Case 5:14-cv cr Document 33-7 Filed 09/11/14 Page 1 of 10

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1 Case 5:14-cv cr Document 33-7 Filed 09/11/14 Page 1 of 10 IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF VERMONT GROCERY MANUFACTURERS ASSOCIATION, et at, v. Plaintiffs. WILLIAM H. SORRELL, in his official capacity as the Attorney General of Vermont, et al., Defendants. Case No. 5:14-cv CR DECLARATION OF ALEXANDER L. BAXTER IN SUPPORT OF PLAINTIFFS' MOTION FOR A PRELIMINARY INJUNCTION I, Alexander L. Baxter, hereby declare: 1. I am the Vice President of Supply Chain Planning for Pepsi Beverages Company, a subdivision of PepsiCo, Inc. ("PepsiCo" or the "Company"), which is a member of Plaintiff Grocery Manufacturers Association. I have been an employee of PepsiCo or its primary Bottler (whether independent or company-owned) for over 23 years in various Manufacturing and Logistics roles (including but not limited to the role of Plant Director, Director of Manufacturing and Logistics, Regional VP of Manufacturing). I have been at my current role for over 6 years. This declaration is based on my personal knowledge and experience, as well as my review of Company books and records and discussions with other employees. 2. I have been informed that the State of Vermont has passed Act 120 into law. As explained to me, Act 120 requires manufacturers to place labels on processed foods containing any ingredient(s) made from crops produced with genetic engineering (GE ingredients) stating that the product is "partially produced with genetic engineering," "may be produced with genetic engineering," or "produced with genetic engineering." -1-

2 Case 5:14-cv cr Document 33-7 Filed 09/11/14 Page 2 of I have been further informed that Act 120 also prohibits use of the words "natural," "naturally made," "naturally grown," "all natural," or "any words of similar import that would have a tendency to mislead a consumer," from being used on the label of any processed food containing any ingredient(s) made from crops produced with GE ingredients. 4. I have been asked to explain the effect Vermont's Act 120 will have on the Company and its product labeling. Specifically, this declaration sets forth: (A) the scope of the sales and distribution of the Company's products and the systems used for labeling those products; (B) how Act 120 would necessitate changes to the Company's labeling; (C) the costs and resources, both immediate and long term, that will be incurred by the Company in attempting to comply with Act 120; (D) the enormous difficulty, if not impossibility, of reformulating the Company's products to avoid Act 120's labeling requirements by eliminating ingredients made from crops produced with genetic engineering from the Company's products; and (E) how Act 120 compels the Company to make misleading and inaccurate statements about its products. A. Background 5. The Company, founded in 1965, is headquartered in Purchase, New York. We are a leading food & beverage company with brands that are respected household names throughout the world. 6. The Company's products are available in stores in all fifty states, including retail locations in the State of Vermont. 7. Product packaging and labeling is one of the ways the Company communicates with its customers. The packaging provides very limited space for communication. Every mandatory statement on a label takes up space the Company might otherwise use to convey its own message. This issue can be particularly significant for smaller sized packages. -2-

3 Case 5:14-cv cr Document 33-7 Filed 09/11/14 Page 3 of The Company designs its product packaging using colors, art, and trademarks that are familiar to consumers to help them easily identify the product on the shelf. 9. The Company's labeling is also designed to comply with federally-mandated labeling requirements. These requirements include information in the nutrition facts panel, the use of the "common or usual name" to identify ingredients contained in the product, net weight and other information. 10. The Company does not produce product labels that are specific to the State of Vermont. In fact, I am not aware of any case where the Company's product label characterizes the ingredients in a product based on the particular State where the product is destined for sale. B. Act 120 Imposes New and Different Labeling Requirements for the Company's Products and Has Significant Implications for the Company's Supply Chain Processes. 11. In order to produce Vermont-specific labels for its food products, the Company will have to identify and develop resources devoted to Vermont-specific food labeling that the Company does not currently have in place. As discussed in more detail below, the Company has a highly complex and integrated supply chain. In order to comply with Act 120, the. Company will have to essentially uproot its supply chain processes across the country. Even if the Company decides to undertake these vast efforts and the significant financial costs associated with them, it still cannot ensure complete compliance with Act and certainly not by July 1, The Company tracks its products by "stock-keeping unit" (SKU), a unique number assigned to each product for purposes of tracking products through the manufacturing, packaging, storage, sales, and distribution processes. The Company does not have separate Vermont SKUs among its existing products because it does not make separate product lines for -3-

