In re Santa Fe Natural Tobacco Co. Mkting & Sales
Practices & Prods. Liab. Litig., 2017 WL 6550897, No. MD 16-2695 (D.N.M.
Dec. 21, 2017)

Lots of claims here against Natural American Cigarettes.
Ultimately, the court allows consumer protection claims to proceed against the
use of the terms “natural,” “organic,” and “additive-free” for cigarettes, on
the theories that they could mislead a reasonable consumer into believing that
the cigarettes were healthier or safer than other cigarettes, because decades
of marketing have equated those terms with healthy products; and that the menthol
cigarettes had no additives, because menthol is a substance that a reasonable
consumer would not know much about; the court rejected a deception theory based
on the processing of the cigarettes.  In
the process, it rejected some First Amendment defenses.

Natural American advertisements from 2013 through 2015
included images of water and plants, along with statements like: “When you work
with the best materials, you don’t need to add anything else. That’s why we use
only tobacco and water. We stick with premium quality, whole leaf natural
tobacco that’s 100% additive-free for a very simple reason — it’s all we
need.” Ads also stated in large bold writing, “100% ADDITIVE-FREE NATURAL
TOBACCO,” and included, in smaller writing, “No additives in our tobacco does
NOT mean a safer cigarette.” Natural American cigarettes are the most expensive
major brand of cigarette; despite this sales increased eighty-six percent from
2009 through 2014, while cigarette sales in the US declined overall by
seventeen percent. Its market share more than doubled, increasing over
twenty-one percent between 2014 and 2015 alone. 

Numerous studies have examined the popularity and consumer
perceptions of cigarettes branded as “natural,” and in 2015 the FDA sent a
letter to Santa Fe Tobacco asserting that some of its labeling practices
“explicitly and/or implicitly” represent that Natural American cigarettes pose
less of a risk than other tobacco products. Santa Fe Tobacco had previously
entered into a Consent Order with the FTC regarding its advertising practices, requiring
the display of the disclaimer: “No additives in our tobacco does NOT mean a
safer cigarette” “[i]n the same style and type size as that required for health
warnings for tobacco cigarettes.” A later “Assurance of Voluntary Compliance” added,
for organic products, “Organic tobacco does NOT mean a safer cigarette.”

Nobody contends that Natural American cigarettes are in any
way safer than other cigarettes. Santa Fe Tobacco also adds menthol to certain varieties; the cigarettes
are also “flue-cured,” meaning processed with heat to secure the sugars, which
synthetically lowers the cigarette smoke’s pH and makes it easier to inhale.
The tobacco is allegedly artificially blended and modified, much like other
cigarettes in the industry.

The court applied the reasonable consumer standard to the
consumer protection laws of fourteen states.  Defendants argued that it was implausible for
consumers to expect a safer cigarette, because a reasonable consumer would read
the disclaimer stating that “no additives does NOT mean a safer cigarette.” Likewise,
they argued that a reasonable consumer knows that menthol cigarettes contain
menthol, so would understand that the no-additive term didn’t cover menthol. Finally,
they argued that a reasonable consumer would know that Natural American
cigarettes are subjected to engineering processes.

The first theory (safer cigarettes) survived.  The court didn’t rely on the
plaintiffs’ submitted studies, though one concluded that “[n]early 1 million US
adult smokers prefer” Natural American cigarettes and they “are 22 times more
likely than other smokers to believe that their brand is less harmful than
other cigarette brands,” leading the study authors to conclude that Natural
American smokers may choose that brand because of the “descriptors organic,
natural, and additive free on product packaging and advertising.” “As surely as
a Ph.D. cannot be swapped for an Article III commission, an academic study
cannot take the place of the Court’s judgment on a rule 12(b)(6) motion.” Maybe
all of the consumers studied were unreasonable consumers, and “the subjective
beliefs of the consumers studied, even if those consumers are generally
reasonable, cannot blindly be swapped for the reasonable consumer’s beliefs.” (What
does that even mean?  If a substantial
number of reasonable consumers receive a message, that message is conveyed to a
substantial number of reasonable consumers—and if a substantial number of
consumers receive a message, that’s good evidence that it’s reasonable for them
to receive it.  Substituting one’s own
judgment about what consumers should
do, when confronted with evidence of what they actually do, is dangerous business.)

