Food & beverages, retail and franchising

In a nutshell

Food and beverages, retail, and franchising law are three overlapping practice areas which center on the trade of products and services. They encompass the sale of goods and services to consumers, as well as business-to-business (B2B) matters. Attorneys who specialize in these fields must take a holistic approach to their work, as they deal with a wide range of issues; matters can encompass real estate leases, franchise documentation, M&A deals, antitrust compliance and IP regulations. There is a contentious side to these practices, where the work is similarly varied: false advertising class actions, GMO (genetically modified organism) labeling claims and data breach investigations are covered, alongside other issues. Practitioners act for an unsurprisingly broad list of clients, including multinational food distributors, international fashion houses, shopping centers and trade associations.

The global flow of products and services, facilitated by the rise of e-commerce, means that lawyers typically have expertise in both international and domestic regulations. The latter are issued by the likes of the Food and Drug Administration (FDA), the United States Department of Agriculture (USDA), the Drug Enforcement Administration (DEA), the Department of Justice (DOJ) and the Federal Trade Commission (FTC).

What lawyers do

Food and beverages/retail (disputes)

• Receive instructions from a client who has been accused of false advertising.
• File for a motion to dismiss.
• If it's a class action, conduct 'class' discovery. This involves working with experts to try to defeat class action certification. Attorneys will depose the experts before filing and defending their reports.
• If class certification is granted (or if the case was never a class action in the first place) attorneys carry out 'merits' discovery. They obtain all the relevant documents and conduct depositions about liability and damages.
• Apply for summary judgment. If summary judgment is denied, the case goes to trial. Attorneys determine the evidence and depositions to use, produce the exhibit list, and decide on what sort of discovery or motions to advocate.
• Go to trial. Handle post-trial steps.
• Attorneys for the plaintiff conduct due diligence before filing a complaint, oppose motions to dismiss, defend class action certification and oppose summary judgment.

Franchising (transactional)

• Receive instructions from a franchisor who would like to establish a franchise agreement with a franchisee.
• Draft a franchise disclosure document (FDD) and send it to the franchisee to review.
• Negotiate any revisions to the disclosure document in consultation with the client.
• Apply to have the FDD filed by a state agency if required under state law.
• Draft the franchise contract and ensure that it is signed by both parties.

 

Realities of the job

• Miriam Guggenheim, co-chair of Covington & Burling’s food, drug and device practice group, says: “The issues in the food and beverages industry are quite broad. There is nutrition and public health policy; engaging with Congress and the FDA; considering what consumer advocacy groups and NGOs think about a particular issue; helping companies think through acquisitions and about the value of the brand; giving labeling advice; and preventing consumer fraud litigation.”

“There will be enforcement actions and recalls where you need to drop everything and help a client make a decision and interact with regulatory agencies.”

• Martin Hahn, food and beverages partner at Hogan Lovells, suggests: “A typical day is unpredictable. There will be countless calls and people that will stop by your office. There will be enforcement actions and recalls where you need to drop everything and help a client make a decision and interact with regulatory agencies.” He jokes: “I never accomplish what I intend to do when I come into the office!”
• Food and beverages cases are often filed in California with the US District Court for the Northern District of California, which is fondly referred to as the 'Food Court.'
• Lawyers in this field must maintain a thorough understanding of various acts, especially the Nutrition Labeling and Education Act (1990) and the FDA Food Safety Modernization Act (2011).
• An interest in science is essential within the food and beverages domain: “You have to be willing to engage with scientific studies and grapple with them,” Miriam Guggenheim points out.
• Guggenheim also emphasizes the importance of time management, especially as a regulatory attorney: “We tend to work on several different matters at a time, compared to litigators or corporate attorneys who might work on one deal for an extended period. I handle 14 to 16 client matters on any given day, which is fun but can also be challenging.” However, she also notes that “the hours are still lower compared to typical litigation or corporate practices.”

“You have to be willing to engage with scientific studies and grapple with them.”

• Deborah Coldwell, franchising litigator at Haynes and Boone, flags the difference between a litigator's and a corporate attorney's schedule: “50% or more of my colleagues are transactional lawyers. They are very busy at year end, whereas we are not so busy. However, we work really hard when we are going to trial – 24/7 in some instances.”
• Working with foreign jurisdictions is common for a transactional franchising lawyer. “We do a significant amount of work for US-based clients expanding internationally,” states Stuart Hershman, a franchising partner at DLA Piper.  He explains that most overseas jurisdictions do not have governmental franchising agencies: “You have to comply with laws internationally, including franchise-specific laws in an increasing number of countries, but overall (there of course are exceptions) there isn't government interaction and oversight like there is in the US.” In contrast, franchising litigators find that most brawls tend to be domestic in nature. “I have not seen that many cross-border court cases,” Coldwell tells us. “Typically if they are cross-border they end up in arbitration.”

