Thursday, January 27, 2011

Manufacturer has standing when competitor claims to use its patented ingredient

Advanced Oral Technologies, L.L.C v. Nutrex Research, Inc., 2011 WL 198029 (D.N.J.)

Plaintiff AOT sued Nutrex for putting 2nitrooxy ethyl2amino 3methylbutanoate on the ingredient list of Nutrex’s bodybuilding supplement Hemo Rage Black. In fact, the molecule is patented and AOT is the exclusive licensee. The court denied a preliminary injunction given the steps Nutrex had taken to cure the problem, but the case continued with Nutrex’s motion to dismiss.

When Hemo Rage Black was first introduced in August 2009 the label listed 56 different ingredients, including the molecule, on the back of the bottle in size 6.5 font. Nutrex argued that it made a mistake: it originally intended to license the molecule from AOT, but then didn’t and inadvertently failed to correct the labels, which had been designed and produced before the supplement was made. (An interesting window into the production process.)

AOT first thought Nutrex was infringing, but then found out the truth; it demanded that Nutrex stop distributing the erroneously labeled product. Negotiations broke down, and on April 1, 2010 Nutrex removed the reference to the molecule from its website and other advertising, and had new labels printed for future manufacturing runs. To correct the faulty labels on existing inventory held in its warehouse, Nutrex crossed out the reference to the molecule with a black marker. Codefendant retailers also removed all references to the molecule in their advertising materials. (Okay, if they didn’t remove the reference from the website, at least, the moment the problem was pointed out, and if this sequence is otherwise correct, I’m seriously unimpressed. Even if they had hopes of negotiating a license, that didn’t put the molecule in any of the existing product; negotiations at best would solve the business problem, leaving the consumer protection problem untouched.)

Despite these efforts at correction, there are still mislabeled bottles available for purchase, some untouched and some allegedly only partially covered or covered with marker that can wear off.

AOT sued for unfair competition, RICO violations, tortious interference, unfair competition, and misappropriation. I’m only going to talk about the Lanham Act claims; several other claims were dismissed for insufficient pleading.

Constitutional standing: Nutrex argued that AOT failed to allege injury in fact or a causal nexus between Nutrex’s actions and harm to AOT. The court thought the injury was “straightforward.” AOT alleged that it markets eNoxide, a supplement containing the molecule; that the molecule’s unique properties give it substantial commercial value; and that consumers recognize the long ingredient name as AOT’s molecule and associate it with those unique properties. AOT further alleged that sales of a product falsely claiming to have the molecule undermine AOT’s goodwill at a critical time in the launch of AOT’s products. (Weirdly, though the product is advertised on several websites I checked, the allegations are couched as if eNoxide has yet to launch.) The allegations were more than sufficient at the pleading stage. “While the damages arising from this conduct may be difficult to quantify, the alleged injury is clear, it is clearly attributable to Defendant's conduct, and a favorable judicial decision (awarding either damages or injunctive relief) will clearly remedy the situation.”

Prudential standing: Standing was even easy under Conte Bros. AOT alleged direct competition, and also alleged that by falsely marketing a supplement as if it had the molecule, Nutrex seriously impaired AOT’s ability to convince the buying public that AOT’s product is effective and damaged its goodwill. This is “precisely the kind of competitive harm and reputational injury that was missing in Conte Bros.” Both the Lanham Act and the New Jersey Fair Trade Act are “designed to prohibit a broad array of misleading representations that undermine commercial interests. … [The Lanham Act] has consistently been used to rectify competitive harms resulting from literally false advertising. There is no reason to believe that it would not apply here ….” The reputational damage claimed was direct and foreseeable; AOT is directly injured, not remote; and, while damages may be difficult to assess, they weren’t so complex or tenuous as to mandate dismissal. Plus, AOT sought injunctive relief, which would require neither speculative damages nor apportionment.

Nutrex argued that the inclusion of the molecule on the label was not material. But plaintiffs aren’t required to offer evidence of materiality at the pleading stage.

The really amazing thing to me is that under Conte Bros. it's apparently worthwhile for a direct competitor to litigate standing even when there's an explicit reference to plaintiff's product.

I note as a point of interest that, while the allegations were enough for Lanham Act purposes, the court held that AOT failed to allege a concrete “injury to business or property” for RICO purposes. The tortious interference claims also failed; AOT didn’t plead facts suggesting that Nutrex actecd knowingly and with malice. When confronted, Nutrex volunteered to strike out the offending ingredient. “While this may or may not have sufficed to undo any damage done to Plaintiff's business or marketing efforts for the Molecule, it hardly suggests deliberate efforts by Defendants to undermine Plaintiff's ability to sell its products.” AOT also failed to sufficiently plead that it lost sales or business because of Nutrex’s interference. Similar pleading deficiencies attended its misappropriation claim.

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