Still, the allegations made the safer cigarette theory
plausible. “The terms natural and organic have long been used across the
country to convey products’ health benefits” (citing, inter alia, a court
relying on its own “common sense,” so I guess an Article III commission can
indeed be swapped for a Ph.D. in some circumstances). Likewise, additives “have
also long been known to or believed to potentially increase health risks.” Under
these circumstances, “the reasonable consumer is not expected to defy decades
of marketing, which has conveyed that natural, organic, and additive-free
products are healthier.” Similarly, the FDA and the FTC both determined that
the defendants’ descriptors conveyed a message that their cigarettes were less
harmful than other cigarettes.

The defendants didn’t fight this conclusion, but argued that
the disclaimer cured any deception.  The
plaintiffs responded that the disclaimer was hidden from consumers and
unhelpful.  However, the disclosure wasn’t
buried in an ingredients list, and, “unlike an ambiguous ingredient term, the
disclosure is a clear statement that ‘no additives does NOT mean a safer
cigarette.’” A reasonable consumer would look on the packages’ sides and top for this
type of disclosure, since product packaging commonly has additional information
about the product on the back and sides. 
Even though a reasonable consumer isn’t expected to understand every
piece of information disclosed on a package’s sides, there was no ambiguity here.  The court partially agreed with plaintiffs
that the disclosure was hidden: though representative packages in the record
contained legible disclaimers, in appropriate colors, not buried in other text,
cigarettes are often sold in a way that prevents consumers from inspecting the
packaging in detail before purchase. However, reasonable consumers wouldn’t miss
the disclosures on the ads—in the ads, the disclaimer was in a prominent
location boxed over the Surgeon General’s Warning.

Despite that, the disclaimer only addressed the lack of additives;
it said nothing about “natural” or “organic,” which independently connoted
health/safety. The defendants argued that “the disclosure plainly disclaims any
notion that Natural American cigarettes are safer than alternatives,” but that
asked for “a hefty inference in light of the disclosure’s specificity…. Specific
language communicates a specific meaning and a reasonable consumer interprets
it with that specific meaning.”

“Additive-free” on menthol cigarettes also plausibly misled a
reasonable consumer. Defendants’ contrary argument assumed “that a reasonable
consumer is so secure in her knowledge that menthol is an additive that an
express representation to the contrary, on a heavily regulated product, does
not mislead her.”  But the evidence indicated
that “[m]enthol’s properties are not commonly known, even among cigarette
users.” Before this case, the judge didn’t know much about menthol, including
whether it was a natural substance or additive. 
It was plausible that consumers wouldn’t know whether it naturally
occurred in tobacco, especially given that many goods have “naturally occurring
qualities that are prominently labeled separately on the good,” such as
caffeine. Even if a reasonable consumer knew that menthol was an additive, it was
still plausible that an additive-free descriptor “undermine[d] her knowledge,”
because menthol is an uncommon substance, compared to products such as almond
milk (with no dairy milk) and veggie bacon (no pork). Menthol’s inherent
qualities weren’t well known; faced with defendants’ descriptors, a reasonable
consumer could conclude that menthol is a type of tobacco or tobacco grown in a
specific location. 

Nor did the ingredient list on the back, which listed
menthol separately, dispel the deception, because the package lacked an
unambiguous signal (like the FTC-mandated disclosure) that the ingredients list
contradicted another representation on the package.  “[T]he reasonable consumer is not
hyper-vigilant and does not expect the product’s packaging to deceive her.” Moreover,
a reasonable consumer could conclude that there was no contradiction in the
ingredients list: she might presume that the FDA requires separate labeling of
menthol.  “Moreover, faced with
conflicting representations, one clear and the other ambiguous, the reasonable
consumer follows the clear one.”

However, “natural” didn’t plausibly mislead a reasonable
consumer into believing that Natural American tobacco was less processed than
tobacco in other cigarettes.  “Natural”
has many meanings, dependent on context, and a reasonable consumer “comes to
the market with a degree of background knowledge,” here that “tobacco undergoes
engineering processes before it is sold in cigarettes. Such awareness is clear
from visually comparing a tobacco leaf to a cigarette.” “Natural” wasn’t enough
to undermine that knowledge or suggest that the tobacco went through less
processing than other cigarettes’ tobacco. Also, since it modified “tobacco,” the
natural descriptor “says little, if anything, about the engineering processes;
it says something about the type of tobacco.”

Finally, on trademarks: the use in the brand name Natural
American Spirit would “carry less persuasive impact on a reasonable consumer
than other product labeling.  The
underlying rationale is that reasonable consumers know that brand names are
often creative and that substantive information about the product is less
likely to be located there.”  I love how well courts understand the psychology of ordinary consumers without needing evidence other than citing other courts.  (I don’t.)

