Alleged Economic Loss from Purchasing Illegal Dietary Supplements Is Sufficient to Establish Standing

Allegations that plaintiffs suffered an economic loss when they bought dietary supplements prohibited by a federal statute are sufficient to establish standing to bring a class action against the supplement manufacturer and distributor, according to the Eleventh Circuit. In Debernardis v. IQ Formulations, LLC, 2019 WL 5996589 (11th Cir. Nov. 14, 2019), two individual plaintiffs brought a putative class action asserting violations of the Florida Deceptive and Unfair Trade Practices Act, the Illinois Consumer Fraud and Deceptive Business Practices Act, New York General Business Law § 349, and for common law fraud and unjust enrichment. Plaintiffs alleged that defendants had engaged in unlawful, deceptive, and unjust conduct when they sold dietary supplements and failed to disclose that the sale of the supplements was illegal.

Under the federal Food, Drug, and Cosmetic Act, as amended by the Dietary Supplement Health and Education Act, the sale of an “adulterated” dietary supplement is prohibited. A supplement is adulterated if (1) it “presents a significant or unreasonable risk of illness or injury” when taken as directed by its label, (2) it contains a “new dietary ingredient”—i.e., one that was not marketed in the United States before October 15, 1994, (3) the Secretary of Health and Human Services declares it to “pose an imminent hazard to public health or safety,” or (4) it contains a poisonous substance that renders it injurious to health. 21 U.S.C. § 342(f)(1). Plaintiffs alleged that the supplement they purchased from defendants contained a new dietary ingredient, DMBA, meaning the supplement was adulterated and its sale prohibited under the Act. According to the complaint, plaintiffs suffered an economic injury by purchasing the supplements. Plaintiffs relied on a benefit-of-the-bargain theory: because the supplements could not be legally sold, the supplements had no economic value. Thus, plaintiffs paid an “unwarranted amount” to purchase the supplements. The defendants moved to dismiss the complaint based on a lack of standing, arguing that plaintiffs had failed to allege an injury-in-fact because plaintiffs received the benefit of their bargain when they purchased the supplements.

The district court granted the motions to dismiss for lack of standing, reasoning that even if the adulterated supplements could not be legally sold, plaintiffs received the benefit of their bargain because there was no allegation that the supplements failed to perform as advertised, that the supplements caused any adverse health effects, or that plaintiffs paid a premium for the supplements.

The Eleventh Circuit reversed and held that plaintiffs’ allegations were sufficient to establish standing. Judge Jill Pryor authored the opinion and was joined by Judge Charles Wilson and Judge Jeffrey Sutton, visiting from the Sixth Circuit. First, applying Florida law, the court concluded that at the motion to dismiss stage, a dietary supplement that is deemed adulterated (and therefore illegal to sell) has no value. The court reasoned that Congress’s decision to ban adulterated supplements based on its judgment that they were unsafe supports the conclusion that adulterated supplements are a defective product that has no value. This conclusion was also consistent with the well-established benefit-of-the-bargain theory that some defects fundamentally affect the intended use of a product and render it valueless.

Second, the court held that plaintiffs had sufficiently alleged that the supplements plaintiffs purchased were adulterated. The complaint alleged that the supplements contained DMBA, which was a “new dietary ingredient” because it was not marketed in the United States before 1994. Therefore, the supplements were presumed to be adulterated under the Act. The court explained that there were two different ways in which the defendants might have attempted to overcome the presumption that a supplement containing a new dietary ingredient is unsafe; however, they failed to take advantage of either of these opportunities. Defendants did not contend that the supplements contained only dietary ingredients that were present in the food supply. And neither defendant provided any notice to the FDA showing that DMBA had a history of harmless use in food products or supplements or other evidence of DMBA’s safety.

Defendants emphasized that the complaint did not allege that the supplements did not perform as advertised or were purchased at a premium due to misrepresentation to support their argument for lack of standing. But the court explained that such allegations aren’t necessary. Alleging an economic loss by purchasing a presumptively unsafe product is enough. This conclusion is consistent with the only decision from another circuit to have addressed standing in this context. See Franz v. Beiersdorf, Inc., 745 F. App’x 47 (9th Cir. 2018) (unpublished). The court also noted that the Seventh Circuit has acknowledged that under a benefit-of-the-bargain theory, an economic injury occurs when the purchaser acquires a worthless product, even absent allegations of physical ham, that the product failed to work as intended, or that the purchaser paid a premium for the product. See In re Aqua Dots Prods. Liab. Litig., 654 F.3d 748 (7th Cir. 2011).

Defendants contended that the court’s decision would open the floodgates because now any consumer who purchased a product that could not be legally sold could allege that they acquired a worthless product and thus have standing to sue. But the court limited its decision to the specific facts of this case—namely, a case involving dietary supplements prohibited by the federal Food, Drug, and Cosmetic Act.

Next, the court addressed one of the defendant’s arguments that plaintiffs lacked standing because their injuries were not fairly traceable to it. Specifically, the sole distributor that supplied the supplements to retailers contended that plaintiffs never alleged that it distributed the supplements that they purchased. The court found that plaintiffs’ allegations supported an inference that the distributor provided the supplements to plaintiffs. The complaint alleged that only the distributor supplied the supplements to retailers, including the retailers that plaintiffs purchased the supplements from.

Posted by Kamryn Deegan.

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