Unfair Competition, Wrongful Death, Shareholder Derivative Actions and Class Actions


Monster Beverage Company – A Case Study Of Vertical Distribution Landmines

By James Mulcahy & Kevin A. Adams on December 11, 2013

I. Introduction

Potential liability for product defects is an expensive and non-trivial concern for all manufactures and their distributors. In recent years, no product has been under more fire than Monster Beverage Company’s popular caffeinated “Monster Energy” drinks.

In a little over a year, a dozen lawsuits have been filed against Monster concerning the safety of the caffeine levels in Monster Energy drinks. These cases include claims for unfair competition, wrongful death, shareholder derivative actions and class actions. Monster does not stand alone as many of the lawsuits name individuals from Monster’s executive team and even distributors as defendants.

While Monster has managed to settle or otherwise fend off many of these lawsuits, the San Francisco City Attorney’s current attack on Monster’s product safety and marketing practices does not appear to be going away.

The purpose of this article is to use the recent litigation faced by Monster to illustrate the potential liability manufactures, distributors and others face as part of the vertical chain of distribution.

II. Overview of California Law on Products Liability

Before analyzing the Monster litigation, it is important to have some understanding of the potential liability that arises out of product manufacturing and distribution. As such, below is an high-level overview of California law on products liability.

It is generally true that all parties in the chain of distribution have potential liability for personal injuries arising out of a defective product. In fact, California courts have extended the doctrine of strict products liability to almost anyone identifiable as “an integral part of the overall producing and marketing enterprise.”[1]

Non-manufacturer defendants are also found liable under the doctrine of strict products liability when:

  • (1) The defendant received a direct financial benefit from its activities and from the sale of the product;
  • (2) The defendant’s role was integral to the business enterprise such that the defendant’s conduct was a necessary factor in bringing the product to the initial consumer market; and
  • (3) The defendant had control over or a substantial ability to influence the manufacturing or distribution process.[2]

With these principles in mind, California courts have applied the doctrine of strict products liability to others involved in the vertical distribution of consumer goods, including, lessors of personal property, wholesale and retail distributors, and licensors.

III. Summary of Litigation Involving Monster

Since August 21, 2012, a total of twelve lawsuits have been filed against Monster arising out of or relating to the marketing of the caffeine levels in Monster Energy drinks. The nature of the litigation can be broken down into shareholder litigation (four cases), product liability/wrongful death litigation (three cases), consumer class actions (four cases), and an action filed by the San Francisco City Attorney for unfair business practices. Of the twelve separate actions, Monster has effectively disposed of – through motion practice or settlement – five of the lawsuits. Two other matters were consolidated, leaving Monster to defend six separate actions.

Of the remaining six lawsuits, three involve product liability/wrongful death claims, two involve purported consumer class actions, and the San Francisco City Attorney’s lawsuit is still alive. In addition, Monster has also initiated a separate lawsuit against the San Francisco City Attorney seeking declaratory relief.

In total, thirteen lawsuits have been filed by or against Monster relating to the caffeine levels in their Monster Energy drinks. The wrongful death lawsuits and other complaints concerning unsafe caffeine levels for children have attracted the attention of Congress. Below, we also summarize a formal hearing held by several members of Congress, and the statements of Monster’s executives during that hearing.

A. Shareholder Litigation

  • 1. Daniel H. Rausch v. Monster Beverage Corporation, et al. (“Rausch”)

    On August 21, 2012, Plaintiff Daniel H. Rausch, “on behalf of himself and all other persons similarly situated,” filed a federal securities putative class action against Monster Beverage Corporation (“Monster”), Rodney C. Sacks (Chairman of the Board of Directors) and Hilton H. Schlosberg (Vice Chairman of the Board of Directors, President, Secretary and CFO) in the U.S. District Court for the Southern District of California.

    The complaint alleged that, on August 8, 2012, after the stock market closed, Monster disclosed financial results that failed to meet analysts’ expectations. As a result, Monster’s stock dropped nearly 10% the next day. On August 10, 2012, after the market closed, Monster disclosed that, in July 2012, it had “received a subpoena from a state attorney general in connection with an investigation concerning the Company’s advertising, marketing, promotion, ingredients, usage and sale of its Monster Energy® brand of energy drinks.” On this news, the stock declined another 11% the next day.

    Based on these alleged facts, the plaintiff asserted violations of Section 10(b) and Rule 10b-5 against Monster, and violation of Section 20(a) of the Exchange Act against the individual defendants, because Monster “was improperly advertising, marketing and promoting its Monster Energy ® brand of energy drinks” and, as a result, Monster’s “financial statements were materially false and misleading at all relevant times.” The prayer for relief sought damages to be proved at trial, interest and attorneys’ fees and costs.

    The lawsuit was voluntarily dismissed by the plaintiffs on September 13, 2012, less than three weeks later, and without Monster making an appearance in the case.

  • 2. Weijia Li, individually and on behalf of all others similarly situated, v. Monster Beverage Corporation, et al. (“Li”)

    On August 24, 2012, just three days after filing the Rausch complaint, Weijia Li, “individually and on behalf of all others similarly situated,” filed another putative class action lawsuit against Monster, Mr. Sacks and Mr. Schlosberg. This lawsuit, filed in the U.S. District Court for the Central District of California, again alleged violations of the federal securities laws, and an identical fact pattern as that alleged in the Rausch complaint.