The defendants argued that the First Amendment precluded
liability.   First, as to plaintiffs’ contract-related
claims, consensual contractual relations didn’t count as state action (nor did
court enforcement thereof) and couldn’t trigger First Amendment scrutiny.  Although Shelley v. Kraemer “held that court
enforcement of an agreement between private parties can, in some circumstances,
be considered governmental action,” that’s been limited to the context of
racial discrimination.  The basic rule is that “state action exists if the dispute is tort-related or if
the rights arise from a state statute, but does not exist if the dispute arises
from a contractual relationship or involves common-law property rights, unless
a non-judicial state actor is involved or if racial discrimination is
implicated.”  [If you want a way to make Shelley seem less weird, Carol Rose has a great explanation of why enforcing some contracts implicates the state in unconstitutional positions, e.g., that racial discrimination is acceptable; this one wouldn’t have that problem.]

Thus, plaintiffs’ state statutory tort claims involved state
action, as did the unjust enrichment claims, which arise from the absence of a
consensual contractual relationship. But plaintiffs’ express warranty claim
arose from a consensual contractual relationship and the First Amendment could
provide no defense.

The court then said it applied Central Hudson scrutiny to the unjust enrichment and statutory
claims because they were based on defendants’ commercial speech, but the claims
survived because the descriptors were (plausibly) inherently or actually
misleading. 

The Central Hudson First
Amendment framework, with its distinction between outright bannable
false/misleading commercial speech and merely potentially misleading speech,
has little relationship to false advertising doctrine as it developed either in
the Lanham Act or consumer protection context. 
The court here framed Central Hudson as providing that states can regulate
speech that is merely potentially misleading
if the government (1) has a substantial state interest in regulating the
speech, (2) the regulation directly and materially advances that interest, and
(3) the regulation is no more extensive than necessary to serve the interest.  Perhaps because of the private action
context, the court didn’t point out that the other option states have with
potentially misleading speech is to mandate disclosure; the majority of circuit
judges to consider the issue have found that disclosure regulations don’t need
to survive this three-step scrutiny.

My commentary: The private cause of action, by its nature, targets an
existing practice that it argues is deceptive. 
The potentially/inherently deceptive distinction, however, asks whether
a complementary disclosure, instead of an outright ban on the deceptive speech,
can sufficiently cure the deceptiveness of the speech standing alone. In a
private cause of action, that is a question of remedy, not of the inherent
nature of the deceptiveness. 

Anyhow, inherently misleading speech is “incapable of being
presented in a way that is not deceptive.” If the speech could possibly be
truthful, the court reasoned, it could not be inherently misleading. Thus, the
“natural,” “organic,” and “additive-free” descriptors here weren’t inherently
misleading as to the safety theory, because none of them “inherently” meant
healthy or safe, and likewise the processing claims weren’t inherently
misleading.  (Insert distant anguished
screams of linguists about “inherent” meaning in language—even onomotopoeia
varies across languages.)  It would be
possible for another manufacturer to truthfully produce natural, organic, and
additive-free tobacco, by picking it, rolling it up, and selling it.  (Note the absence of any explanation about
how the advertising would make
different claims.)  But the menthol theory
involved inherent misleadingness, because “additive-free’s meaning exists in
direct conflict with the menthol’s presence in the cigarette.… It is not
possible for some other cigarette manufacturer to produce a menthol cigarette
that is additive free and truthfully
advertise it as such” (emphasis added).

Defendants argued that the menthol was added to the
cigarette filters, and not the tobacco, so the additive-free natural tobacco
label was truthful, but when the cigarette is smoked, inevitably the menthol
intermingles with the tobacco, making the claim inherently misleading. “The
Defendants’ final argument that any misunderstanding could be dispelled through
a new disclosure misapprehends the inherently misleading test. The Court cannot
assume in new disclosures otherwise no speech would be inherently misleading.
Any assumed disclosure could cure deception with a simple explanation that the
inherently misleading speech is a lie.” 
[Again, both a good point about the unworkability of the current
“inherently” misleading test under First Amendment doctrine and a good demonstration that the test isn’t set
up to judge tort claims.]

