Litigation Risks on the Horizon for Manufacturers, Distributors and Retailers of Energy Drinks

Companies wishing to avoid class action and consumer litigation are well-advised to pay close attention to administrative actions which target their particular industry or products. Investigations or even preliminary fact finding subpoenas issued by federal regulators or state attorneys general are often tracked by class action plaintiffs bar and subsequently serve as a blueprint for a consumer class action. Candice Choi reports that the energy drinks that are so popular with young adults and kids (including my own) are coming under regulatory scrutiny.

As energy drinks continue to surge in popularity, the disclosure by Monster Beverage Corp. that it’s being investigated is the latest signal that the high-octane industry is coming under sharper scrutiny.

The Corona, Calif.-based company said in a filing with the U.S. Securities and Exchange Commission on Thursday that it received a subpoena last month from an unidentified state attorney general’s office concerning the advertising and ingredients of its energy drinks.

The disclosure comes at a time when concerns over energy drinks have intensified.

Energy drinks remain a tiny part of the carbonated soft drinks market, representing just 3.3 percent of sales volume, according to the industry tracker Beverage Digest. But while soda consumption has flagged in recent years, energy drinks are growing by leaps and bounds.

Last year, sales volume for energy drinks rose by nearly 17 percent, with the top three companies — Monster, Red Bull and Rockstar — each logging double-digit gains, according to Beverage Digest. The drinks are often marketed at sporting events such as surfing and skateboarding, popular among younger people.

The levels of caffeine in the drinks have raised worries. Although the U.S. Food and Drug Administration caps the amount of caffeine in soda to 0.02 percent, there is no such limit for energy drinks.

Full article available here.  It is my prediction that we will see a host of consumer class action lawsuits in coming months relating to these popular energy drinks. The SEC subpoena directed to Monster is not the first shot across the bow.   As Choi reports:

The investigation disclosed by Monster is just the latest red flag for the energy drink market. In April, Sen. Dick Durbin, D-Ill., called on the Food and Drug Administration to investigate the industry, noting that the high levels of caffeine and stimulating additives in the drinks could be dangerous for younger consumers. The letter came after a 14-year-old Maryland girl died of a cardiac arrhythmia after drinking two 24-ounce cans of Monster energy drinks in a short time.

A WORD TO THE WISE . . .

Manufacturers, distributors and retailers of energy drinks should take heed. The following mitigation steps may be indicated:

• Consider whether any marketing claims concerning the health benefits of energy drink may be subject to a claim of an unsubstantiated or misleading representation to consumers.
• Confirm that the caffeine levels stated in all packaging are accurate and supported by not only internal testing but also third party validation.
• Determine whether the beverage is marketed as a dietary supplement rather than an ordinary beverage and whether FDA regulatory concerns are triggered.
• Review indeminty provisions to determine whether there has been a proper allocation of risks and cost of defense.  If you are a retailer, does your contracts with distributors appropriately require those parties of the manufacturer to defend and indemnify for a claim such as this?
• Review insurance coverage issues and consider whether it makes sense to obtain liability coverage for such a litigation risk.  Coverage for an “advertising injury” may or may not be triggered.