    The Li case was voluntarily dismissed by the plaintiff on September 20, 2012. Monster never made an appearance in the case.

  • 3. Gary Rumbaugh v. Rodney C. Sacks, et al. (“Rumbaugh”)

    On September 13, 2012, Gary Rumbaugh filed a shareholder derivative action against certain officers and directors of Monster in the California Superior Court, County of Los Angeles. The named defendants included Mr. Sacks, Mr. Schlosberg, Harold C. Taber, Jr. (director), Benjamin M. Polk (director), Norman C. Epstein (director), Mark S. Vidergauz (director), Sydney Selati (director), and Monster as a “Nominal Defendant.” The complaint alleged that the individual defendants:

    [I]nitiated a course of conduct that was designed to and did: i) conceal the fact that the Company was improperly advertising, making and promoting its Monster Energy brand in order to allow defendants to artificially inflate the price of the Company’s shares; ii) maintain the Individual Defendants’ executive and directional positions at Monster and the profits, power, and prestige that the Individual Defendants enjoyed as a result of these positions; and iii) deceive the investing public, including shareholders of Monster, regarding the Individual Defendants’ management of Monster’s operations, the Company’s financial health and stability, and future business prospects, specifically related to the Company’s financials that had been misrepresented by Defendants throughout the Relevant Period as a result of the improper advertising and promotion of its Monster Energy brand.

    Based on these allegations, plaintiffs asserted claims for breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment. The prayer for relief sought damages, equitable relief, restitution, and attorneys’ fees and costs.

    The facts alleged in this case closely mirrored the allegations in the Rausch and Li complaints – including the August 2012 stock declines and Monster’s receipt of a subpoena from an attorney general (now identified as the New York attorney general) in July 2012. The complaint also cited articles in the “New York Times’ Business Day” and “Fox Business” publications for the proposition that the New York attorney general subpoenaed Monster, PepsiCo and Living Essentials – each a manufacturer of “so-called energy drinks” – as part of an investigation into whether the companies are misleading consumers about the quantity of caffeine their drinks contain, the health risks they could pose, and whether the companies violated federal law in promoting the drinks as dietary supplements rather than as foods, which are regulated more strictly.

    On December 19, 2012, the case was transferred to California Superior Court, County of Riverside, where it was later dismissed on March 5, 2013, following the filing of a stipulation for voluntary dismissal. To our knowledge, the New York attorney general has not taken any further action following the issuance of the subpoena.

  • 4. Eric Spitzer, derivatively on behalf of Monster Beverage Corporation v. Rodney C. Sacks, et al. (“Spitzer”)

    On May 3, 2013, Eric Spitzer initiated a shareholder derivative lawsuit against members of Monster’s Board of Directors and executive officers in the U.S. District Court for the Central District of California. The complaint alleged injuries stemming from Monster’s handling of its August 2012 announcement that in July 2012 it had “received a subpoena from a state attorney general in connection with an investigation concerning the Company’s advertising, marketing, promotion, ingredients, usage and sale of Monster Energy brand of energy drinks.” The complaint also quotes extensively from statements apparently made by Senators Richard Blumenthal and Richard Durbin to the United States Food and Drug Administration (the “FDA”) requesting that the FDA investigate the energy drink industry.

    Within the month, the parties filed a stipulated voluntary dismissal, effectively dismissing the case, with prejudice, on May 28, 2013.

B. Product Liability and Wrongful Death Claims

  • 1. Wendy Crossland, et al. v. Monster Beverage Corporation (“Crossland”)

    On October 17, 2012, Wendy Crossland and Richard Fournier filed a complaint against Monster in the California Superior Court, County of Riverside. Plaintiffs, the surviving parents of 14-year-old Anais Fournier, brought the lawsuit following the December 23, 2011 death of Anais. According to the complaint, within a 24-hour period from December 16, 2011 through December 17, 2011, Anais consumed two 24-oz. Monster Energy drinks – “the equivalent caffeine content of fourteen (14) 12-oz. cans of Coca-Cola.” Several hours after drinking the second energy drink, Anais went into cardiac arrest. At the hospital, the medical staff placed Anais in an induced coma in an attempt to reduce brain swelling, a state that she remained in for six days until they decided to terminate her life support. According to the autopsy report and death certificate, the cause of death was “cardiac arrhythmia due to caffeine toxicity complicating mitral valve regurgitation in the setting of Ehlers-Danlos Syndrome.”

    Plaintiffs further allege that, in addition to caffeine, the Monster Energy drinks contain guarana and taurine – additional forms of caffeine. Medical journals and other publications are referenced by plaintiffs in the complaint for the proposition that a massive amount of caffeine is generally known to impose adverse health effects on consumers.

    Based on these facts, plaintiffs assert claims for (1) strict products liability (design defect), (2) strict products liability (failure to warn), (3) negligence (design, sale and manufacturing), (4) negligence (failure to warn), (5) fraudulent concealment, (6) breach of implied warranties, and (7) wrongful death.

    Damages sought in the complaint include compensatory damages for pain and suffering, emotional distress, loss of enjoyment of life and other non-economic damages, medical expenses, funeral and burial expenses, mental and emotional distress, interest and attorneys’ fees and costs.

