An EGG-cellent Example of How a Law Suit Can Backfire: Unilever v. Hampton Creek

Unilever, maker of Hellman's, sued Hampton Creek for false advertising and unfair competition over its egg-free "Just Mayo" product.

Unilever, maker of Hellman’s, sued Hampton Creek for false advertising and unfair competition over its egg-free “Just Mayo” product.

Hampton Creek, according to its website, is “a company dedicated to [helping everyone] eat delicious food that’s healthier, sustainable, and affordable.”  Earlier this year, Hampton Creek was featured on This Week in Startups where it demonstrated its “Just Mayo” product.

Just Mayo

Just Mayo is an egg-free dressing designed to replace traditional egg-based mayonnaise.  Indeed, one of the main points of Just Mayo, appears to be to avoid the use of eggs.  According to Hampton Creek CEO Joshua Tetrick, eggs are some of the most inefficient food products, requiring an energy to food ratio of 39:1.  Hampton Creek on the other hand achieves an energy to food ratio of 2:1.  According to Tetrick, Just Mayo resulted from two years of research and development by Hampton Creek.

The Lawsuit

Unilever sued Hampton Creek for false advertising and unfair competition.  See the Complaint.

On October 31, 2014, Conopco (a company that does business as Unilever), the maker of Hellman’s mayonnaise, sued Hampton Creek for false advertising and unfair competition under  the Lanham Act (federal law) and various state laws.  According to Unilever, the Food and Drug Administration regulations define “mayonnaise” as “the emulsified semi-solid food prepared from vegetable oil” and containing an “acidifying” ingredient of either (1) vinegar or (2) lemon or lime juice, and an “egg yolk-containing” ingredient.  Unilever also alleges that “mayo” is a commonly understood synonym for “mayonnaise.”  Therefore, according to Unilever, Hampton Creek is falsely advertising its product by calling it “mayo” when it does not include any “egg yolk-containing ingredient.”  See the Complaint here.

False Advertising Under the Lanham Act

False advertising plaintiff’s typically have to prove:

(1) the defendant made a false or misleading statement of fact in a commercial advertisement about a product;

(2) the statement either deceived or had the capacity to deceive a substantial segment of potential consumers;

(3) the deception is material, in that it is likely to influence the consumer’s purchasing decision;

(4) the product is in interstate commerce, and the plaintiff has been or is likely to be harmed by the statement.

Should the case progress, it will be interesting to see how a court addresses the second element above. Just Mayo is specifically and clearly marketed as being egg free.  Therefore, regardless of the FDA’s definition of “mayonnaise” it would seem hard to suggest that Hampton Creek’s “Just Mayo” brand could deceive or have the capacity to deceive a substantial segment of potential consumers looking for traditional egg-based mayonnaise.

The Backlash

Shortly after Unilever initiated its suit, it received significant public backlash.  Well known chef Andrew Zimmerman initiated a petition on asking Unilever to stop bullying Hampton Creek.  In the word of Zimmerman:

Unilever, a UK-based 60 billion dollar multinational corporation, filed a lawsuit confessing that Hampton Creek is taking away market share from a couple of its products: Hellmann’s and Best Foods. Thus, as Unilever admits, it’s attempting to rely on an archaic standard of identity regulation that was created before World War II to mandate that Hampton Creek removes its products from store shelves.

As of November 20, the petition had over 70,000 online signatures.

Additionally, as reported by One Green Planet, marketing experts have stated that Hampton Creek received over $3M of free product placement based advertising per day in the week following the lawsuit.  Accordingly Hampton Creek received over $21M of marketing benefits in just the first week following the lawsuit.

The Lesson

It will be interesting to see how far Unilever presses the lawsuit.  It is unlikely that they expected this degree of backlash and this outpouring of support for Hampton Creek.  Indeed, given the increasing awareness of the need for sustainable food sources, and allergy-friendly foods, the public opinion appears to be that Hampton Creek is on the right side of history.  Accordingly, filing a lawsuit against a competitor requires much deeper analysis than whether one is likely to prevail on its legal claim.  Here, even if Unilever ultimately prevails on its claims (which is not a certainty, as discussed above), it’s quite possible that Hampton Creek might end up the winner.


