Stay ADvised: What's New This Week, May 23
In This Issue:
- Purchasers Suing Coinbase and GMO Trust Claim That Nothing's Stable About GYEN Stablecoin
- Like a Persistent Cough, Plaintiffs Allege Ricola Cough Drop False Representations Won't Quit
- Kraft Bagel Bites False Ad Suit Bites the Dust (and Not the Mozzarella)
- Brand Peddling Patriotic Clothing Caught Allegedly Faking Made in USA Labels, Says FTC
Purchasers Suing Coinbase and GMO Trust Claim That Nothing's Stable About GYEN Stablecoin
What's in a name? According to purchasers of one "stablecoin" cryptocurrency, nothing but false advertising.
Those purchasers have now filed a class action lawsuit in California federal court against cryptocurrency exchange Coinbase and GMO Trust, the issuer of the GYEN cryptocurrency at issue, alleging that the two falsely marketed the stability of the currency and caused millions of dollars in investor losses after the truth emerged.
A payment stablecoin is a type of cryptocurrency that is designed to maintain a stable value relative to a national currency or other reference asset and be redeemable for fiat currency. As alleged in the complaint, GMO Trust represented to purchasers that the cryptocurrency GYEN was "pegged" to the Japanese yen at a one-to-one rate, and that since it was being backed by a government-issued currency that is traditionally considered quite stable, it too, would be stable.
GMO Trust further marketed GYEN as an investment that can "virtually eliminate volatility" and repeatedly promoted the stability of the currency. According to the complaint, Coinbase, too, touted GYEN's parity with the yen to promote the cryptocurrency.
However, the purchasers allege that when GMO Trust made these representations, it and Coinbase knew that GYEN's "peg to the yen was prone to break and that such an event would be likely, if not certain, when GYEN opened for trading on Coinbase" in November. According to the complaint, GYEN had collapsed months earlier on other exchanges, but the defendants hid its volatility risks from purchasers.
This volatility manifested almost immediately, allege plaintiffs. After rising sharply when Coinbase first allowed trading of the asset on its exchange, at one point reaching seven times the value of the yen, GYEN plummeted dramatically, "falling 80 percent in one day" back to the value of the yen. Coinbase allegedly "compounded the harm" by restricting many customers' ability to sell the asset and eventually suspending all trading of GYEN without explanation. The proposed class includes hundreds of GYEN purchasers who collectively lost "untold millions in a matter of hours," according to the complaint.
The complaint alleges that though defendants passed off blame to one another for losses that plaintiffs attribute to misrepresentations and omissions, "both contributed to the debacle as both deceived investors regarding the nature of the asset."
Plaintiffs assert causes of action for negligence, negligence per se, negligent misrepresentation, conversion, and violations of New York and California business laws and the Securities Act. The plaintiffs are seeking actual, compensatory and punitive damages, as well as pre- and post-judgment interest, attorney fees, costs and an order blocking GMO Trust and Coinbase from making the alleged misrepresentations.
Despite their name, not all cryptocurrencies labeled as stablecoins operate as advertised. It remains to be seen how much courts will see this as an issue of marketing misrepresentations or as the response of a still relatively new and as-yet unregulated financial instrument to currently volatile market conditions. For more on stablecoins, see DWT's Banking and Financial Services publication on stablecoins, here.
Like a Persistent Cough, Plaintiffs Allege Ricola Cough Drop False Representations Won't Quit
A recent lawsuit claims that popular herbal cough suppressant Ricola misleadingly chalks up the lozenge's effectiveness to its herbal ingredients when the real workhorse is the menthol.
According to the complaint, Ricola deceptively markets its cough drops to make it appear as if their therapeutic effect is caused by its "swiss alpine herbs," when in reality the only active ingredient in Ricola is menthol. Ricola, however, omits reference to the presence of menthol on its front label, appearing only on the back label as the "active ingredient."
Plaintiff alleges Ricola's advertising manages to create the false impression that the herbal ingredients are the effective ingredient by prominently and boldly announcing on its front packaging that the product is made with "SWISS ALPINE HERBS" alongside stylized photos of said herbs and their names. Other representations in furtherance of this alleged false impression include the following statements: "Original Herb Cough Drops," "Great Tasting," and "Effective Relief."
The company does this to capitalize on what plaintiff says is a growing multibillion-dollar market for products containing herbal ingredients. Plaintiff alleges that "many consumers believe that certain herbal ingredients are more potent and less harmful than man-made ingredients." She alleges that the pharmaceutical industry repeatedly looks for ways to incorporate herbal ingredients in over-the-counter products to appeal to this market.
"Consumers seeing the Product's front label will expect its cough suppressant and oral aesthetic functionality will be provided by its herbal ingredients. It is false, deceptive and misleading to claim or imply that the Product's inactive ingredients provide a therapeutic benefit," reads the complaint.
Further, the complaint alleges that Ricola's competitors do not make the same misrepresentation by clearly including menthol on the front label, giving Ricola an unfair edge that allows it to charge a premium for its product. Plaintiff notes that only Ricola conveys the message that its herbs (not its menthol) provide the "cough suppressant and oral anesthetic properties."
