. Valley of Cal., Inc. (1994) 24 Cal. App. 4th
555, 562, 29 Cal. Rptr. 2d 463 ; Guthrie v. Times-Mirror Co. (1975) 51
Cal. App. 3d 879, 889, 124 Cal. Rptr. 577] , with justification [ Twomey
v. Mitchum, Jones & Templeton, Inc. (1968) 262 Cal. App. 2d 690, 711, 69
Cal. Rptr. 222] .
A seller of products or services may be under a duty to speak because
of the trust the customers put in the seller. A failure to speak
could be considered constructive fraud [ Blair v. Mahon (1951) 104 Cal.
App. 2d 44, 49, 230 P.2d 832].
Amount of Compensatory
Damages
One who willfully deceives another with intent to induce him or her to
alter his or her position to his or her injury or risk, is liable for
any damages that the injured party thereby suffers [Civ. Code § 1709].
Remedies for material misrepresentation or fraud in the sale of goods
include all remedies available under Com. Code §§ 2101-2724 for
nonfraudulent breach [Com. Code § 2721]. Damages available for breach of
warranty and other available remedies include the difference between the
value of the goods as warranted and their actual value [see Com.
Code §§ 2714(2), (3), 2715].Damages may include incidental and
consequential damages, including lost profits if the lost profits could
not reasonably be prevented through mitigation efforts or otherwise [
Green Wood Industrial Co. v. Forceman Internat. Development Group, Inc.
(2007) 156 Cal. App. 4th 766, 774, 67 Cal. Rptr. 3d 624 ; see
Com. Code § 2715(2)(a)].
CONCLUSION
While most business people can easily understand that they would be
liable for engaging in activities involving mislabeling or
misrepresenting content or origin of products, it is harder for some to
realize that anyone in the chain of distribution of the false product
may face equal liability to third parties or customers. The moment one
discovers that a product being distributed may not be what it is
represented to be, one has an affirmative duty to immediately take
corrective action to protect those down the distribution line and the
public in general. Both civil and criminal liability arises if one does
not act effectively and immediately and pointing the finger at the one
further up the chain is not a valid defense.
Keep in mind, however that if one finds that someone further up the
distribution line has falsely represented an article, one may be liable
to one’s own customers, yes, but one also has a cause of action against
the perpetrator and those further up the distribution channel. One is
both a victim and the perpetrator and relief should be immediately
considered.
It is also vital to understand that if the product is unsafe one faces
product liability claims and criminal responsibility to the
public that could not only be massive, but may not be covered by
insurance. Intentionally turning a blind eye to a dangerous condition
may not only be dangerous to the public, but may eliminate insurance
coverage and result in criminal prosecution. This is particularly
important for American businesses to keep in mind when dealing with
imports from locales that may not be vigilant in maintaining quality
control or correct investigation of sourcing information.
Let the buyer beware is an old saying but in the sense of distributing
such products, it is let the seller as well as the buyer beware… |
