Wednesday, April 25, 2012

Settlement agreement not specific enough to bar slamming the "competition"

Cogent Solutions Group, LLC v. Hyalogic, LLC, 2012 WL 1083513 (E.D. Ky.)
Cogent Solutions Group and Hyalogic compete in the joint supplement market. Hyaluronic acid ("HA") is a key component in their respective products. In 2011, CSG sued Hyalogic and another company for misleading ads, primarily focusing on the defendants' use of a "Competitive Analysis Chart" comparing the competing products. The parties settled shortly thereafter, and defendants agreed to remove all copies of the chart from circulation.  They also agreed to refrain from making "false or misleading statements about the other [p]arty's products," and Hyalogic agreed not to say that Cogent’s product Baxyl contained preservatives that break down hyaluronan, a key ingredient.
CSG argued that Hyalogic breached the settlement based on a YouTube video of a speech given by Dr. Karen Brown at a trade show, and based on Hyalogic’s alleged failure to timely remove the chart from circulation.  The court found that CSG failed to prove breach.
The liquidated damages provision of the settlement agreement listed statements that, if proven by clear and convincing evidence to have been knowingly used by Hyalogic in print for sales or marketing purposes, would result in damages.  The statements included claims that Baxyl was not bio-available, couldn’t be absorbed sublingually, or might have a pro-inflammatory effect, along with claims that the human body can only absorb 3 mg or HA or that the joints only need 3 mg of HA.
First, CSG couldn’t show by clear and convincing evidence that Hyalogic was responsible for the YouTube video.  Hyalogic argued that it was posted by an unrelated Malaysian company.  CSG responded that Hyalogic’s website had contact information for many international partners, including Malaysian ones.  That was only enough for a weak inference, not clear and convincing evidence, especially when Hyalogic’s affidavit specifically stated that the only relationship between the companies was that the Malaysian company sold Hyalogic’s products.
Second, CSG couldn’t show that a verbal statement in a YouTube video was “in print.”  Settlement drafters, grab your track changes: “noticeably absent from the plain language of this clause is the term ‘Internet,’” which was especially important because, in another part of the settlement agreement, Hyalogic agreed to make changes on the chart on any future use "in print or on the Internet."  By inference, internet uses weren’t covered by the liquidated damages provisions.
Third, CSG couldn’t show that the statement was used for sales or marketing purposes after the date specified by the agreement, May 17, 2011.  The videos were originally put on Hyalogic’s website in June 2010, and were unchanged after the settlement.  Thus, the YouTube video was “in the public domain” prior to the key date, according to the court.  (I don’t get why this is a separate reason than the rationale that Hyalogic was not responsible for the Malaysian company’s use.)
CSG separately alleged breach of a separate prohibition on false or misleading statements about CSG’s products.  The court again found no breach.  The YouTube statement that Hyalogic’s product is “more than 6 times that of the competition” wasn’t enough: Hyalogic presented a sworn statement that there were at least 13 other liquid HA supplements on the market competing directly with the parties’.  Thus, the YouTube statement didn’t contain the necessary reference to the “other Party’s products”—a reference to “the competition” wasn’t enough.  Likewise, references to “others” who “use preservatives and fillers that break down HA in their product” were insufficient.
Nor did CSG show that Hyalogic failed to make its best efforts to remove the chart attacking CSG from circulation.  It didn’t show a single instance of Hyalogic using the chart post-settlement.
Finally, CSG argued that Dr. Brown’s statements in the YouTube video were false and misleading, such as "you only need ... 3 milligrams."  Even assuming falsity, it wasn’t an explicit reference to CSG’s product, given the other products on the market.  CSG argued that the reference was targeted, because she spoke about "competitors" that "use citric acid and/or potassium sorbate as preservatives," and two out of the three products that contain trace amounts of these preservatives are made by CSG.  But Hyalogic’s sworn statement said that there were 9 such non-CSG products, and there still wasn’t a specific reference to Baxyl.

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