Corporations that sell to consumers and are subject to consumer lawsuits commonly receive deposition demands for top executives. Corporations can frequently defeat these demands by showing that the executives did not participate or have control over the matter at issue. But a recent ruling from a federal trial court in California demonstrated how controlling social media content can help change that result, leaving a CEO as a defendant in a consumer class action alleging fraud and false advertising. (Kamal v. Eden Creamery, LLC, No. 18-cv-01298-BAS-AGS (S.D. Cal. June 26, 2019).)The case involves claims relating to Halo Top® ice cream pints. Eden Creamery, which produces and markets Halo Top, was founded in 2011 by the individual who is now the company’s CEO. Like many companies, Eden Creamery advertises on social media, urging consumers to “find your pint” and “select your favorite pints” of Halo Top ice cream.
The plaintiffs filed a class action lawsuit, claiming that Eden Creamery frequently “underfilled” its pint containers, providing less than the advertised pint of ice cream. (Like most ice cream pints, the containers are opaque, so that a customer cannot see the amount of product and “slack space” in each container.) The plaintiffs filed a common law fraud claim as well as state statutory false advertising claims under the laws of California, Arizona, Illinois, Nevada, New Jersey, and New York. The plaintiffs named not only Eden Creamery, but also its founder and CEO in the California state statutory claim.
The company moved to dismiss the entire complaint. The court denied some claims, but allowed other claims to proceed—including the claim against the founder and CEO.
The court began its analysis by pointing out, under California law, that the corporate form typically shields officers from liability, except for an officer’s own tortious conduct. Generally, an officer that authorizes or directs or participates in conduct can be personally liable. The court pointed out that “a lesser showing of direct participation or action or personal involvement will suffice; ‘mere knowledge’ of alleged wrongful acts is insufficient for liability.” (Slip op. at 12, citation omitted.)
In this case, the plaintiffs alleged that the founder and CEO exercised oversight over production and product distribution, as well a control over the company’s marketing and advertising strategy.
“So what? Doesn’t every goods (manufacturing) company CEO do that?” you may be thinking.
The court agreed: “If this were all the [complaint] alleged, the Court would agree with the Defendants.” (Slip op. at 12.) But the plaintiffs went beyond those allegations, and claimed that:
- The CEO started the company in his home;
- The CEO was “intimately involved in the day-to-day operations”;
- The CEO reviewed and approved standardized statements to consumers to respond to complaints about “underfilled” pints;
- “Most critically, Plaintiffs allege that [the CEO] ‘gave final approval’ to the design and language found on each Halo Top pint container label as well as statements and photographs used on the Company’s website and its social media sites.” (Id.)
Therefore, the court ruled, the plaintiffs had alleged sufficient participation by the CEO to proceed against him. The court pointed out that whether the plaintiffs would ultimately be able to hold the CEO liable “is a matter best resolved through discovery, not in the present motion to dismiss.” (Id. at 12-13.)
This case demonstrates that liability typically flows with control. Many companies, particularly start-ups from the past few years, begin with a founder controlling everything from creation of the goods to social media presence. What does your CEO control today? Is s/he prepared to defend this in a court proceeding?