    On November 19, 2012, Monster filed a demurrer and motion to strike the complaint. Instead of responding to Monster’s filings, the plaintiffs amended the complaint on December 19, 2012. In addition to naming “Doe Defendants,” the plaintiffs re-characterized their titles as the “surviving parents” – and not “successors in interest.” The specific causes of action were unchanged by the amendment.

    Shortly after the amendment, Monster filed a motion for an undertaking pursuant to Code of Civil Procedure Section 1030 – which is designed to “afford security for an award of costs which the defendant might otherwise have difficulty enforcing against a non-resident plaintiff.” See Shannon v. Sims Service Center Inc., 164 Cal.App.3d 907(1985). To secure an undertaking, the defendant must show that (1) the plaintiff resides out of state or is a non-California entity, and (2) there is a “reasonable possibility” that the defendant will prevail in the case. The Court later denied Monster’s request because Monster had not shown a “reasonable possibility” that it would prevail in the case.

    On January 14, 2013, Monster demurred to the first amended complaint. The demurrer was denied by the court and Monster was ordered to answer the complaint. Monster filed its answer on June 7, 2013. The answer contains a general denial of all claims and 36 affirmative defenses.

    The parties currently appear to be in a contentious discovery battle – fighting over access to medical records, depositions, and discovery responses. The plaintiffs filed a motion to compel further discovery responses, documents and also seeks to depose several of Monster’s executives. Monster countered with a motion for a protective order. The court granted plaintiff’ motion to compel, in part, and ordered Monster to produce additional responsive materials.

    On September 19, 2013, the plaintiffs filed a motion for monetary and evidentiary sanctions against Monster and its counsel for “willfully violating an order of the court and for continuing discovery abuse.” On October 2, 2013, the court ordered Monster to pay the plaintiffs $4,200 in monetary sanctions and denied plaintiffs’ request for evidentiary sanctions.

  • 2. Angela Wheat v. Monster Beverage Corporation, and Ed F. Davis, Inc. (“Wheat”)

    On January 23, 2013, Angela Wheat, the mother of Jason Hamric, filed a complaint in Oklahoma District Court against Monster and an Oklahoma corporation, Ed F. Davis, Inc., for claims arising out of her son’s injuries attributed to the consumption of Monster Energy drinks. The complaint alleges that Jason Hamric, then 16 years old, “collapsed and lost consciousness,” resulting in “full cardiopulmonary arrest with no pulse or blood pressure” sometime after consuming a Monster Energy drink. The Defendant, Ed F. Davis, Inc., is the distributor of “the Monster Energy drink that Jason consumed.”

    The complaint asserts claims for (i) strict products liability (design defect and failure to warn), (ii) negligence (in the design, manufacturing and sale), (iii) negligence (failure to warn), (iv) violation of the Oklahoma Consumer Protection Act (unfair trade practices), (v) violation of the Oklahoma Consumer Protection Act (deceptive trade practices), (vi) negligence per se, and (vi) punitive damages. The plaintiff seeks damages “in an amount in excess of $75,000 exclusive of interest and costs,” punitive damages, and attorneys’ fees and costs.

    Monster answered the complaint on February 12, 2013. On July 31, 2013, plaintiff submitted an expert witness report identifying the following experts: Dr. Anjan M. Shah (Jason’s treating physician), Dr. Stacey L. Hail (a toxicologist), Dr. Amal E. Moorad (a rehab specialist), and Lon Fuff, M.S., C.R.C., C.D.M.S. (a life care planner).

    The parties currently appear to be wrapping up discovery. The next scheduled events are a pre-trial conference, set for December 9, 2013, followed by a jury trial in January, 2014.

  • 3. Paula Morris v. Monster Beverage Company (“Morris”)

    On June 25, 2013, Paula Morris, “individually and as surviving parent, and as successor in interest to Alex Morris,” filed a complaint against Monster in the California Superior Court in Alameda County. The complaint asserts claims for (1) strict products liability (design defect), (2) strict products liability (failure to warn), (3) negligence (design, sale, manufacturing), (4) negligence (failure to warn), (5) fraudulent concealment, (6) breach of implied warranties, and (7) wrongful death. The claims are identical to those asserted by the plaintiffs in the Crossland lawsuit (discussed above).

    The complaint alleges that Alex Morris, while 19 years old, died following his “ingestion of a toxic amount of caffeine and other stimulants through his consumption of at least two(2) 16-oz. cans of “Monster Energy” drinks in the twenty-four (24) hours before — and per day – for three (3) years prior to his death.” The prayer for relief seeks damages, medical expenses, loss of consortium, funeral and burial expenses, and costs of suit.

    On July 26, 2013, Monster filed an answer to the complaint. As part of the answer, Monster contends that Morris died of a heart condition unrelated to his consumption of Monster Energy drinks.

    The case is in its preliminary stages as the parties are currently involved in significant discovery, including a battle over the medical records subpoenaed by Monster from Morris’ medical providers.

  • C. Summary of Consumer Class Action Lawsuits (Unfair Competition)

    1. Jennifer Wooding, on behalf of herself and all others similarly situated and the general public, v. Monster Energy Company, et al. (“Wooding”)

    On November 5, 2012, Jennifer Wooding filed a consumer rights class action lawsuit against Monster for alleged “false and misleading advertising of energy drinks containing an extremely dangerous and potentially lethal ingredient epigallocatechin-3-gallete.” According to the complaint, this lethal ingredient “is well-documented in the medical literature to be associated with liver injuries, that the product could cause adverse side effects, that persons with known liver conditions should not use the product, or, that the product should not be used in conjunction with or shortly after drinking alcohol.” Monster’s energy drink called “Monster Rehab Green Tea + Energy” is said to contain the “lethal ingredient.”