However, the rest of the Central
Hudson test can also be skipped, and the speech at issue banned outright,
if the speech is “in fact, misleading.” The standard here is not that of a
reasonable consumer, but a subjective standard. 
The plaintiffs alleged that the products’ labeling was uniform,
justifying the inference that they saw the claims, and they also alleged the
existence of a study showing that “smokers … frequently concluded that
‘natural’ cigarettes must be healthier or safer than cigarettes containing
chemicals.” Another study concluded that over sixty percent of Natural American
smokers believed their brand was less harmful than other cigarette brands. Thus,
it was plausible that consumers actually were deceived.  The disclosures didn’t correct this problem
for reasons discussed above.

[In the court’s formulation of the reasonable
consumer test as an objective one not based on actual consumers, state consumer
protection laws have apparently decided to allow some commercial speech that is
(1) completely unprotected by the First Amendment and (2) actually deceptive,
simply because (3) the court concludes that reasonable consumers shouldn’t be fooled by it.  I respectfully submit that this idea is
inconsistent with the history and logic of consumer protection law, which was
designed to remove many of the traps for the unwary of the old caveat emptor regime.  The better way to harmonize the idea of an
“objective” standard with the idea of what consumers actually believe (which
the court seems to think of as “subjective” on an individual basis) is the
venerable concept of a “substantial number of reasonable consumers.”  The fact that a substantial component of the
customer base is deceived is evidence that their conclusions are reasonable (as
opposed to idiosyncratic), and objective things can be said about the aggregate
of consumers.]

Likewise, even if the menthol representations weren’t
inherently misleading, they were plausibly in fact misleading. So too with the
unprocessed cigarette theory: it was plausible that these plaintiffs, though
not reasonable consumers, would believe that the term natural meant that
Natural American cigarettes were subjected to fewer engineering processes than
other cigarettes.

Even if the plaintiffs’ theories of deceptions didn’t
involve inherently or actually misleading speech, their theories satisfied Central Hudson’s remaining three
prongs.  Marching through: there’s a
substantial governmental interest in protecting consumers from misleading
speech.  Defendants argued that “natural”
had no ascertainable meaning, but “the government has an interest in regulating
a word with an underdeterminate meaning. Although perhaps less dangerous than
representations that are demonstrably false, words with many meanings or
unclear meanings have a capacity to mislead, because consumers can interpret
them in ways that do not reflect reality.” 

Does the speech restriction directly and materially advances
the asserted government interest?  This
step requires more than just “mere speculation or conjecture” that the speech
restriction will advance the interest: “[R]ather, a governmental body seeking to sustain a restriction on commercial
speech must demonstrate that the harms it recites are real and that its
restriction will in fact alleviate them to a material degree” (emphasis
added).  There doesn’t need to be a
“surfeit” of empirical background, however; studies and anecdotes can suffice,
as well as history, consensus, and “simple common sense.” The evidence of
deceptiveness alleged by plaintiffs was sufficient, meaning that enjoining use
of the challenged terms or awarding money damages, which would likely cause
defendants to remove or change their ads, would advance the government’s
interest in protecting consumers from deceptive speech.  Defendants argued that this wasn’t true
because of the already-existing disclosures, but see above; “in light of the
disclosures’ placement underneath the barcode and divorced from the Surgeon
General’s warning, money damages or an injunction would materially advance the
state’s interest even as to the ‘additive-free’ term, because a substantial number
of consumers would not think to look there for that disclosure, or would not
even see the disclaimer until after they were deceived into paying a premium
for Natural American cigarettes.”

Was the regulation no more extensive than necessary?  Money damages satisfied this requirement,
because they’d “encourage” defendants to improve disclosures; but moving or
adding disclosures might not be enough to protect consumers, so an injunction
might also meet this requirement. Certainly you can’t tell from the pleadings
alone.

The court also ruled on a slew of other state- and
claim-specific issues, which I will not go over.

Injunctive relief wasn’t moot, even though a Memorandum of
Agreement with the FDA required them to cease using those terms, except for the
natural term in their brand name. But the plaintiffs wanted to enjoin the
Natural American brand name, and the Memorandum of Agreement was subject to an
ongoing lawsuit in federal district court which could vacate the agreement.
Still, defendants represented that “Santa Fe is no longer utilizing the phrases
‘Additive Free’ and ‘Natural’ in the NAS cigarette product labels, labeling,
advertising, and promotional materials … and Santa Fe is in compliance with
the [Memorandum of] Agreement.”  Given
the ongoing challenge to the MOA, defendants’ promise to remove the terms was
only a promise, and they didn’t carry the “formidable burden of showing that it
is absolutely clear the allegedly wrongful behavior could not reasonably be
expected to recur.”  So injunctive relief
claims could proceed.