Legal Issues

The lazy, hazy, crazy days of summer are here. In most years, summer is a great time for relaxing with a beach novel and enjoying a good action movie.  But “Summer 2015” feels different. It marks the mid-point in a year of unprecedented activism impacting the food and drink industry. Here are a handful of things to watch as the remainder of the year unfolds.

DIETARY GUIDELINES

Every five years, the U.S. Department of Health and Human Services (HHS) and U.S. Department of Agriculture (USDA) jointly issue the latest iteration of the federal government’s formal guidance on healthy eating, the so-called “Nutrition Guidelines.”  The guidelines form the basis for federal food and nutrition programs and policies, including the School Lunch Program and the USDA MyPlate icon. 

Typically, the HHS and USDA adopt recommendations and make very few changes in formulating food policy.  However, this year’s recommendations are controversial and venture into new territory, focusing on “sustainable eating” and the reduction of sodium, sugar and saturated fats.

“Sustainable” eating is the new politically correct buzzword for a plant-based diet and less red meat.  

The guidelines recommend a diet rich in vegetables, fruits and whole grains, while lower in red and processed meats. But are the guidelines based solely on the latest in nutritional science or is this key recommendation motivated by something other than dietary health?   

According to the guidelines, a diet higher in plant-based foods and lower in animal-based foods is more health-promoting and “is associated with less environmental impact than is the current U.S. diet.” Is the new “science” of sustainability being used to condemn certain products and lifestyles? That is a legitimate question for consideration this summer.

The guidelines endorse a diet low in saturated fat, and less added sugars and sodium. Although the food industry has reformulated products and expanded efforts to reduce sodium, sugar and saturated fat content, the guidelines propose taxation on higher sugar- and sodium-containing foods to encourage consumers to reduce their consumption.

Dietary Guidelines have always fallen short of providing clear, consistent recommendations for healthy eating.  But 2015 may mark the year that the guidelines go from being a “once every five years distraction” to a vehicle for eating away at American’s dietary “freedom of choice.” 

FOOD SAFETY

The Food Safety Modernization Act (FSMA) is intended, as the FDA puts it, “to ensure the U.S. food supply is safe by shifting the focus from responding to contamination to preventing it.”  

FSMA requires many facilities throughout the food supply chain to have a written food safety plan that includes, among other things, a hazard analysis and set of policies and procedures for implementing and documenting compliance.  

Facilities will need to implement preventive controls to prevent or significantly minimize food safety hazards identified, monitor preventive controls and take corrective actions as necessary – all admirable goals.

But the “devil is in the details,”  and in government-speak, that means detailed regulations have yet to be finalized by the FDA despite that it has been more than three years since President Obama signed FSMA. But this is about to change. 

By the end of August we should have final rules on the Preventive Controls for Human Food and Animal food.  Then at the end of October, we expect final rules on Foreign Supplier Verification, Third-Party Auditing and the Produce Rule.

Some of these rules will represent substantial changes in the way business has been conducted.  For example, the Foreign Supplier Verification rule will make food companies responsible for vouching that their overseas suppliers meet FDA requirements. So, what are reasonable FSMA expectations for the remainder of this year?

The crystal ball is cloudy, but expect the FDA to release a series of final rules and to honor its announced deadlines – or at least be very close.

But there are some dark clouds on the horizon. Recent departures in the FDA’s top management raise the possibility of a diminished focus on the food safety agenda. 

Furthermore, the FDA’s history of acting in a timely fashion (including observing deadlines) is pathetic, at best. And, of course, there is always concern that budget restraints will serve as a convenient excuse if there are further delays in the FDA’s food safety efforts.

It is important that food companies use the summer to (a) understand what sections of FSMA are applicable to their operations, and (b) take concerted steps in implementing required policies and procedures.  

Most companies have plenty of work to do in order to be ready for the new rules, including negotiating contracts with suppliers, rethinking specifications for ingredients and requesting more product information from their suppliers.