    The complaint alleges claims for (i) violation of the California Consumers Legal Remedies Act, (ii) violation of California’s unfair competition law, (iii) breach of express warranty, (iv) breach of implied warranty, and (v) unjust enrichment. On December 3, 2012, Monster removed the case to federal court.

    Before Monster answered the complaint, the plaintiff filed an amended complaint on February 1, 2013. The amendment to the original complaint included (i) damages in excess of “$5,000,000, exclusive of interest and costs,” (ii) additional language regarding Monster’s advertising efforts (i.e., Monster advertises “through a variety of media, including point of sale displays, magazines, the Internet and on Monster Rehab Green Tea + Energy’s packaging”), (iii) additional information on plaintiff’s alleged damages, and (iv) additional factual information on the origin of the drink at issue.

    On March 8, 2013, Monster filed a motion to dismiss the first amended complaint. In the motion, Monster argued that the amended complaint should be dismissed because its conclusory allegations are “unsupported,” and the named plaintiff has not been harmed (i.e., “she does not allege that she suffered any injury from drinking Rehab Green Tea or that Rehab Green Tea did not fulfill its intended purpose”).

    Monster also argued that the conduct complained of by Plaintiff – “safety and efficacy of a dietary supplement” – is within the exclusive jurisdiction of the FDA, and that (i) there is no private right of action to enforce FDA regulations, (ii) plaintiff’s claims are preempted by the United States Federal Food, Drug, and Cosmetic Act (“FDCA”) and the Nutrition Labeling and Education Act (“NLEA”), (iii) the FDA has primary jurisdiction over matters of dietary supplement labeling and regulation, and (iv) it would violate the dormant commerce clause by allowing California consumer law to create a “patchwork of state regulation” that would burden interstate commerce.

    Finally, Monster argued that its claims “hydrates like a sports drink” and “re-fresh, re-hydrate, re-vive, or in other words, re-habilitate” are non-actionable puffery (i.e., statements upon which a reasonable consumer would not rely).

    In support of its motion to dismiss, Monster submitted a request for judicial notice to the court asking the court to judicially notice certain items outside of the court record. Included in the items to be judicially noticed are: (i) the Federal Trade Commission’s “Dietary Supplements: An Advertising Guide for Industry” setting forth specific guidelines for advertising dietary supplements; (ii) a January 2, 2013 letter from the Federal Trade Commission Chairman, Jon Leibowitz, to Edward Markey, a Member of the United States House of Representatives, in response to Representative Markey’s concern over the safety of energy drinks, especially given an increase in advertising targeted at children and teenagers; and (iii) a November 21, 2012 letter from the Department of Health & Human Services to Senator Richard J. Durbin, who had expressed concerns about the caffeine levels in energy drinks and the associated risks among “young people.”

    Plaintiff timely opposed the motion – arguing that the factual allegations were sufficient to state a valid cause of action; and, that the state claims were not preempted by federal law. On April 15, 2013, and before the court issued a ruling on Monster’s motion to dismiss, the parties filed a joint stipulation to dismiss the case. The joint stipulation provides that (i) plaintiff has agreed to dismiss her individual claims “with prejudice,” (ii) plaintiff has not received any consideration for agreeing to dismiss her claims, (iii) the proposed class claims are dismissed “without prejudice,” and (iv) each side is to “bear their own costs.” The case was subsequently dismissed.

  • 2. Michael Zuckman v. Monster Beverage Corp. (“Zuckman”)

    On November 13, 2012, Michael Zuckman and the “General Public” filed a lawsuit against Monster in the Superior Court for the District of Columbia. The complaint alleges that Monster’s energy drinks are unsafe and “target adolescents.” Therefore, according to the allegations, Monster’s conduct is in violation of the District of Columbia Consumer Protection Act, among other things. The prayer for relief seeks a declaration that Monster has violated the D.C. Consumer Protection Procedures Act, the entry of an injunction against Monster, and restitution, statutory damages (treble damages), costs of suit and attorneys’ fees.

    Monster removed the case to the District Court for the District of Columbia on December 10, 2012. The removal was based upon diversity jurisdiction (i.e., the matter in controversy exceeds $75,000 and the parties reside in different states).

    The plaintiff subsequently filed a motion to remand the case back to the state court. Monster opposed the motion. After significant briefing and questions from the court, on August 6, 2013, the District Court granted plaintiff’s motion and remanded the case back to state court. While the court’s reasoning is lengthy (18-pages), essentially, it remanded the case after looking at the specific damages alleged by the class representative (not the putative class), and determined that the class representative’s alleged individual damages do not exceed the $75,000 jurisdictional threshold.

    On August 16, 2013, Monster filed an appeal with the U.S. Court of Appeals for the D.C. Circuit. At this point, the issue on appeal has been fully briefed and the parties are waiting for a hearing and/or ruling from the D.C. Circuit.