 

 

Current issues

June 2022

Food and beverages

• According to a tally by Perkins Coie, litigation against food and beverage companies set a record of 220 cases in 2020.
• There has been much debate and consumer concern over labeling and advertising in recent years. Recent attention has been given to what constitutes 'natural' food as, at the time of writing, there is not yet a clear legal or regulatory definition. The past four years have been marked by a sharp rise in the number of lawsuits filed that allege misrepresentation on labeling for 'natural' products, including food and other consumer goods like laundry detergents. In a recent case against The Coca-Cola Company, a consumer is suing the brand for advertising its berry Fanta beverage as containing 100% natural flavors, when it does in fact contain artificial flavoring.
• Another recent case saw McDonalds consumers alleging that they were led to believe that the vanilla flavor at the fast food chain is only derived from ‘real vanilla plants.’  The case which was heard in February 2021, was dismissed by a California federal judge the following month, but picked up again in April after an amended complaint was filed. The interesting thing about these kinds of lawsuits is that companies can be targeted even if they comply with FDA regulations, as arguments are often based on advertising material, photos and assumptions.
• As a result, transparency is on the rise, as Miriam Guggenheim explains: “We're seeing a continued interest by consumers to learn more about their food. Companies are intending to be more transparent about their products, by stating what the ingredients are and where they come from.” This can, however, create new problems: “They are using more plain English and can come up against regulatory bodies if they aren't consistent with defined terms.”
• Health food enthusiasts and influencers have hopped on the kombucha trend, touting the health benefits of the fermented drink. However, in tax, this product is treated as alcohol as the law states any drink with 0.5% or more alcohol content is classed as alcohol. Congress is due to look at this, including proposals to increase the threshold to 1.25% ABV.
• The increasing number of 'meat alternatives' has put pressure on the $200 billion a year meat industry in the US. Plant-based substitutes are taking up an increasingly large market share, and by one estimate will be work $95.5 billion by 2029. There's been debate about whether these substitute products should be regulated by the FDA or US Department of Agriculture and how competition with traditional meat products should be managed.
• The Agriculture Improvement Act of 2018 reinforced the prior Act of 2014; its biggest changes included the removal of certain cannabis products from the Controlled Substances Act. As such, use of CBD has been increasing in the mainstream over the past few years, and this will be an area that continues to develop along with the regulations surrounding it. In March 2022, Flora Growth Corp announced the completion of its first import of food and beverages containing CBD from Colombia to the US, following an update on Colombia’s framework for the use, distribution, and export of cannabis.
• After sugar taxes had made some headway under the Obama administration, the tide seems to have turned. A few cities have their own soda taxes, but so far there isn’t anything nationwide. The Pennsylvania Supreme Court upheld an appeal against the state's beverage tax in July 2018, but a follow-up with similar intentions has been submitted, and Arizona, California and Michigan have passed legislation that prohibits local sugar taxes for the foreseeable future.
• The US has a bigger food waste problem than any other country in the world, putting pressure on supply chains. Data from Visual Capitalist suggests that ‘over 80% of Americans mistakenly discard good food because of unclear labels.’ Currently, these labels are not subject to regulation by the FDA.
• In February 2022, The United States Department of Agriculture (USDA) announced a $1 billion investment to support sustainably produced food in an attempt to combat climate change.
• At the beginning of the year, the FDA reflected on its new approaches to tackling food-borne illness, including tech-enabled traceability, root cause analysis, and outbreak data. There are suggestions that the pandemic created an urgency around developing remote surveillance methods.

 

Retail

• Deloitte’s retail industry analysis maps out three areas to watch:

1) The Great Resignation: many retailers are having to invest more in employee recruitment and retention, with issues including wages, flexible working, culture, and DEI initiatives.

2) The supply chain: the way consumers shop has changed significantly over the course of the pandemic – it's now less predictable and demand planning, inventory management, and fulfillment forecasting can’t keep up

3) Digital revolution: e-commerce has soared through the pandemic and many retailers are considering staff-free cashier-less stores.

