The legal and financial implications of labeling a product “all natural” or “healthful” can be significant. Many companies highlighting this characteristic in their promotional campaigns have found themselves subject to class actions, Lanham Act claims, and government enforcement activities.
Affiliates Laura Stamm and
Joel Steckel have consulted to companies and legal counsel on a number of false advertising matters, including those involving “all natural” claims. In this article, they discuss some economic approaches to evaluating and calculating damages in these lawsuits.
Joel Steckel: This is the $64,000 question. To the best of my understanding, there is no real consensus, which is a large part of the problem. Neither the FDA nor the FTC has defined “all natural.” And while a product may claim to be natural, it may contain certain component ingredients – say, high-fructose corn syrup – that some consumers may consider less than healthy. Because companies and consumers may interpret “all natural” claims differently, and because no objective definition exists, it is very difficult to assess whether a product justifies such a claim.
Laura Stamm: A common allegation in Lanham Act claims is that by falsely advertising its product as “all natural,” the defendant made sales that otherwise would have gone to the plaintiff. The plaintiff may seek recovery for its actual harm, typically measured as the profits the plaintiff lost because of allegedly unfair competition on the part of the defendant. If those losses cannot be established, the advertising costs associated with correcting any false statements made by the defendants may be used as an alternate measure of damages. And if the false advertising was willful, the plaintiff may seek to disgorge the portion of the defendant’s profits that resulted from its actions. (See related case, "Fishman Transducers, Inc. v. Stephen Paul d/b/a Esteban, et al.")
The key economic questions I am routinely asked to address are: By how much did the defendant increase its sales as a result of the alleged false advertising? How many of those sales would the plaintiff have made? And how much profit would the plaintiff have earned on those additional sales? The answers can be found using a number of tools. Benchmarking, for example, allows us to compare products that are similar in all other ways except for the attributes at issue. And using econometric analysis, we can isolate the portion of the price of the “all natural” product at issue that can be attributed to its claims of being healthful.
Joel Steckel: I view harm or damages as rooted in consumer behavior. As Laura says, a common allegation is that the defendant made sales that otherwise would have gone to the plaintiff. This reflects changes in consumer behavior that are allegedly caused by the claim in question. Given this, I often use consumer surveys to isolate how sales were affected by the alleged false claim. For example, if only 10% of consumers can be shown to have purchased a beverage directly because of its “all natural” labeling, then, at most, 10% of the sales and profits associated with that beverage should be attributed to the allegedly false advertising claim.
Joel Steckel: The conceptual starting point does not really differ at all. We still have to examine the claim’s impact on consumers – only now we must define harm somewhat differently. Instead of defining harm in terms of lost sales, we would likely define it as the difference between what the consumer paid for a product or service and what she received. We can use a variety of tools to assess this. We can employ hedonic price models, discrete choice analysis, or conjoint analysis to conduct market research that will help determine the economic value of a claim to consumers.
Laura Stamm: There is always an element of uncertainty associated with class action settlements and the amount that will ultimately be paid out, because the process usually requires that the consumer claim the award. And the award itself can depend on some kind of future action, such as the consumer redeeming a coupon for a discount on a future purchase. But a damages expert can model various assumptions associated with “take rates” and can help the defendant understand its potential exposure. ■
Laura Stamm has testified on damages in Lanham Act matters, general commercial disputes, and intellectual property matters. She has helped to develop economic and financial models to analyze damages and critique opposing experts’ analyses.
Joel Steckel, is a vice dean and a marketing professor at New York University’s Stern School of Business. He has consulted, testified as an expert witness, and conducted modeling and analysis in numerous cases involving antitrust, damages assessment, false advertising, and marketing strategy.
From Analysis Group Forum: Winter 2013