Supreme Court Laps Up POM Wonderful's Case

The Supreme Court is moving away from interpreting the law to give government exclusive control over enforcement -- and that may hold a clue for the future of securities regulation.
Tasty and ready to take on Coca-Cola in court.

Antioxidants got you down? They would if you were POM Wonderful LLC, which makes pomegranate and blueberry juices that have to compete with the Coca-Cola Co.

Coca-Cola makes its own juice product that mentions pomegranates and blueberries on the label but has only 0.3 percent of the former and 0.2 percent of the latter. POM sued Coke alleging false advertising. Coke replied that the government regulates food labeling, and that its label was fine. Who should win?

Today the U.S. Supreme Court struck a blow for private enforcement of the laws when it allowed POM's suit to go forward. The decision matters because it signals that the court is moving away from interpreting the law to give government exclusive control over enforcement -- and that may possibly hold a clue for the future of securities regulation.

To see why this case reached the Supreme Court, you need to know that there are two different approaches to government regulation embodied in the laws about false advertising and the laws regulating food and drugs. Both go back to the Franklin Roosevelt-Harry Truman era.

One approach, adopted by the Lanham Act of 1946, relies on private parties to enforce the laws against false advertising. The idea is that private market actors will always have an incentive to get their competitors to tell the truth. Rather than expending government resources to monitor all advertising, Congress established a structure where companies or individuals can sue each other alleging violations of the law. It was this private enforcement model that POM sought to use against Coke.

The alternative model relies on government regulation, supervision and enforcement. Congress chose this approach when it enacted the Federal Food, Drug and Cosmetic Act of 1938. Of course, private parties might in principle want to enforce food labeling laws against their competitors, but the FDCA doesn't rely on that possibility, perhaps because an entire industry might well share a common interest in labeling products to mislead consumers or in producing an unsafe product. The FDCA was also enacted in no small part to make consumers feel confident that what they see is what they eat. To achieve such confidence, government supervision was thought to be needed.

As far as Coke was concerned, it should be safe from being sued under the false advertising laws if it was satisfying the legal duties imposed by the food labeling laws. The Barack Obama administration agreed in part, entering the case as a friend of the court arguing that the safe harbor should extend only in so far as the FDCA or FDA regulations specifically authorize or require the labeling. On either view, Coke's or the government's, it would reduce the government's control over food labeling if POM's suit could proceed on false adverting grounds.

The justices unanimously rejected the positions taken by Coke and the Obama administration. The court reasoned that there was no danger to the government's regulatory ability if private parties could also engage in false advertisement enforcement. This matters for two reasons. First, the court's decision reflects the general rise of private enforcements that rely on market mechanisms. Since Bill Clinton's administration, Democrats and Republicans alike have increasingly embraced the idea of privatized, market-driven mechanisms that free up government resources and therefore allow for leaner government. Whatever might have been the more government-centered enforcement approach of the New Deal or the Great Society, the contemporary preference for private enforcement is clear.

The other reason to care about the decision is that the Supreme Court will decide this term the considerably higher profile question of whether privately originated securities litigation should be curtailed. This issue is roughly analogous in that securities litigation initiated by private parties, not the SEC, is a privatized part of the regulatory system that includes both civil and criminal enforcement by the government.

It's always risky to read the tea leaves. But the holding in the POM case at least hints that the court will not gut private securities litigation and leave enforcement overwhelmingly to the government. Tune in again soon to see if I'm right.

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