alcohol beverage maker has standing b/c D’s non-alcoholic label plausibly attracts alcohol drinkers too

Tortilla Factory, LLC v. Makana Beverages, Inc., No. CV
18-2981-MWF (PLAx), 2018 WL 8130609 (C.D. Cal. Nov. 14, 2018)
Tortilla Factory makes kombucha beverages under the brand
name “Kombucha Dog.” Makana also makes kombucha drinks. Kombucha is “a
fermented beverage produced from a mixture of steeped tea and sugar, combined
with a culture of yeast strains and bacteria.” Many consumers allegedly choose kombucha
because it is natural, has low sugar content, and contains healthy probiotics.  Because of fermentation, kombucha may contain
alcohol in excess of 0.5% by volume. Because Tortilla Factory “does not dilute
the beverage like other manufacturers,” Kombucha Dog beverages allegedly contain
alcohol in excess of 0.5% by volume. Such beverages are deemed alcoholic and
must adhere to relevant federal laws and Alcohol and Tobacco Tax and Trade
Bureau (TTB) regulations, including displaying a health warning statement under
the Alcoholic Beverage Labeling Act of 1988.
Makana doesn’t label or market its beverages as alcoholic,
but Tortilla Factory alleged that they in fact contained “between 0.6% and 1.9%
alcohol,” as confirmed “by utilizing headspace gas chromatography combined with
mass spectrometry from a third party lab to test alcohol levels.”  This allegedly “confused and misled consumers
(and jeopardized their health and safety).” 
In addition, Tortilla Factory alleged that Makana “understate[s] the
sugar content of [its] drinks, to mislead consumers into believing the products
are healthier than other kombucha drinks on the market that properly advertise
their sugar content.” “Given the manufacturing process for a true kombucha
product, as [Makana’s] products purport to be, it is highly unlikely that the
sugar level is accurate.”
It sued for state and federal false advertising.  Makana argued that Tortilla Factory lacked
standing because it wasn’t targeting the nonalcoholic market, and Makana’s
flavors were completely different from Tortilla Factory’s “eccentric” flavors,
making it not plausible that any Makana drinkers would switch to Kombucha Dog.
“Construed in Tortilla Factory’s favor, as it must be, the
Complaint actually suggests that Tortilla Factory and Makana are both targeting
health-conscious kombucha drinkers, and that Tortilla Factory accurately
discloses the amount of alcohol in its beverages while Makana does not.” Different
flavors didn’t necessarily mean different markets.  It was plausible that, properly labeled,
Makana’s consumer base would shrink to exclude under-21s, and if, as the
complaint indicated, “kombucha drinkers are a relatively abstemious and
health-conscious bunch, such a labeling change could presumably reduce the number
of over-21 Makana drinkers…. With Makana and Kombucha Dog on equal (or more
equal) footing, alcohol-labeling-wise, it is entirely plausible that at least
some consumers who had historically purchased Makana based upon its lack of
alcohol content might elect to try Kombucha Dog.” Uncertainty about proving that
number was insufficient at the motion to dismiss stage.
Applying Rule 9(b), the court then found the alcohol
allegations sufficent but not the sugar allegations.  It wasn’t enough to invoke information and
belief is that, “[g]iven the manufacturing process for a true kombucha product,
as [Makana’s] products purport to be, it is highly unlikely that the sugar
level is accurate.” Tortilla Factory could test Makana’s sugar content just as
it tested alcohol content. Even if allegations on information and belief were
allowed because the information was uniquely under Makana’s control, a
plaintiff making a fraud claim upon information and belief “still must ‘state
the facts upon which [its] belief is founded.’ ” Tortilla Factory didn’t
explain the facts underling its belief that it is “highly unlikely that the
sugar level is accurate” “[g]iven the manufacturing process.”
Alcohol content was different; the facts were alleged and
allegedly supported by testing.  Makana
pointed to a TTB webpage about kombucha stating that: [P]roducers may use any
method that has been formally validated (e.g., that underwent a multi-laboratory
performance evaluation) or that is otherwise scientifically valid for purposes
of determining the alcohol content of beverages, including beverages that
contain less than 0.5% alcohol by volume. Makana didn’t argue that Tortilla
Factory’s method was not scientifically valid, nor could it at this stage. “Instead,
Makana argues, in essence, that Tortilla Factory cannot satisfy its pleading
burden unless it alleges that it has tested the alcohol content of Makana’s
kombucha drinks using the more permissive scientifically valid testing methods
(since the TTB does not specify a particular test) and that the alcohol content
registered above 0.5% in this test.”  The
court refused to draw inferences against Tortilla Factory at the pleading stage—specifically,
that there are other scientifically valid methods that would detect less
alcohol in Makana’s beverages.  If Makana
can show that other valid tests come out differently, “Makana should be in a
position to file a relatively quick and streamlined motion for summary
judgment.”
Makana also argued that Tortilla Factory failed to allege which
specific Makana kombucha beverages (of various flavors) were tested. The complaint
listed each of Makana’s flavors, defined them collectively as “Kombucha
Products,” and alleged that, based on third-party lab testing, the “Kombucha
Products contain between 0.6% and 1.9% alcohol.” “In this Court’s opinion, and
absent any authority suggesting otherwise (which Makana has not cited), these
allegations are sufficient to put Makana on notice which products were tested.”

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