The Cupcake Bill: How Sweet Is It?

Types : Bylined Articles

In response to the shutdown of an un-licensed 12-year-old’s $200/month sales of home-baked goods to help out local fundraisers, Illinois Governor Pat Quinn on June 10, 2014 signed the “cupcake bill,” which unanimously passed both houses of state government and allows home bakers to operate without regulation by local governments or health departments. The cupcake bill permits $1,000/monthly sales of home-baked goods, provided: (1) sellers (a) have no complaints made against them to health departments and (b) inform purchasers that the food was made in a home kitchen; and (2) there is a local government ordinance authorizing the direct sale of home baked goods.

Illinois is just one of many state governments and local municipalities enacting legislation authorizing small food entrepreneurs and food-based charitable endeavors. For example, earlier this year, Riverside County, California enacted an ordinance allowing food trucks to operate within its borders, and Elsinore, California this July will consider similar regulations to permit food trucks, as well.

But before microbusinesses like food trucks and small food operations (“Cupcake Businesses”) toss sprinkles into the air like celebratory confetti, they should recognize that laws like the Illinois “cupcake bill” are not 100 percent exoneration from food liability. And in the world of food litigation, language and labels matter.

Cupcake laws don’t vitiate consumer fraud statutes
The substantial majority of food label class actions are brought under state consumer protection laws, which (among other things) make deceptive and misleading conduct toward consumers unlawful. Allegedly misleading food product labels are unlawful commercial practices that harm consumers by causing them injury in purchasing products that are, in fact, other than what their labels lead consumers to believe them to be. So if a Cupcake Business makes false or misleading representations regarding its food product (or its ingredients) or affixes a deceptive label to the product, is liability under state consumer protection laws still a possibility?

Is the Cupcake Business a “Person” Who Can Sue or Be Sued?
Whether Cupcake Businesses could become defendants in the national wave of food labeling class action litigation would turn in large part on whether they constitute “persons” subject to the pertinent states’ consumer fraud statutes. Each state’s statute defines the types of entities subject to their provisions. For example:

(1) Not all state consumer protection statutes limit defendants to large corporations (e.g., under Section Two of Illinois’ Uniform Deceptive Trade Practices Act, “person” means “an individual, corporation, government or governmental subdivision or agency, business trust, estate, trust, partnership, unincorporated association, 2 or more of any of the foregoing having a joint or common interest or any other legal or commercial entity”; and

(2) similarly, not all state consumer protection statutes limit plaintiffs to household consumers (e.g., businesses may be plaintiffs under New Jersey’s Consumer Fraud Act).

Therefore, Cupcake Businesses could very well be subject to food labeling laws under state consumer fraud statutes, depending on how those statutes define the “persons” entitled to sue and able to be sued under those laws. The size of a food business – whether a small cupcake or a big enchilada – is not determinative of whether that seller could be liable under state consumer protection statutes.

But wait, there’s more…
Of course, statutory consumer fraud claims are separate and apart from agency regulations, such as the FDA’s “gluten-free” labeling rule, under which a Cupcake Business could also be liable.

In August of 2013, the FDA issued a regulation that defines the term “gluten-free” for food labeling. “Gluten-free” is a voluntary label that manufacturers may elect to use in the labeling of their foods. However, manufacturers that label their foods gluten-free are accountable for using the claim in a truthful and not misleading manner, and for complying with all requirements established by the regulation and enforced by the FDA. The FDA has set a gluten limit of less than 20 parts per million (ppm) for foods that carry the label “gluten-free,” “no gluten,” “free of gluten,” or “without gluten.” At the present time, any food sellers using “gluten-free” labeling must now make certain their products are in compliance with the FDA regulation. After this past summer’s August 5, 2014 compliance deadline, a food that is labeled “gluten-free” but fails to meet the requirements of the regulation will be subject to regulatory action by the FDA. On its website, the FDA states: “We expect that restaurants’ use of gluten-free labeling will be consistent with the federal definition . . . Given the public health significance of gluten-free labeling, we encourage the restaurant industry to move quickly to ensure that its use of gluten-free labeling is consistent with the federal definition.”

Since use of the phrase “gluten-free” on a product label is voluntary on the part of the seller, and since gluten is not a nutrient whose levels must be disclosed on labels under FDA regulations, use of “gluten-free” labeling does not come within the nutrition labeling mandates of Subpart A of Title 21, Part 101 of FDA regulations governing food labeling. See 21 C.F.R. 101.9(c) Furthermore, there are nutrition labeling exemptions for small businesses under FDA regulations. See:

(a) 21 C.F.R. 101.9(j)(1) (“The following foods are exempt from this section [on nutrition labeling of food]: Food offered for sale by a person who makes direct sales to consumers who has annual gross sales made or business done in sales to consumers that is not more than $500,000 or has annual gross sales made or business done in sales of food to consumers of not more than $50,000, provided that the food bears no nutrition claims or other nutrition information in any context on the label or in labeling or advertising”); and

(b) 21 C.F.R. 101.9(j)(18) (“The following foods are exempt from this section: Food products that are low-volume [meaning] the person claiming the exemption employed fewer than an average of 100 full-time equivalent employees and fewer than 100,000 units of that product were sold in the United States”).

However, for those Cupcake Businesses who may elect to affix “gluten-free” labels to their products, bear in mind that compliance with the FDA’s gluten-free regulation is probably still expected: “This definition is intended to provide a reliable way for people with celiac disease to avoid gluten[,] [g]iven the public health significance of ‘gluten-free’ labeling . . . We will consider enforcement action as needed, alone or with other agencies, to protect consumers,” the FDA has said. “Establishing a definition of the term ‘gluten-free’ and uniform conditions for its use in food labeling will help ensure that individuals with celiac disease are not misled and are provided with truthful and accurate information with respect to foods so labeled,” the Administration has commented.

So, while the risk may be small of the FDA pursuing a Cupcake Business for transgression of the gluten-free labeling regulations, there are probably few small-size entrepreneurs interested in becoming an example for FDA enforcement in this area – especially when use of the gluten-free label is voluntary in the first place. Ditto for the cost-benefit analysis of small businesses’ use of gluten-free labels in the class action context: while the risk of becoming a class action target may be small (given the low monetary reward potential against Cupcake Businesses for class action plaintiffs’ counsel), do the benefits of the gluten-free label sufficiently offset the risk of being the first test case by a plaintiff’s lawyer – in this era of staggering numbers of consumer fraud food labeling class actions being filed each month?

Final thoughts
Laws such as the Illinois cupcake bill aren’t the only menu item on the list of possible liability claims that might be made against food sellers – whether big or small. Thinking of the cupcake bill as an unqualified exoneration from food seller liability would be a half-baked idea.

Article was published in the American Bar Association TIPS Product Liability Newsletter