By MATEUSZ PERKOWSKI

Capital Press

A California walnut company has agreed to pay $3.45 million to settle a class action lawsuit that accused it of false advertising.

Diamond Foods of San Francisco has struck a deal with walnut consumer Elliot Zeisel of New York, who claimed the company misled consumers by promoting the "heart healthy" attributes of walnuts.

As part of the settlement, which must still be approved by a federal judge, Diamond has agreed to pay consumers $3.25 to $8.25 for each package of walnuts they bought that contained the "heart healthy" claims, depending on size and other conditions.

If the total amount of compensation exceeds $2.6 million before the settlement is finally approved, Diamond can pull out of the deal. If the amount falls below $2.6 million, the balance will be donated to food banks.

Attorneys for Zeisel will also be able to collect $850,000 from Diamond under the deal's terms.

Though Diamond continues to dispute that the language it used to promote walnuts was unlawfully misleading, the company has agreed to discontinue the "heart health" labels and similar materials on its website.

The controversy stems from a statement on Diamond's walnut packages that claimed "the omega-3 in walnuts can help you get the proper balance of fatty acids your body needs for promoting and maintaining heart health."

In February 2010, the U.S. Food and Drug Administration sent a warning letter to Diamond, alleging the company violated food labeling rules by marketing walnuts as if they were intended to treat a medical condition.

The agency said "there is not sufficient evidence to identify a biologically active substance in walnuts that reduces the risk of (coronary heart disease)" and requested that Diamond change the labeling.

A month later, Zeisel filed a legal complaint accusing the company of violating consumer protection laws and unjustly enriching itself with false advertising.

Diamond argued that Zeisel wasn't actually harmed by the advertising, since he admitted to buying walnuts for reasons other than health, but a federal judge certified the case as a class action earlier this year, allowing other affected walnut consumers to join the litigation.

With the parties now having reached a settlement in principle, they expect to present the agreement to a federal judge for final approval in August 2012, according to court documents.

However, the deal does not end other legal problems faced by Diamond, formerly a walnut farmers' cooperative that transformed into a publicly traded snack food company in 2005.

Since November 2011, seven lawsuits have been filed against the company accusing it of violating federal securities law. Diamond is accused of inflating its profits by misstating how much money it spent on walnuts.

In December, the company also disclosed that its accounting practices for crop payments are being formally investigated by the U.S. Securities and Exchange Commission.

Diamond's stock price was recently trading at below $35 per share, down from more than $90 per share in September 2011, before an investment consulting firm raised questions about its walnut purchases.