False Advertising or Labeling - The Remedies and Risks

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Congress originally enacted the Lanham Act, including § 43(a) (which is codified at 15 U.S.C. § 1125(a), in 1946 and amended it in 1988.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):

• The defendant must have made a false or misleading statement of fact in advertising.

• That statement must have actually deceived or had the capacity to deceive a substantial segment of the audience.

• 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.

• 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 (8^th 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…