MERGER ACTIVITY 

The nation’s food chain provides numerous examples of consolidation over the last quarter century. In both raw foodstuffs and processed foods, mega-mergers have concentrated control among the nation’s largest food manufacturers. And at the retail end, grocery giants have done the same.

This summer’s merger du jour is the proposed combination of Sysco and US Foods. If the parties overcome the government’s attempt to enjoin the merger, it has the potential to alter the competitive dynamics in foodservice distribution.  Not since the summer of 2007 and the government’s challenge to Whole Foods’ acquisition of Wild Oats have we seen such an interesting battle between major food industry forces and the federal government.    

Sysco is the largest U.S. company in the sale, marketing and distribution of food products to restaurants, healthcare and educational facilities, the hospitality industry and other customers that specialize in meals away from home. The company operates 193 distribution centers and had about $44 billion in revenue for fiscal year 2013. US Foods is the second largest U.S. foodservice distributor to restaurants, healthcare and hospitality facilities, government operations and educational institutions.  In 2013, US Foods had $2.2 billion in annual revenue and operated more than 60 locations nationwide.

Why is the government challenging the Sysco – US Foods deal?  The government believes that the merger would substantially lessen competition in the market for “broad-line food distribution services” provided to “national customers,” – that is, customers with numerous facilities dispersed nationally or across multiple regions of the country – that have elected to buy all or virtually all of their food and food-related products from a single foodservice company.    

If the transaction happens, it will mean the end of customers being able to bid the two largest foodservice distributors against each other to win significant cost savings.

FOOD LABELING 

The FDA’s release of final rules for menu labeling last year significantly expanded its regulatory reach to restaurants and beyond. 

These burdensome requirements mean covered businesses should begin preparing now for the Dec. 1, 2015 compliance date. 

The menu labeling rules apply to restaurants and “similar retail food establishments” that have 20 or more locations, doing business under substantially the same name and selling substantially the same menu items, regardless of type of ownership. 

A “restaurant” offers food that is “usually eaten on the premises, while walking away, or soon after arriving at another location” and either served in the establishment or processed and prepared primarily in the establishment. At the most basic level, restaurants must post calorie amounts by each standard menu item. The posting must be made on menus and menu boards and on signs adjacent to standard menu items that are self-serve or on display. 

Covered establishments must also post two prescribed statements on menus and menu boards: A succinct statement regarding daily caloric intake (“2,000 calories a day is used for general nutrition advice, but calorie needs vary”) and a statement regarding the availability of additional nutrition information (“Additional nutrition information available upon request.”). 

The labeling requirements apply to standard menu items routinely included on a menu or menu board or routinely offered as a self-service food or food on display. Beer, wine and mixed drinks that are standard menu items are covered. But beer or bottles of liquor behind a bar or mixed drinks ordered from the bar that do not appear on a menu or menu board are not covered. 

The effective date for the menu labeling rules is Dec. 1, 2015. Failure to comply with the rules will render the food misbranded under the Food, Drug and Cosmetic Act (FDCA). Misbranding under the FDCA — even if unintentional — is a criminal misdemeanor offense. 

The FDA therefore has the discretion to hold criminally liable those with authority – including “responsible individuals” with a duty to implement measures to ensure compliance – for menu labeling violations.

CONSUMER ACTIVISTS 

Americans’ fascination with food and affinity for litigation to affect social change has brought food-based issues to the courthouse. A growing number of consumers pay close attention to label claims. 

Aided by attorneys eager for court-awarded fees – which are an accepted part of class settlements – consumers are taking their grievances to court in record numbers. 

Consumer activists gleefully challenge the statements (and perceived omissions) on both packaged and restaurant food, from McDonald’s’ suggestion that it is part of a balanced or nutritious diet to Kashi’s claim as an “all-natural” cereal.  Many of these cases have been successful. Even if they do not result in a judgment favorable to plaintiffs, the companies sued have changed their advertising and paid significant settlement amounts. These cases show no sign of letting up. Contesting food advertising and labeling claims will continue despite the expense of litigating similar issues for hundreds of different products. 

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