How Startups Can Understand FDA Regulations

At the earliest of stages, startups should understand whether and how the FDA governs their product or service.

At the earliest of stages, startups should understand whether and how the FDA governs their product or service.

The Food and Drug Administration (“FDA”) regulates drugs, biological products, medical devices, the food supply, cosmetics, dietary supplements, tobacco, and products that give off radiation.  Startups considering operating in one of these areas, for example by making an app or product that offers health advice, a product or service that will come into contact with food, or food itself, will likely be within the reach of the FDA’s regulations.  Knowing what the FDA regulates, and how to comply with the FDA’s regulations in your specific situation can be a daunting task.  The amount of FDA regulation (and the resulting cost and complexity of compliance) depends on exactly what the product or service does, and the FDA’s perceived risk to consumers.

Non-compliance can lead to an FDA audit, shut down of the product or service, or even fines.  For example, 23andMe, designed and built a DNA testing kit, which TIME magazine called the “Invention of the Year” in 2008, that allows users to assess their genetic risk of contracting certain diseases.  They raised over $50 million from Google and other investors to create their product.  Despite an ongoing dialogue with the FDA about the product and the scope of its diagnostic abilities, the FDA issued a warning to 23andMe, requiring them to stop selling their product as of November 22, 2013.  Read more about 23andMe’s FDA issues and the debate about the FDA’s ability to keep up with rapidly changing technology here and here.

Obtaining guidance early can allow a startup to design products and services that avoid regulation, minimize the amount of applicable regulation, or get started on the path to regulatory approval or compliance.  A complication, however, is that it is difficult to give blanket statements or guidelines as to how to proceed because each company’s situation will be different based on its specific product and what it is marketed to do for consumers.  Medical app developers should review this review of the FDA’s regulatory process.

To get the necessary guidance on how to avoid issues with the FDA, a startup should consider the following options:

  • Mentors.  Finding someone who has worked with a company in a similar situation should be the first step for any startup considering working in an area regulated by the FDA.  While a mentor may not be able to answer every detailed question, their experience and know-how are indispensable, and relatively cheap.  In terms of payment, some mentors will help for free, however, many startups find it advantageous to provide particularly useful mentors with a small equity stake in the company.
  • Employees.  Sometimes, hiring employees with knowledge of the ins and outs of FDA regulation in the relevant fields is the best way forward.  Having someone who knows how to navigate the regulatory landscape on a full time or part time commitment to the company is often necessary when working on strategy and product development in a regulated field.  Having employees with this knowledge can add expense to a startup, but, being able to move forward quickly and without having to revise products and services over and over again after they have been designed can save serious money and time in the long run.
  • Advisory Board.  While having a single mentor can be useful, a multi member advisory board provides even greater benefits for startups that need help with a range of issues.  When creating an advisory board, a small equity stake would be common for an early stage startup.  Creating successful advisory boards is not as simple as it may seem.  Mark Suster provides this great post on structuring an advisory board.
  • Contact the FDA directly.  The FDA website has a host of information, and it is possible to contact the FDA by phone or mail for advice on how to proceed.  While the FDA can be very helpful, in order to obtain useful advice, the startup needs to be able to explain their product or service in a fair amount of detail to the FDA.  Thus, it is often more useful to wait to contact the FDA after designing the product or service, with advice from mentors, an advisory board or attorneys, before contacting the FDA itself.
  • Experienced FDA regulatory attorney.  While some generalist attorneys have experience working with FDA regulation, often times, a specialist will be required.  Specialists are expensive, but, for complex issues such as FDA regulatory compliance, are often the only way to go.  Many of these attorneys tend to be located in Washington DC, and your general attorney should be able to recommend a reputable attorney or firm.

In conclusion, while the costs of obtaining definitive legal guidance on how to ensure FDA compliance can be very expensive, it is important to get help early and often when working on a product or service that might implicate FDA regulation.  Investors know that FDA compliance can be tricky and will want to know how a potential investment company will navigate these issues.  In the early stages, mentors and an advisory board can provide preliminary guidance.  Then, once more money has been raised, specialists can help the company engage with the FDA to ensure the company does not receive a warning letter requiring the cessation of sales.