Rejected compliance offer to AG leads to fee shift after defense victory

State ex rel. Rosenblum v. Living Essentials, LLC, 313 Or.App. 176, A163980 --- P.3d ----, 2021 WL 2946172 (Jul. 14, 2021)

The state alleged that LE falsely advertised its 5-hour Energy drinks, misrepresenting (1) the effects of the noncaffeine ingredients in their products and (2) the results of a survey of physicians in several “Ask Your Doctor” advertisements, falsely implying that physicians recommended 5-HE to their patients. Not only did the state lose, the court of appeals found that the trial court erred in denying attorneys’ fees.

First, the trial court didn’t err in requiring materiality to prove an unlawful trade practice under Oregon statutes. The challenged claims were, for example, that 5HE “contains the powerful blend of B-vitamins for energy, and amino acids for focus. The two-ounce shot takes seconds to drink and in minutes you’re feeling bright, alert and ready for action. And the feeling lasts for hours—without the crash or jitters.” As for the doctors claim, the ads said, e.g. “We asked over 3,000 doctors to review Five-Hour Energy and what they said is amazing. Over 73% who reviewed Five-Hour Energy said that they would recommend a low-calorie energy supplement to their healthy patients who use energy supplements. 73%. … Is Five-Hour Energy right for you? Ask your doctor. We already asked 3,000.”

The court held that the state failed to prove materiality. As to the first, it found defendant’s expert more persuasive. That expert “offered a consumer survey demonstrating that the NCI blend in defendants’ caffeinated products is not a significant factor in consumer purchasing decisions; that most consumers were repeat customers who were satisfied with their experience with the product; that consumer buying was influenced by a multitude of factors, including product effectiveness, taste, convenience, and price.” And the court also found that the Ask Your Doctor campaign wasn’t misleading or material. It was persuaded that by expert and survey evidence “that advertising is not highly influential to consumer purchasing decisions in general; that, in particular, the cessation of the AYD advertising campaign did not cause a drop in sales; that consumers expect bias in a survey touted in advertising; and that the doctors’ survey was not represented to be conducted in a scientific or unbiased manner.”

The state argued that the legislature “did not intend to require specific proof of materiality in each individual case, which can be difficult and expensive.” This is not really the same thing as not requiring materiality at all, and the court of appeals was unpersuaded. Reading the statutory requirement that a practice “cause[ ] likelihood of confusion or of misunderstanding,” for example, it had to cause something, and that something must necessarily be material; if it weren’t material, it would be unlikely to create confusion or misunderstanding. Not only was that consistent with the history of unfair competition laws, a statute without a materiality requirement would risk running afoul of the state constitution’s protection for free speech.

The trial court also concluded that falsity about the non-caffeine ingredients would be material, so that didn’t entirely resolve the case. The trial court found was persuaded by the state’s view that those ingredients do not produce feelings of energy and alertness “during the five hours following consumption.” However, the specific presentation of each claim saved 5HE [as we all know that consumers read ads like they’re looking for perjury.] For example, “ ‘B-vitamins for energy,’ is not an inherently false representation, as the body does require B-vitamins in order to produce energy.”

The court thus found that Decaf 5HE’s claims had false implications, but only one case of the product came to Oregon. It found that civil penalties weren’t allowed because the falsity wasn’t willful and thus entered a verdict in favor of 5HE. The state argued that the court should have found a violation even if civil penalties weren’t appropriate. But the state didn’t show explicit falsity, only false implications, so its theory of the case (that the other ingredients had no effect at all, as opposed to no effect for 5 hours after consumption) failed.

The statute also provides: “If the defendant prevails in [an action brought by the prosecuting attorney under the relevant statute] and the court finds that the defendant had in good faith submitted to the prosecuting attorney a satisfactory assurance of voluntary compliance [AVC] prior to the institution of the suit ***, the court shall award reasonable attorney fees at trial and on appeal to the defendant.” Defendants qualified. They submitted an AVC commiting not to make false/misleading material representations and offering $250,000 be used by the State of Oregon as allowed by law, including, but not limited to, restitution and consumer education.

The state rejected the AVC on the grounds that “it does not provide restitution for Oregon consumers and because it does not provide sufficient assurances that [defendants] will not re-offend.” It was merely a restatement of the legal prohibition on false/misleading claims, and relative to defendants’ size and income, the proposed payment was “insufficient to provide meaningful deterrence to future misconduct.” Although defendants won at trial, the trial court agreed that the AVC was not satisfactory “given the state’s claims and the relief that they were seeking at the time.” Noting that the UTPA is subject to various interpretations and “not a lot of developed case law,” the trial court found that, despite not prevailing, not all of the state’s claims were unreasonable, there were contested legal theories involved, and the case was one that “probably needs to be litigated.”

But even if it was reasonable for the state to litigate, defendants were still entitled to fees. The AVC was concededly submitted in good faith; was it “satisfactory”? This assessment must be made by a court based “on the circumstances existing at the time the AVC was submitted, not through the lens of hindsight.” The legislative history indicated that the mandatory attorney fee provision was intended to protect sellers by deterring the state from bringing “unjustified” actions. A later amendment specified that the prosecuting attorney could reject as unsatisfactory any AVC that didn’t promise specific restitution for people who lost ascertainable money/property or that didn’t include certain recordkeeping or other requirements necessary to ensure cessation. But that’s not exclusive; there can be other reasons for an AVC to be unsatisfactory.

This one, however, was satisfactory. It did offer restitution, even though the sum it offered could also be used other ways at the state’s discretion. Given that the case involved “a small-scale consumable product, in which it may be difficult, if not impossible, to identify specific individuals who may have been injured by the alleged violation, and in the absence of any argument by the state that the restitution amount promised was inadequate,” this offer was fine. Nor was the offer contrary to Oregon law—even assuming that 5HE’s promise not to make material misrepresentations or omissions about 5-HE that consumers would reasonably rely on to their detriment “would hold defendants to a less demanding standard than what is required under the UTPA,” the AVC contained other provisions promising to obey the UTPA in its entirety.  Even if it was “reasonable” for the state to have rejected the AVC and proceeded to trial, the statute didn’t have a reasonableness test.