4 Case 5:14-cv cr Document 33-7 Filed 09/11/14 Page 4 of 10 distribution in Vermont. The Company sells over 1,700 SKUs in Vermont, with each product having its own packaging design and content. A single snack product, for example, will generally have a different SKU for each size the Company sells, and each type of packaging it uses. 13. A complex network of over 100 manufacturing facilities around the country is involved in making the over 1,700 SKUs sold in Vermont. The network is comprised of both company owned plants and third party facilities. None of these facilities is located in Vermont. 14. The Company does not currently label its food products as "produced with genetic engineering," as Act 120 requires. Although the Company is still in the process of determining which of its products would be subject to this aspect of Act 120, based on its current assessment hundreds of its products will be affected. 15. For instance, the Company does not specifically require the use of genetically engineered crops in the ingredients in its products. However, the Company purchases ingredients like corn, soy and sugar on the open market and its purchases reflect what is widely available in the U.S. market. As discussed below, approximately 90% of the corn, soy, and sugar beet crops produced in the United States are currently grown with seeds developed through genetic engineering. The Company, in turn, sources hundreds of ingredients that are made from or with corn, soy or sugar beets. Therefore, a substantial number of the products that the Company sells in Vermont are likely to be implicated by Act 120's affirmative "produced with genetic engineering" labeling requirement. 16. Furthermore, in order to comply with Act 120, the Company will also have to review the content of its labels and advertising to ensure it is in compliance with the Act's ban on terms such as "natural," "naturally made," or "naturally grown." Any non-compliant or -4-

5 Case 5:14-cv cr Document 33-7 Filed 09/11/14 Page 5 of 10 potentially non-compliant advertisements or packages will have to be revised. Finally, the Act reaches terms that are "of similar import" to the term "natural." The Company does not know which specific terms the State of Vermont considers to be of "similar import" to "natural" and is unclear about how it can ensure compliance with this aspect of the law_ C. Act 120 Harms the Company by Requiring it to Incur Substantial Costs Which May Never Be Recovered. 17. In order to comply with Act 120's labeling requirements, the Company must develop Vermont-specific labels. 18. The Company has already started the process of evaluating potential options directed at revising its labels for products sold in Vermont, but it is highly unlikely that it can achieve full compliance with the Act, and certainly not by July 1, That is, in part, because the Company faces significant logistical and operational issues associated with implementing those strategies. 19. Specifically, the Company will have to create and maintain dual packaging (Vermont packaging and packaging for the rest of the country) for approximately 1,700 SKUs. This will involve creating approximately 1,700 new incremental graphic designs and printing plates at a cost of several million dollars. Furthermore, maintaining a dual inventory of labels on an ongoing basis will significantly increase our overall packaging costs. 20. Many of our IT systems today do not have the ability to differentiate between different versions of the same SKU, These systems will need to be reprogrammed at significant expense, impacting approximately 59 producing locations all across the country and all outside of Vermont. 21. Maintaining dual inventories will also impact our manufacturing processes. Plants will need to find ways to make separate product nms for products that may end up for sale -5-

6 Case 5:14-cv cr Document 33-7 Filed 09/11/14 Page 6 of 10 in Vermont, giving rise to significant concerns about costs resulting from stoppages and other inefficiencies. Furthermore, both Company and third party manufacturing facilities will have to maintain separate inventories of labels and products for Vermont. We currently do not have the necessary physical space even in our own facilities to accomplish this. 22. The distribution channels for the Company's products do not allow the Company to target the distribution of products to specific states. There is no single point of distribution into Vermont. Instead, the Company sells through multiple distribution channels to reach consumers in Vermont and does not entirely control what products enter Vermont and may end up on store shelves. Examples of such channels include shipments to: a) regional warehouses managed by wholesalers who in turn distribute products to various traditional grocers; b) regional warehouses owned by larger customers that serve as regional hubs for distribution; c) distributors that re-sell to convenience stores; d) distributors that sell to schools and universities; e) foodservice distributors that sell products to restaurants, health care institutions, hotels and companies; and f) distributors that sell to vending machine operators. 23. In no case are any of the above channels of distribution specific to Vermont. In order to implement a separate label scheme for Vermont, the Company will have to work with all of its varying distributors and customers to ensure that the labels get into Vermont. This effort will require substantial time and money, with no guarantee of success. Even for Company distributed products, we do not have distribution systems that are dedicated exclusively to Vermont due to economic and logistical barriers. Accordingly, compliance with Act 120 will require our trucks to carry dual inventories of products, increasing our overall delivery costs. Additionally, all of the various costs discussed above could make it economically infeasible for -6-

