Court Reverses Prior Decision Finding ‘Carbon-Neutral’ Claim May Be Misleading

A US federal district court, upon a motion to reconsider, granted the defendant’s motion to dismiss class action claims concerning its use of the term “carbon neutral.” This decision represents a victory for consumer goods manufacturers and marketers; however, industry players are advised to continue exercising prudence and care in environmental quality–related labeling.

In January 2024, the US District Court for the Southern District of New York allowed a series of class action claims against Danone Waters of America Inc. to proceed, alleging that Danone’s use of the term “carbon neutral” on its Evian water bottles was misleading and could cause consumer confusion. However, the court recently reversed course in a motion for reconsideration.

COURT’S INITIAL DENIAL OF DANONE’S MOTION TO DISMISS

The class action alleged that Danone’s claim of carbon neutrality on its Evian water bottles violated a number of state consumer protection laws barring unfair and deceptive trade practices, including New York General Business Law (GBL) Sections 349 and 350, Massachusetts General Laws Chapter 93A (Chapter 93A), and the California Consumers Legal Remedies Act (CCLRA).[1] The plaintiffs also asserted claims against Danone for breach of express warranty, breach of implied warranty, unjust enrichment, and fraud.[2]

The court dismissed the New York-based claims and the breach of implied warranty claims but allowed all other claims to proceed, concluding that a reasonable consumer could plausibly conclude that “carbon neutral” means that no carbon is emitted during the extraction, bottling, and delivery of Evian water, and that a reasonable consumer could conflate the terms “carbon neutral,” “carbon zero,” and “carbon free.”

The court relied on the Federal Trade Commission’s (FTC’s) Guides for the Use of Environmental Marketing Claims (the Green Guides), which caution marketers against making “unqualified general environmental benefit claims” that are “difficult to interpret” and “likely convey a wide range of meanings” that are difficult, if not impossible, to substantiate.

Agreeing with plaintiffs, the court determined that “carbon neutral” was “precisely the type of ‘unqualified general environmental benefit’ claim” that the FTC cautions against in the Green Guides. The court also cited a consumer survey conducted by plaintiffs, reflecting that nearly 60% of consumers did not understand the meaning of “carbon neutral.” Finally, the court determined that providing a link with more information on the back of the bottle did not rectify the potential consumer confusion.

COURT GRANTS RECONSIDERATION AND DISMISSES ALL CLAIMS AGAINST DANONE

Danone asked the court to reconsider its decision. The court granted Danone’s motion and dismissed all claims without prejudice.[3]

Reasonable Consumer Standard

In its initial order denying Danone’s motion to dismiss, the court relied on two cases in concluding that the reasonable consumer would be confused by the “carbon neutral” labeling under Massachusetts law. On reconsideration, the court determined that those cases presented “close questions” and, in any event, were not analogous to the facts in Danone. In each case, the labeling was found to be misleading, in part, because there was an industry convention or governing regulation prescribing certain labeling requirements, which the defendant violated.

But here, the court noted that no such standard or regulation exists and that consumers could have reviewed the back label, which would direct them to a website providing a comprehensive explanation of what “carbon neutral” means.

As for plaintiffs’ claims under California’s consumer protection laws, the court noted that it had “overlooked two key decisions.” Those decisions held that

1. a reasonable consumer is one who makes “contextual inferences from the product itself and packaging,” and such additional information may “cure[] any ambiguity;”
2. “there is a floor to the reasonable consumer standard and when consumers make assumptions about a product that the seller is providing something that is impossible, these consumers do not meet the standard;” and
3. an ambiguous front label can be resolved by reference to the back label.

Based on these principles, the court held that a reasonable consumer would not interpret “carbon neutral” to mean no carbon was emitted because no “carbon-zero” products exist. This conclusion was supported by the curative information provided on the website listed on the back label. Additionally, the labeling makes clear that the water is transported a number of times, which could not possibly result in a “carbon-zero” product.

Green Guides

The court reversed its initial decision, which held that “carbon neutral” was the type of “‘unqualified general environmental benefit’ claim that the FTC cautions marketers not to make.” Upon reconsideration, the court looked to the examples of such claims listed in the Green Guides—“eco-friendly,” “greener,” “eco-smart,” “environmentally friendly”—and found that “carbon neutral” is qualitatively different and not a “general environmental claim,” as contemplated by the Green Guides.[4]

Consumer Survey

The court revisited the above-referenced consumer survey proffered by plaintiffs, which plaintiffs suggested demonstrated that 60% of the population did not understand what “carbon neutral” meant. In granting reconsideration, the court found that only 29% of the sample group misunderstood the term—a material deviation from the court’s initial assessment.

In any event, the court explained that the relevant question is whether “a reasonable consumer would have looked to the back of a product for clarity and consulted the other additional information available when confronted with an unfamiliar or ambiguous term on the front label,” and found that a consumer would indeed do so.

In other words, the dispositive issue is not whether a reasonable consumer in an isolated situation understands what the term “carbon neutral” means, but rather whether the label would mislead a reasonable consumer acting reasonably under the circumstances.

Dismissal Without Prejudice

The court dismissed plaintiffs’ claims without prejudice, consistent with US Court of Appeals for the Second Circuit guidance discouraging dismissals with prejudice “prior to issuing a ruling that highlights the ‘precise defects’ of those claims.” However, the deadline for plaintiffs to amend their complaint expired on December 13, 2024, and accordingly, the dismissal will be deemed with prejudice.

KEY TAKEAWAYS

Legal Exposure: Carbon-Neutral Claims

While this decision represents a favorable outcome for industry participants, the initial decision makes clear that this case presented a close call in the court’s view. As such, manufacturers and marketers should continue to monitor the rapidly evolving legal landscape. As just one example of the shifting legal terrain, a California law enacted last year requires any company doing business in California that makes any claim about achieving net-zero emissions or carbon neutrality to make extensive new disclosures.

For more information on the new California laws, please refer to our following thought leadership:

• California Requires Companies to Disclose Climate Change Risks, GHG Emissions
• 5 Things to Know About California’s New Climate Disclosure Law

Importance of the Green Guides

In both of its decisions, the court scrutinized the Green Guides. The court deemed “carbon neutral” to be a more concrete and precise phrase than the general environmental claims addressed by the Green Guides, but the change in opinion is a reminder to be on the lookout for any claims suggesting an “unqualified general environmental benefit.”

For more information, see our previous LawFlash about the FTC’s long-anticipated update to the Green Guides. Release of the updated Green Guides is anticipated in 2025. Until then, companies should continue to strive for compliance with the guides.

Impact of the 2024 US Election

Independent of whether the FTC or Trump-Vance administration scrutinizes “green” or “environmental claims,” state attorneys general and private plaintiffs will likely continue to bring such claims under state consumer protection laws. Further, California regulators are expected to vigorously enforce climate disclosure laws enacted last year.

How We Can Help

This recent decision seemed to be a close call in the court’s view, and artful lawyers may bring similar actions concerning other products’ environmental claims. Companies should carefully evaluate environmental marketing statements, including by reviewing internal processes and documenting substantiation. It may be prudent to perform a review or audit of current environmental marketing claims. Our team of consumer protection and advertising lawyers stand ready to assist with such efforts.