  • 3. (i) Alec Fisher v. Monster Beverage Company, et al. (“Fisher”)
    (ii) Connor Rucks v. Monster Beverage Corporation (“Rucks”)

    Fisher. On December 12, 2012, Alec Fisher filed a putative consumer class action lawsuit against Monster and “Monster Energy Company” in the Central District of California. The complaint alleges claims for violation of California Business & Professions Code §§ 17200 (unfair competition) and 17500 (false advertising), violation of California’s Consumers Legal Remedy Act (“CLRA”), breach of express and implied warranties, violation of the Magnuson–Moss Warranty Act (alleging that Monster’s energy drinks are unsafe for human consumption), and unjust enrichment.

    Similar to the claims in Wooding, the plaintiff class alleges that Monster “knowingly or with reckless indifference, market[s], advertise[s] and sell[s] Monster Energy Drinks as completely safe via playful/seductive advertising designed to attract pre-teens and teens and via product placement.” However, unlike the Wooding plaintiff’s attack on a single Monster product, the consumer class here is seeking “redress for Defendants’ unfair and deceptive trade practices on behalf of anyone who purchased for personal consumption any of the [28 varieties of] Monster-branded energy drinks.” The claimed damages are in excess of $5,000,000.

    Attached as an exhibit to the complaint is a spreadsheet – entitled “The Center for Food Safety Adverse Event Reporting System” (“CAERS”) – detailing the number of emergency room visits in which Monster Energy drinks were somehow involved. According to the report, CAERS “is a post-market surveillance system that collects reports about events or problems that are allegedly related to [certain] regulated products.” The report identifies 40 separate “adverse events,” between the dates February 2, 2004 through October 11, 2012, resulting in injury or death to consumers who had consumed Monster Energy drinks some time earlier.

    Rucks. On December 18, 2012, Connor Rucks filed another putative class action lawsuit against Monster in the Central District of California. The complaint is basically a carbon copy of the Fisher complaint which had been filed six days earlier. At the request of the parties, Fisher and Rucks were consolidated in a single action before the Central District of California.

    As a result of the pending litigation, on February 13, 2013, Monster announced that it was changing the labeling on its cans so the Monster Energy drinks will no longer be considered dietary supplements, but rather a traditional beverage. Prior to February 13, 2013, the Monster Energy drinks had been sold as “dietary supplements,” while Red Bull energy drinks (the number two selling energy drinks) had historically been sold as a traditional beverage.

    On April 15, 2013, Monster moved to dismiss the case. The motion to dismiss reiterates the same arguments raised by Monster in its motion to dismiss the Wooding case. Additionally, Monster argued that the amended complaint should be dismissed because: (i) plaintiffs fail to satisfy Rule 8, which requires a “short and plain statement,” because their 113-page, 244-paragraph complaint makes “it difficult to tell exactly what Plaintiffs are claiming, individually or on behalf of the class;” and (ii) the amended complaint fails to plead fraud with specificity. On May 15, 2013, the plaintiffs opposed the motion to dismiss on numerous grounds.

    On July 9, 2013, the court granted Monster’s motion to dismiss both the Fisher and the Rucks cases. The court found that (i) the allegations contained in both complaints were insufficient to demonstrate an injury to either Rucks or Fisher and, therefore, they failed to allege Article III standing to assert the alleged claims, (ii) the fraud-based allegations failed to meet the specificity required by Federal Rule of Civil Procedure, Rule 9(b), (iii) the consumer protection claims – to the extent they were based on Monster’s failure to adequately label its products – were dismissed because there was no alleged evidence that Monster improperly labeled its drinks; (iv) the consumer protection claim – based on Monster’s alleged failure to warn consumers – was dismissed because the warnings suggested by plaintiffs were not mandated by the FDA; (v) the unfair competition, false advertising and CLRA claims were dismissed for failure to adequately allege reliance; and (vi) the claim for breach of express warranty was dismissed because it was based upon statements that were nonactionable puffery.

    The plaintiffs were given “limited leave to amend” the complaint, but were not permitted to pursue the consumer protection claims – because they were preempted by federal law – and were instructed to set forth “a short and plain statement of the claim,” and any allegedly fraudulent conduct with “particularity.”

    On July 26, 2013, the plaintiffs filed a second amended complaint – 13 pages shorter than their prior iteration of the complaint – limited to claims for unfair business practices, false advertising, violation of California’s consumer protection laws, breach of express and implied warranties, violation of the Magnuson–Moss Warranty Act, and unjust enrichment. Monster subsequently moved to dismiss the second amended complaint on many of the same bases as its prior motion to dismiss.

    The hearing on Monster’s motion to dismiss was held by the court on October 21, 2013. During the hearing, the court announced a tentative ruling, heard oral argument from the parties, and took the matter under submission. The tentative ruling is not part of the court’s docket and, therefore, not available to the public. At the time of this writing, the court has not yet issued a final ruling on the matter.

    D. Litigation Involving the San Francisco City Attorney

    • 1. Monster Beverage Corporation, et al. v. Dennis Herrera, in his official capacity as the City Attorney of San Francisco (“Monster’s Declaratory Relief Action”)
    • 2. People of the State of California ex rel. Dennis Herrera, San Francisco City Attorney v. Monster Beverage Corporation (“Herrera’s Lawsuit”)

    On October 31, 2012, less than two weeks after the Crossland case was filed, the San Francisco City Attorney, Dennis J. Herrera, sent a letter to Rodney Sacks, the CFO of Monster. Herrera sent the letter to express his (and the city’s) concern over the high caffeine levels in Monster products. In emphasizing his point, Herrera identified (1) five deaths reported to the FDA within the prior twelve months, allegedly related to the consumption of Monster Energy drinks, (2) the American Academy of Pediatrics conclusions that energy drinks “should never be consumed” by adolescents, and (3) Monster’s labeling of its energy drink as a “dietary supplement” rather than as a conventional food or beverage – “perhaps in an attempt to circumvent the safety standards required for food and beverage additives.”

