A federal appeals court revived a potential class-action lawsuit against Whole Foods Market Inc. over allegations that the natural grocer routinely overcharged New York City customers, a blow to the company as it fights to lure back customers following a difficult period.
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The Second U.S. Circuit Court of Appeals in New York on Friday ruled a lower court erred when it dismissed a case last year brought by a Manhattan resident against the Austin, Texas-based company, accusing it over overcharging him for a variety of items.
In its opinion, the appeals court wrote that Whole Foods shopper Sean John had "plausibly alleged" that "Whole Foods packages were systematically and routinely mislabeled and overpriced." Aiding Mr. John's assertions, according to the court: a release from the New York City Department of Consumer Affairs, which in 2015 concluded that Whole Foods stores in New York had "routinely overstated the weights of its prepackaged products -- including meats, dairy and baked goods."
The case now returns to district court. Lawyers for Mr. John said they would now argue the case should become a class-action on behalf of other Whole Foods shoppers. "Consumers need to be able to rely on the accuracy of labels when they shop," said Greg Blankinship of Finkelstein Blankinship, Frei-Pearson & Garber LLP.
A Whole Foods spokeswoman said the company was disappointed in the court's decision. "We will continue to vigorously defend against the plaintiff's meritless claims," she said.
The ruling comes amid a difficult and expensive period for the gourmet grocer at a time when it is fighting to regain share in the competitive natural and organic market.
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The company also faces an activist fight brought forward by shareholders after its stock value has lost nearly half its value from its peak and sales have steadily fallen for 21 months.
Whole Foods recently shook up the company's board, appointed a new chief financial officer and is pushing through operational changes to try to improve sales and reassure stockholders.
The litigation arises out of a 2015 investigation in New York City that found Whole Foods routinely mislabeled weights of freshly packaged foods, ranging from an overcharge of $0.80 for a container of pecan panko to $14.84 for packaged coconut shrimp.
Chief Executive John Mackey apologized, saying the mislabeling was an error by employees but that it also led to some undercharging for food sold at New York stores. The company settled the allegations for $500,000 and agreed to conduct quarterly audits and increased training around pricing. The city didn't find fraud or evidence of intentional misconduct by Whole Foods employees, according to the consent decree disclosed in court papers.
Whole Foods's sales growth slowed sharply after the investigation was released. It also came at a time more conventional grocers enhanced their selling of organic products, often at cheaper prices than Whole Foods.
The company has since slashed prices to try to woo back customers. Mr. Mackey has said he expects to see growth return to the company's sales by next fiscal year.
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(END) Dow Jones Newswires
June 02, 2017 14:50 ET (18:50 GMT)