• For example, March 2021 saw Amazon open its first cashier-less store in the UK, called Amazon Fresh. This follows the opening of Amazon Go in the US.
• The popularity of online shopping has already in recent years affected the commerce of bricks-and-mortar retailers, particularly with the reliance on e-commerce during the pandemic; retail space in shopping malls has consequently become cheaper.Furthermore, the sector has suffered from the lackluster economy, leading to an increased number of companies filing for bankruptcy. 2019 saw 23 major US retailers file for bankruptcy, including Barneys New York, Diesel, Forever 21 and Sugarfina. This was up from 16 in 2018, when big names like Claire's, Toys R Us, Kiko USA and Sears filed for bankruptcy. 2020 saw 30 retailers file for bankruptcy, despite government subsidies, and the trend has continued through 2021 and 2022.
• Similarly, the rise in streaming platforms, as well as cinema/theater closures during the pandemic, has put AMC on the bankruptcy watchlist. =
• According to Deloitte US, the retail industry should be ready for more economic change. The economy slowed in 2019: GDP growth declined from 3.1% in Q1 to 1.9% in Q3, with a drop in investment growth.Unfortunately for retailers, the downward trend has continued over the last two years, with Deloitte highlighting empty shelves, over a million retail job vacancies, and inflation. On the bright side, Deloitte’s latest retail industry outlook suggests that the coming months offer the chance for retailers to rebrand, including ‘reinventing the physical store for the digital age.’
• The digitalization of the retail market (via increased use of mobile devices and the spread of social media) has given rise to many opportunities for lawyers. Warren Karp identifies an important trend in this digitalized retail market: “There is a move from multichannel retailing to consumer-centric, omnichannel retailing where the consumer has multiple choices. They can get products from anywhere, delivered directly from a fulfillment center or store.”
• Intellectual property is an important strand of retail work. Companies often look to protect their designs under trade dress – a constituent of the Lanham Act. Examples include the shape of a HERSHEY KISS chocolate, the Vans checkerboard pattern, and the red sole of a Christian Louboutin shoe. In 2019, theowner of Dr. Martens, AirWair, launched trade dress lawsuits against BooHoo, Nasty Gal and Pretty Little Thing for the infringement of its shoe designs. With the rise in fast fashion over the last two years, there have been similar lawsuits, most notably against China-based online fashion company Shein. Most recently, Stussy has filed a lawsuit against the company, alleging the infringement of Stussy’s graffiti-style trademarks.
• Products are also becoming 'smarter' in line with technological developments. E-textiles are of great interest to apparel manufacturers, as well as to the military sector, which accounted for over 26% of the global market share, according to research by Technavio. In addition, US conglomerate DuPont has recently launched a range of 'smart clothing' aimed at the healthcare and fitness industries, which incorporates stretchable electronic inks and films that can trace the wearer's heart and breathing rates. A new breakthrough in the use of cellulose in the conductive fibers space means that e-textiles and smart clothing can be powered by the wearer’s body heat alone.
• In response to Russia’s invasion of Ukraine, many companies have since taken action to limit their activity and association with the Russian state. For example, Costco has suspended its purchase of seafood from Russian fisheries. McDonald’s has temporarily closed all its restaurants in the country.
• Following the legalization of marijuana for recreational use in New York last year, the state is looking to permit the legal retail of cannabis sometime this year. The Governor of New York has put forward $200 million to fund the launch of cannabis retailers.

 

Franchising

• One of the big issues in the franchising market continues to be the 'joint employer' model. It has thrown up the following question: which party is responsible for employees? The franchisor (the owner of the franchise) or the franchisee (the company or individual licensed to operate under the franchise)? The saga started in 2014 when the National Labor Relations Board decided that McDonald's could be held partly responsible for its franchisees' employees. Much has happened since then with the 2015 Browning-Ferris case expanding the definition of a joint employer, much to the consternation of franchisors. This was then overturned and reinstated in the years that followed, but the legal ping-pong is now closer to settling down. In April 2020, the National Labor Relations Board introduced a new rule clarifying that for a company to be considered a joint employer of a worker, it must have sway over key terms of the worker’s employment, including hiring, wages, hours and discipline. In September 2020, this rule was taken down by the district court for Southern New York, which stated that the definitions in the rule were limited. In February 2021, the U.S. Department of Labor submitted a new regulation proposal to the White House, which has since been rejected.
• “Over the last two-plus years there has been an increasing effort by certain administrative agencies in the US to hold franchisors liable for things that happen at the franchisee level,” Stuart Hershman tells us. Consequently, a lot of franchising lawyers are advising on employment dispute resolution matters.
• McDonald's is also at the center of another trend – as the number of its franchisees increases, the foundation of a National Owners Association has strayed dangerously close to a union in certain eyes. Though the group was incorporated as a nonprofit, its activities could be seen to resemble collective bargaining. Organizations such as this which resemble unions, but don't have that official status, could have a profound effect on the nature between franchise owners and franchisees in the future.
• Technology also poses a challenge to the franchising market, Deborah Coldwell notes. She explains that there are laws for everything “from drone delivery, to online ordering, to website franchise sales,” adding: “Keeping up is going to be a challenge for lawyers and companies because technology moves so quickly.”