    In his letter, Herrera demanded that, within 30 days, Monster “provide evidence concerning the safety of [its] products for consumption by adolescents.” Herrera also requested substantiation for Monster’s advertising claims that:

    • Monster and Monster Mega are “Dietary supplements” under federal law;
    • “[B]igger is better”;
    • “[Y]ou can never get too much of a good thing!”;
    • “3 cans per day” of 16 oz. Monster is “responsible” or safe consumption by adolescents and adults;
    • “2 cans per day” of 24 oz. Monster is “responsible” or safe consumption by adolescents and adults;
    • Monster and Monster Mega are safe for consumption except for “children, pregnant women or people sensitive to caffeine”;
    • “Monster Energy drinks generally contain approximately 10 milligrams of caffeine from all sources per ounce”;
    • Monster’s “products are and have always been safe”;
    • Monster Rehab “hydrates like a sports drink”; and
    • Monster Energy “delivers twice the buzz of a regular energy drink.”

    The records reveal that over the next six months, an ongoing dialogue occurred between Herrera and representatives of Monster. The specifics of those discussions have not been made public. Then, on April 24, 2013, Herrera sent another letter to Monster. The letter, titled “Privileged and Confidential Settlement Communication,” proposed a May 2, 2013 meeting between Mr. Herrera’s office and representatives of Monster for purposes of a “constructive dialogue concerning Monster Energy Drinks.” Herrera threatened legal action if Monster refused to comply.

    The April 24, 2013 letter also contained a proposed stipulated injunction prepared by Herrera’s office and intended “to frame [their] discussion about the terms upon which the City Attorney would be prepared to settle his investigation of Monster Energy Drinks.” It is clear from the face of the 6-page injunction proposal that Herrera sought to impose significant burdens on Monster’s marketing, sales and distribution activities. For example, the proposed injunction would have required Monster to comply with the following:

    • (i) Revise all of its warning labels to read “Not appropriate for individuals under 18, pregnant/nursing, or sensitive to caffeine. The FDA has stated that healthy adults may safely consume up to 400 mgs of caffeine per day. This product contains ___ mgs.”;
    • (ii) Not use anyone under the age of 18 (or appear to be under the age of 18) in its marketing;
    • (iii) Not promote its drinks on the property of any school that has students under the age of 18;
    • (iv) Not sell its drinks or merchandise to anyone under 18;
    • (v) Not sell its drinks in a manner that “encourages rapid consumption”;
    • (vi) “[N]ot sponsor events that feature athletes under the age of 18, or at which more than 20% of people in the audience are likely to be under the age of 18”; and
    • (vii) Not sell its drinks in cans greater than 16 ozs.

    Monster’s Declaratory Relief Action. On April 29, 2013, five days after receiving Herrera’s April 24, 2013 letter and proposed injunction, Monster filed an 86-page complaint (including exhibits) for declaratory relief against Herrera in the California Eastern District (“Monster’s Declaratory Relief Action”). Monster, represented by Morrison & Foerester LLP, sought a judicial declaration that:

    • a. Herrera’s attempts to regulate Monster’s energy drinks are preempted by the FDA and barred by the doctrine of primary jurisdiction;
    • b. Herrera’s conduct constitutes a violation of the First and Fourteenth Amendments of the US Constitution under the doctrines of (i) “compelled speech,” (ii) “content-based speech,” (iii) “commercial speech,” and (iv) “void for vagueness”; and
    • c. Herrera’s conduct violates the Commerce Clause of the U.S. Constitution, Article I, Section 8, Clause 3.

    In addition to its request for declaratory relief, Monster’s complaint provides numerous examples of other common beverages that contain more caffeine than Monster Energy drinks (160 mg of caffeine) – e.g., Starbucks “Short” (180 mg), “Tall” (260 mg), “Grande” (330 mg), and “Venti” (415 mg), Redbull ( approximately 160 mg), Rockstar (240 mg), 5-Hour Energy (240 mg), 52 oz. Mountain Dew (234 mg).

    In response to Monster’s Declaratory Relief Action, Herrera issued press releases on April 30, 2013 and May 3, 2013, attacking Monster’s attempts to “halt City Attorney’s investigation into allegations that Monster Energy markets potentially unsafe products to children,” and praising the FDA for investigating Monster.

    Coincident with the filing of its compliant, Monster also filed a notice of related case in an attempt to consolidate Monster’s Declaratory Relief Action with the pending consumer class action lawsuit, Alec Fisher v. Monster Beverage Company, et al. (Fisher and Rucks, discussed above at page 9). As part of its attempt to consolidate its lawsuit with Fisher and Rucks, Monster argued that the cases should be related because they both concern the issue of whether Fisher’s and Rucks’ claims and Herrera’s claims “are preempted by the FDA or subject to the doctrine of primary jurisdiction.”

    Herrera opposed Monster’s consolidation attempts arguing the differences in the cases – i.e., Monster’s Declaratory Relief Action involves questions of constitutional law and preemption, while the Fisher and Rucks consumer class action claims concern Monster’s representations and omissions regarding its marketing and sales of the Monster Energy drink.

