Does Stocking Shelves = Product Promotion?

While online shopping continues to grow at lightning speed, last year a whopping 90 percent – yes, that’s nine zero – of all retail sales in North America still took place in brick-and-mortar stores, according U.S. Census Bureau data. Though this giant percentage comes from combining many different categories of retail sales – from groceries to apparel and everything in between – the fact remains that in 2018 only a small fraction of retail purchases (a measly 10 percent) happened online.

Combine that statistic with the fact that 70 percent of consumers’ purchasing decisions are made in the actual store rather than being pre-planned and it becomes crystal clear why the Federal Trade Commission has said that store shelves are retail stores’ “most important asset.” It’s such a coveted asset that some companies actually pay retailers special compensation just to have their wares placed on certain shelves, as part of a system called “slotting allowances” (upfront payments from a manufacturer to a retailer – usually a grocery store – to have a product placed on shelves).

So when a retailer features a product on a shelf – by the front door, in a display window, next to the cash register or near popular items, for example – the retailer (which is making a profit from selling these products) is engaged in its own type of product promotion, right? Not so, says a district court in Texas that recently ruled that placing a product for sale in a brick-and-mortar store is not advertising.

The decision came in a lawsuit (Outlaw Laboratory, LP v. Shenoor Enterprise, Inc.) filed by a manufacturer of men’s supplements against several convenience stores for false advertising under the Lanham Act. The lawsuit alleged that the stores sold and falsely marketed competing supplements (known as Rhino male enhancement supplements) as “all natural” and sans “harmful synthetic chemical” when they aren’t. (FYI: In November 2018, the FDA warned consumers to avoid these Rhino products due to “undeclared and potentially dangerous drug ingredients.”) The Texas court decided that retailers cannot be held liable for false advertising based solely on allegations that they displayed and sold the products at issue in their stores.

[T]he policy concerns stemming from a decision that holds retailers liable for false advertisements created and controlled solely by third parties could be severe. Here, Defendants undoubtedly sell many products—should they be responsible for scrutinizing and determining the veracity of every claim on every product label in their stores simply because they sell the product?

The court answered that question with a resounding no, shielding retailers from liability for promoting falsely labeled products on their shelves for profit.

Interestingly, this decision is at odds with another recent decision from a California court that held that a website owner who sold third-party male-enhancement products that allegedly contained illicit pharmaceutical ingredients could be held liable for disseminating the false advertising through its website (even though it didn’t actually write the false statements itself).

And placing third-party products on store shelves is like the real-life, physical version of featuring third-party products on a website, isn’t it?

Fortunately for consumers, this decision is limited in its reach and impact. For one thing, the decision was made in a case between competitors and the court’s legal analysis pertained solely to the Lanham Act, meaning the decision should have no bearing on false advertising cases filed by regulators or consumers under different laws (e.g., the FTC Act, state consumer protection laws). And, of course, there’s the age-old legal principle of binding precedent, undoubtedly explained in great detail in one of the legal books that are stocked on my shelves. But suffice it to say here that one judge’s decision in a district of one state does not necessarily dictate what another judge in another district court might decide if presented with similar facts. So to the other Outlaw Labs of the world, better luck next time.