7 Case 5:14-cv cr Document 33-7 Filed 09/11/14 Page 7 of 10 us to deliver and sell smaller, niche or limited time products in Vermont and neighboring states, potentially jeopardizing the financial performance and viability of those products and brands. 24. Meeting the July 1, 2016 compliance date means that as of that date, all products manufactured by the Company that are subject to Act 120 and do not have compliant labels must be pulled from retailers. This means that the Company will have to have completed any relabeling efforts far enough in advance of July 1, 2016 to ensure an adequate supply of properly labeled products and to avoid obsolescence costs associated with old label and product inventories. Furthermore, the process of clearing retail shelves of non-compliant products and substituting into the market compliant products may take several months and even up to a year to complete. This means that the Company may have to begin shipping product with redesigned labels more than a year before the July 1, 2016 compliance date to ensure all of its newlyrelabeled products are, in fact, on store shelves in Vermont as of that date. 25. Many of the Company's products have a long shelf life. For many longer shelf life products, the label re-design/implementation process should have started approximately seven months ago to avoid significant obsolescence costs associated with product and raw material inventory. For many products that have a shorter shelf life, the label redesign and implementation process would have needed to begin by this month (September 2014), to avoid obsolescence. 26. It is my understanding that Vermont is still developing rules to implement Act 120 and will not have final rules until the middle of Additionally, we also do not have guidance on what words Vermont will consider to be of "similar import" to "natural." These gaps and ambiguities in Act 120 will not only add significant burdens and costs on the Company, but also significantly impede its ability to achieve full compliance by July 1,

8 Case 5:14-cv cr Document 33-7 Filed 09/11/14 Page 8 of Exacerbating this problem is the fact that Act 120 relieves retailers from all liability selling processed food products with non-compliant labels. Thus, unless the product is expired or recalled by the manufacturer, Vermont retailers are incentivized to sell through their existing stock of goods rather than order replacement goods with alternative label designs. 28. For all of the reasons stated above, for the Company to make labeling and supply chain changes necessary to comply with the Act's requirements would entail significant commitment of resources and expenditure of funds. These costs could not be recouped from the State of Vermont if Act 120 were later invalidated. Nor could the Company restore its ordinary operations without incurring further cost. 29. Alternatively, the Company could stop selling its products in Vermont. Between now and July 1, 2016, however, it will be difficult and perhaps even impossible for the Company to fully achieve this result for the logistical reasons described above. And if the Company did not sell its products in Vermont, it would lose significant revenue, consumer goodwill and brand damage that could not be compensated by a favorable ruling in this litigation. D. It Would be Virtually Impossible for the Company to Reformulate Its Products to Avoid Act 120's Labeling Requirements. 30. To avoid Act 120's labeling requirements, the Company's products would have to qualify for one of Act 120's exemptions, which require either that: (1) "the genetically engineered materials in the aggregate do not account for more than 0.9 percent of the total weight of the processed food," or (2) the product is "food that an independent organization has verified has not been knowingly or intentionally produced from or commingled with food or seed produced with genetic engineering." 31. The Company could not meet its requirements for such ingredients if it restricted its purchases to non-ge varieties due to the prevalence of GE crops in the United States' food -8-

9 Case 5:14-cv cr Document 33-7 Filed 09/11/14 Page 9 of 10 supply. There isn't enough non-ge corn/soy/sugar beets grown in the United States to meet the Company's demands and the demands of all other food manufacturers in the United States. 32. Moreover, if the Company attempted to comply with Act 120 by seeking qualification for one of these exemptions, it would need to engage in a costly and multi-step process. First, it would need to identify those products that actually contain GE ingredients, and then assure that any replacement ingredients for those products did not contain the specified percentage of GE ingredients. This would require significant modifications to the Company's supply chain procedures to ascertain whether genetically engineered strains of a given crop are present in the supply acquired by the Company. Indeed, it remains to be seen whether such supply chain modifications are feasible. The Company also would have to create an alternate supply chain that only handles ingredients that are not grown with GE seed. This would lead to substantial expense. E. Act 120's Labeling Requirements Harm the Company by Requiring it to Engage in Unwanted Speech That is Inaccurate and Misleading. 33. Act 120's labeling requirements will force the Company to engage in speech that it would not otherwise engage in, and prohibit the Company from engaging in speech that it might otherwise make. 34. Act 120 defines "genetic engineering" to mean "a process by which a food is produced by an organism or organisms in which the genetic material has been changed through the application of: (A) in vitro nucleic acid techniques, including recombinant deoxyribonucleic acid (DNA) techniques and the direct injection of nucleic acid into cells or organelles; or (B) fusion of cells (including protoplast fusion) or hybridization techniques that overcome natural physiological, reproductive, or recombination barriers, where the donor cells or protoplasts do -9-

10 Case 5:14-cv cr Document 33-7 Filed 09/11/14 Page 10 of 10 not fall within the same taxonomic group, in a way that does not occur by natural multiplication or natural recombination." 35. This definition of "genetic engineering" does not accurately describe the processes by which the Company produces its food products. The Company does not use "in vitro nucleic acid techniques," "fusion of cells," or any other similar techniques to produce its food products. I swear under penalty of perjury that the foregoing is true and correct. DATE: September, 2014 Alexander L. Baxter -10-