    Herrera’s Lawsuit. On May 6, 2013, Herrera filed his own lawsuit against Monster in the California Superior Court, County of San Francisco, titled People of the State of California ex rel. Dennis Herrera, San Francisco City Attorney v. Monster Beverage Corporation (“Herrera’s Lawsuit”). Herrera’s Lawsuit alleged that Monster had violated California’s Business and Professions Code § 17200 (unfair business practices), and sought relief in the form of injunctive relief, civil penalties, and damages.

    Attached to the complaint in Herrera’s Lawsuit is a March 19, 2013 letter from “eighteen scientific experts” to FDA Commissioner Margaret A. Hamburg, M.D. In the letter, the experts conclude that, “based on a review of the current scientific literature . . . the large amount of added caffeine in energy drinks is not safe as required by law.”

    Monster immediately removed Herrera’s Lawsuit to District Court in the Northern District of California. On May 8, 2013, Monster filed a second notice of related cases in Monster’s Declaratory Relief Action, this time advising the court in California’s Eastern District of Herrera’s Lawsuit, which was – and still is – pending in California’s Northern District.

    On May 30, 2013, Herrera moved to dismiss Monster’s Declaratory Relief Action. Herrera’s primary arguments in support of his motion were as follows: (i) Monster lacked standing to bring the claim because there is no “cognizable legal injury or harm” to Monster; (ii) the lawsuit is merely a “race to the courthouse” that should be dismissed under the doctrine of

    Younger Abstention because Herrera’s Lawsuit was filed first and should take priority; (iii) Monster’s void for vagueness claims should be dismissed because Herrera’s April 24, 2013 letter is not an enforceable law; and (iv) the First Amendment claims must fail because the First Amendment does not protect deceptive marketing.

    Monster opposed Herrera’s motion to dismiss on numerous grounds. As part of its opposition, Monster referenced (and attached) an April 19, 2013 letter from the FDA to Herrera. In the short two-page letter, the FDA acknowledged Herrera’s concerns over “the caffeine levels in energy drinks posing serious health and safety risks,” and advised Herrera that the FDA was in the process of investigating the issues.

    On July 3, 2013, Monster filed a motion to dismiss, stay or transfer Herrera’s Lawsuit because Monster’s Declaratory Relief Action was – and is – pending in California’s Eastern District. On the same date, Herrera filed a motion to remand Herrera’s Lawsuit from California’s Northern District back to the state court where Herrera initially filed the case – i.e., before Monster removed the case to federal court. In his motion, Herrera argued that his lawsuit “is the quintessential example of an action that belongs in state court,” because it is “based entirely upon Monster’s violation of state law, namely California’s Unfair Competition Law.” Because the complaint does not present a federal question or allege a violation of federal law, according to Herrera, the action is not subject to federal jurisdiction. Monster opposed the motion to remand by again arguing that the issues in dispute are federal questions – i.e., issues that the FDA has jurisdiction over.

    On September 23, 2013, the Northern District Court granted Herrera’s motion for remand, thus, denying Monster’s motion to transfer, and remanded the case back to the San Francisco Superior Court. The next scheduled event in the case is a case management conference, set for November 21, 2013. Monster was given until 30 days after the case management conference to respond to the complaint.

    In the Eastern District case, on August 22, 2013, U.S. District Judge Virginia A. Phillips issued an order denying the majority of Herrera’s motion to dismiss. Notably, Judge Phillips’ found that the FDA has primary jurisdiction over the issues raised in Herrera’s April 24, 2013 letter, and that Herrera “seeks to impose more than required by the FDA.” It appears from this ruling that Judge Phillips may at some point grant a motion for summary judgment filed by Monster on these grounds – thus, leaving Herrera’s complaints with the FDA to enforce as a regulatory matter.

    As part of her ruling, Judge Phillips also rejected Herrera’s argument that the court should not exercise jurisdiction over the case because Monster was forum shopping, noting that Monster’s request for declaratory relief was appropriate because it had been threatened with litigation and that its headquarters are within the district in Corona, California.

    Further, Judge Phillips found that Younger Abstention did not apply to this case because Herrera’s Lawsuit – having since been removed by Monster to federal court – was no longer pending in state court. However, in a footnote, Judge Phillips noted that Herrera’s pending motion to remand the case back to state court was currently pending in the Herrera Lawsuit. “If the matter is remanded to state court, the Court may, at that point, determine whether abstention is appropriate.”

    Alternatively, Judge Phillips granted Herrera’s motion to dismiss as to Monster’s Commerce Clause and Void for Vagueness claims. The court gave Herrera until September 26, 2013 to answer the complaint.

    Instead of answering the complaint, Herrera renewed his motion to dismiss under the Younger Abstention Doctrine and included an argument that the case should be dismissed under the “Anti-Injunction Act.”[1] Monster’s opposition is due by November 11, 2013, and the hearing has been scheduled for December 9, 2013.

    E. Response of Congress

    The alleged injuries and deaths involving the caffeine levels in energy drinks have gotten the attention of Congress. On July 31, 2013, the U.S. Senate held a hearing on the marketing of energy drinks to youths. Many of the Senators (and those reporting on the hearing) equate the attack on energy drinks to Congress’ earlier attacks on tobacco.