Missing from the complaint are any allegations that the cough suppressants are ineffective or that the product does not contain the advertised herbs—only that the effectiveness doesn't derive from the herbs. Thus, a key question beyond whether the messaging actually conveys the false impression plaintiffs' allege is likely to be whether plaintiffs have suffered any injury as a result of these alleged misrepresentations.
Kraft Bagel Bites False Ad Suit Bites the Dust (and Not the Mozzarella)
One Wisconsin court has taken a bite so large out of this Bagel Bite suit that there's now no bagel, or lawsuit, left. The court dismissed a lawsuit alleging that Kraft falsely advertised its Bagel Bites Pizza Snacks as made with real mozzarella cheese and tomato sauce, finding the claims not misleading and preempted by the Food, Drug and Cosmetic Act (FDCA).
Plaintiff Christopher Lemke averred that Kraft misled consumers into believing Bagel Bites are made with real cheese and tomato sauce when in fact they are made with a cheese blend (part-skim mozzarella, modified food starch, and skim milk) and a tomato blend (water, tomato paste, cane syrup, corn starch, salt, methylcellulose, citric acid, potassium chloride, ammonium chloride, spice, yeast extract, natural flavor, and calcium lactate).
The complaint alleged that plaintiff repeatedly purchased the Bagel Bites because of the package claim that they "contained mozzarella cheese and tomato sauce" and that he wouldn't have purchased the product otherwise.
But the court held that the Bagel Bites label is "on its face neither false, deceptive or misleading, nor leads to consumer confusion more generally." To prove his consumer protection claims, plaintiff had to show that the labels were likely to deceive the reasonable consumer, "which requires a probability that a significant portion of the general consuming public … could be misled." That was simply not the case here, the court held.
First, as to the mozzarella cheese claim, plaintiff argued that based on the front label's promises of "REAL cheese" and "Mozzarella Cheese," reasonable consumers would not expect a cheese blend with food starch. Siding with Kraft, the court reasoned that the FDCA definition of mozzarella cheese allows for the inclusion of ingredients like "clotting enzymes," thereby preempting plaintiff's claim.
Moreover, the product label didn't claim that the Bites were made of "100% mozzarella cheese" or only mozzarella cheese, which might have foreclosed a dismissal. Likewise, "part-skim" mozzarella "fits within the [FDCA] standard promulgated for claims to 'mozzarella cheese.'"
As for the tomato sauce claim, the court again sided with Kraft, finding that the FDA Compliance Policy Guide had not established a standard of identity for tomato sauce, its only guidance on this being that tomato sauce must be made of the ingredients displayed on the ingredients list. For this reason, plaintiff's tomato sauce claims were also preempted.
Apparently Wisconsin judges know their cheese, even if the same can't be said for plaintiffs. Given the vagaries of the packaging, this was a difficult case from the start for plaintiffs given that the package does not purport to claim that it contains 100 percent mozzarella (or cheddar, or gruyere, or any other type of) cheese. This made preemption an easier argument for defendant than is sometimes the case.
Brand Peddling Patriotic Clothing Caught Allegedly Faking Made in USA Labels, Says FTC
Picture a desert landscape and a pride of fierce lions, their manes shining in the bright sun, roaring at a herd of passing sheep, ready to eviscerate them. But the lions don't lunge—their paws are too busy ripping Made in China labels from clothing items emblazoned with the American flag and carefully sewing on Made in USA labels instead.
Okay, this scene was not actually part of a commercial script, but it does reflect recent allegations against retail brand Lions Not Sheep (which specializes in clothing often adorned with a proud American flag).
What really happened: in only its second action under the newly codified Made in the USA Rule, the Federal Trade Commission (FTC) alleged that Lions Not Sheep and its owner Sean Whalen falsely did something like what the lions above did, albeit with no actual lions, sheep, or desert: they slapped "phony" Made in USA label to clothing imported from China and other countries.
According to the FTC's complaint, Lions Not Sheep advertises its clothing as "Made in USA" or "Made in America," "BEST DAMN AMERICAN MADE GEAR ON THE PLANET," and "Are your products USA Made?" The FTC argues these statements are false advertising and that the brand's apparel is wholly imported with "limited finishing work, including printing or embroidery" actually performed in the USA.
The FTC alleges that it knows this based on a YouTube video that Whalen published of himself explaining how he buys products in China and makes them appear as if they are made in America. The FTC further says that Whalen and Lions Not Sheep removed the origin tags from apparel and substituted Made in USA tags. Lions Not Sheep's false and misleading representations violate the FTC Act, the agency says.
The proposed consent order would require Lions Not Sheep to pay a judgement in the amount of $211,335. Additionally, the company and Whalen must stop making Made in USA claims unless they can show that the products are made in the United States according to the Made in USA Rule (that the product's final assembly or processing and all significant processing takes place in America, and that almost all the products' components are from the States as well).
The order would also require Lions not Sheep to "come clean about foreign production," meaning that it must disclose to what extent its products are foreign versus American-made.
By pursuing an action against a company that specifically markets itself as patriotic and Made in the USA, the FTC has targeted for one of its first Made in USA rule enforcement actions an egregious violator. It may be only the second FTC action, but it will most surely not be the last.