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So, You Received a Demand Letter

Demand Letter Demand Letter

Sometimes it’s fun checking the mail. Sometimes it isn’t. Like other industries, companies operating in the hyper-competitive natural products space may receive, from time to time, a demand letter from an attorney, outlining a purported legal claim by a consumer or competitor. While there is no immunity from such letters, knowledge is power and can enhance your response.

Under some state and federal laws, before a plaintiff can file a consumer class action alleging false advertising or breach of warranty, the plaintiff must first send the defendant a pre-lawsuit “notice” or “demand” letter explaining the alleged legal violation and giving the company a chance to remedy the situation without litigation. Usually, the letter demands the sky: a full refund for everyone who purchased the product in the past four years. But demand letters aren’t exclusive to consumer class actions; sometimes they allege trademark or patent infringement, or violations of the Americans with Disabilities Act, California’s Proposition 65, or other laws. If your company receives one, what next?

The demand letter is the first salvo in the looming battle. But as the military strategist Sun Tzu observed, “If you know the enemy and know yourself, you need not fear the results of a hundred battles.”

First, Know the Adversary

Just because a plaintiff’s attorney sends a demand letter threatening to sue doesn’t mean the attorney will sue. Some plaintiff’s attorneys send out dozens or even hundreds of demand letters hoping for quick settlements but will rarely follow through with an actual lawsuit. Other plaintiff’s attorneys will very likely sue. Experienced defense counsel often will have critical intel about the adversary’s modus operandi, intel that will help you decide how to respond—or perhaps even not respond—to the demand letter.

Knowing the adversary also includes knowing the individual claimant named in the demand letter. In the consumer class action context, that means the specific consumer named in the letter who allegedly purchased your product. If your company has any records concerning the claimant, such as transaction records, invoices, or loyalty program records, gather them immediately. Consider whether the claimant’s purchase or transaction may have been governed by any terms of sale or terms of use. For example, is the claim subject to any arbitration agreement or class action waiver? Ask your counsel if the claimant has any known history of prior litigation or prior demand letters to other companies. Many claimants are “frequent fliers,” recycled from one demand letter to the next. That history may severely damage the claimant’s credibility, and it is best to know that early, while you are deciding whether to settle or fight.

Second, Know Yourself

Candidly assess the strength or weakness of the claim with your counsel. Consider also whether the business practice challenged in the demand letter is important to your business or could be easily discontinued or modified. Sometimes, for example, demand letters challenge marketing statements that have lost their usefulness to the company in any event. Or perhaps the demand letter comes when a marketing “refresh” or product reformulation is already contemplated or underway. Consider also whether an insurance policy or indemnification agreement potentially covers the claim. In our experience, the claims in many demand letters stand little chance of success in court or have meager monetary value at trial. But practical business considerations are often as important as the legal ones when deciding whether to pursue an early settlement or fight.

Regardless of whether you consider settlement negotiations, if the practice challenged in the demand letter is “old news”—that is, a business practice you already discontinued or are about to change—it may be important to promptly notify the claimant’s attorney, so he or she knows a lawsuit isn’t necessary to change the practice. This may moot or narrow certain remedies available to the claimant if he or she files suit. Your counsel can help you decide whether or when to alert the claimant’s attorney regarding such changes.

Recognize, too, that demand letters follow trends. If you are receiving a demand letter challenging a particular advertising claim or business practice, there is a good chance you are not alone. Some other company may already be defending against a similar—if not identical—claim in court. With some planning and strategy, you may be able to reduce litigation costs, or better gauge settlement value, by “drafting” behind or learning from cases already underway.

Demand letters might allege your company has violated a state or federal regulation. For example, in the consumer class action context, demand letters often allege a product’s labeling violates some hyper-technical FDA (U.S. Food and Drug Administration) regulation. While it is always important to determine whether your business practice complies with such regulations, several legal theories may bar a private party from bringing a lawsuit to enforce the regulations. Enforcement is often restricted to public agencies. Consumers are frequently limited to claims that the product’s marketing is false or misleading, not that it violates a regulatory standard.

Finally, if you decide to pursue early settlement, make sure you understand what the settlement will—and will not—cover. Many demand letters are settled on an “individual” basis, meaning the only person giving up his or her claim is the person named in the demand letter. That means you might receive an identical demand letter from another consumer. Your counsel should help you assess that risk and can discuss with you how to take it into account when evaluating whether to settle or defend the claim. In rare circumstances, a demand letter might justify contemplating a class action settlement, capable of resolving all consumers’ claims at once.

So, if the demand letter comes, there’s a plan. NIE

A partner with Amin Talati Wasserman, William Cole is a skilled trial attorney and former federal prosecutor with over 25 years’ experience. Cole’s practice includes consumer class actions, intellectual property, business litigation, white collar and FTC matters. Matt Orr, a partner with Amin Talati Wasserman, is a litigator with a proven track record of success defending many of the nation’s leading retailers and manufacturers of food, beverage, dietary supplement, and cosmetic products. He is particularly known for his extensive experience in consumer class actions. For more information, visit www.amintalati.com.