    The Senate’s focus on energy drinks began last year, following the death of Anais Fournier (addressed above) and its receipt of a report from the Federal Substance Abuse and Mental Health Services Administration – showing that the number of emergency rooms visits involving energy drinks doubled to nearly 21,000 from 2007 to 2011.

    During the hearing, the Senate acknowledged that it has called on the FDA to investigate the safety of energy drinks, and emphasized its focus on the energy drink industry’s marketing techniques, which it claim are targeting young consumers.

    Rodney Sacks, the chief executive of Monster attended the Senate hearing and spoke out in defense of the industry. Mr. Sacks said negative publicity has hurt the energy drink category overall:

    • The reduction in the growth rate of the energy drink market in the U.S. that I alluded to in my previous conference call on May 8, 2013, continued through the second quarter of 2013, we believe in part due to the ongoing negative publicity that continues to question the safety of energy drinks and/or their ingredients and/or suggest limitations on their ingredients, including caffeine and/or levels thereof, and the minimum age restrictions for consumers.

    Mr. Sacks cited Nielsen Co. U.S. retail statistics for the 13 weeks ended July 27, 2013. Monster’s sales grew 10.1% in the 13 weeks ended July 27, 2013.

    Mr. Sacks also stated that Monster has sold more than 9 billion energy drinks over the past 11 years. In 2012, the company sold about 2 billion cans of Monster Energy drinks in about 90 countries. “Put another way, more than 5 million cans of Monster Energy drinks are sold and safely consumed around the world each day.” “Unfortunately, inaccurate, speculative and biased articles continue to be published regarding energy drinks and, in particular, the caffeine levels therein,” he said. “The simplest and most effective way of addressing these comments is to compare the caffeine levels in Monster Energy drinks from all sources to the caffeine levels in coffeehouse coffee such as, for example, Starbucks or Caribou, as this comparison is easily understood by and is meaningful to consumers.”

    In the second quarter this year, Monster had net sales of $630,934,000, a 6.5% increase from $592,640,000 during last year’s second quarter. Legal and other costs related to regulatory matters and other costs had a negative impact on Monster’s bottom line. However, Mr. Sacks followed this information with: “We are pleased to report another quarter of solid sales growth, in both our domestic and international markets, but note that there were certain exceptional costs that affected profitability during the quarter,” Mr. Sacks said.

    Despite the single-digit category growth rates we are seeing in our major markets, the Monster Energy brand continues to grow in excess of such category growth. Monster Energy Zero Ultra, launched in the third quarter of 2012, has become one of our best-selling products. Following on this success, we launched Monster Energy Ultra Blue in March 2013.

    Congress is actively working on legislation that would strengthen dietary supplement labels to more strictly enforce the FDA’s requirements (see Senate Bill 1310).

    IV. Where Does Monster Stand?

    The litigation facing Monster has been pending for over a year now. A review of the litigation reveals that Monster’s defense has received mixed results. Monster has effectively disposed of all of the shareholder litigation and derivative claims (i.e., Rausch, Li, Rumbaugh, and Spitzer). However, all three product liability/wrongful death lawsuits (i.e., Crossland, Wheat, and Morris) appear to be headed to trial. Two of the three putative consumer class actions are still alive – though Fisher and Rucks may be dismissed following the plaintiffs’ failure to adequately amend their complaint. Also, both lawsuits involving the San Francisco City Attorney are still in play. Because the lawsuits are still at the pleading stage, however, it is too early to tell whether Monster will successfully get them dismissed.

    The most significant victories for Monster thus far concern the California Central District Court’s rulings in Fisher (granting Monster’s motion to dismiss – finding no evidence that Monster improperly labeled its drinks and that many of the plaintiffs’ complaints are not mandated by the FDA), and Monster’s Declaratory Relief Action (denying Herrera’s motion to dismiss – finding that the FDA has primary jurisdiction over the issues raised by Herrera’s April 24, 2013 letter). It appears from these rulings that the courts may ultimately dismiss claims against Monster relating to caffeine levels, product labeling, and marketing – leaving them as regulatory issues for the FDA to enforce.

    Should the court(s) refuse to retain jurisdiction over these matters, the only items left for Monster to litigate will be the wrongful death/product liability cases and any state law claims (e.g., Business and Professions Code §§ 17200 and 17500) not premised on federal law.

    V. CONCLUSION

    In Monster’s recent public filings with the Security Exchange Commission, they report spending millions of dollars in litigation. This expense along with the time spent defending the litigation would put some companies out of business. Monster’s recent journey through this litigation landmine is just an example of the potential liability faced by manufactures, distributors and others within the vertical chain of distribution.

    Disclaimer: While every effort has been made to ensure the accuracy of this article, it is not intended to provide legal advice as individual situations will differ and should be discussed with an experienced franchise lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.




    [1] The Anti-Injunction Act (28 U.S.C. § 2283), is a federal statute that prohibits federal courts from issuing an injunction against proceedings in any state court, subject to specifically defined exceptions. [1] GM’s national account customers purchase vehicles directly from GM as the original equipment manufacturer – and not from GM dealers.
    [1] Vandermark v. Ford Motor Co., 61 Cal.2d 256, 262 (1964).
    [2] Bay Summit Community Association v. Shell Oil Co., 451 Cal.App.4th 762, 775 (1996).
    [3] Price v. Shell Oil Co., 2 Cal.3d 245, 252 (1970).

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