Tuesday, December 06, 2016

Fifth Circuit reverses multimillion-dollar antitrust verdict based on false advertising, remands

Retractable Technologies, Inc. v. Becton Dickinson & Co., No. 14-41384, 2016 WL 7046601, -- F.3d – (5th Cir. Dec. 2, 2016)

Regardless of the merits, courts don’t want plaintiffs bringing false advertising claims as antitrust claims.  Thus, they have imposed a number of empirically dubious, essentially random preconditions to treating false advertising as an antitrust violation; it is basically impossible for any plaintiff to show that all of the preconditions apply.  My usual approach is to say “the antitrust claims failed because they were antitrust claims,” but here the jury awarded RT treble damages for an antitrust claim based mostly on BD’s false advertising, so I’m going to say more.  This judicial hostility is enough to make me wonder whether antitrust law could be revived merely by making treble damages optional rather than mandatory, as they are in false advertising.

BD and RT are competitors in the market for safety syringes. A jury awarded $340 million (after trebling) against BD for its alleged attempt to monopolize the United States safety syringe market in violation of § 2 of the Sherman Act. The jury also found BD liable for false advertising under § 43(a).  The court of appeals reversed and vacated on §2, necessitating a remand for redetermination of whether disgorgement was now appropriate (given the disappearance of the antitrust damages) and whether injunctive relief should be reconsidered.

There are four main products in the safety syringe market: shielding needles, pivoting needles, sliding sleeve needles, and retracting needles, each of which is appropriate in specific hospital, clinical, or office settings. BD produced all four types and was also the major manufacturer of conventional syringes. RT’s principal product was the VanishPoint retractable syringe, which had a fixed, albeit retracting needle.  This protects against accidental injections but doesn’t work for other hospital and clinical uses.

In 2002, about five years after RT introduced the VanishPoint, BD created its own retractable syringe, the Integra. BD’s Integra suffered from design flaws such as leaking and failing to deliver a full dose of medicine. RT outsold BD in the retractable syringe sub-market: BD had a 1/3 share of the market, while RT’s market share was 2/3. By 2010, in the “relevant product market” for all safety syringes, BD’s market share was 49%, Covidien 30%, Smiths 10%, and RT 6%.

RT sued BD in 2001 for antitrust violations and product disparagement (based on the same advertising issues litigated here). The suit settled in 2004 and BD paid RT $100 million, with the parties releasing claims “which accrued on or at any time prior” to the agreement’s signing.

Three years later, RT filed the instant suit alleging patent infringement and antitrust and Texas common law violations. The district court tried the patent case first, and rendered judgment for RT (including “a mere $5 million in damages”) based on two BD versions of the Integra. On appeal in 2011, the Federal Circuit upheld the judgment only as to one model, which BD then removed from the market.

The non-patent claims continued.  RT argued that BD: monopolized and attempted to monopolize the markets for hypodermic syringes, safety needles and syringes, IV catheters, and safety IV catheters in violation of § 2 of the Sherman Act; excluded RT from these markets in violation of the Clayton Act §§ 1 and 3; violated the Lanham Act; and violated coordinate Texas law (later dismissed).

RT’s evidence “emphasized BD’s contract practices that allegedly foreclosed competition by offering customers sole source contracts, loyalty discounts, and market share rebates.” RT also invoked BD’s false advertising, patent infringement, and unfair competition.  The court submitted twelve separate antitrust interrogatories to the jury covering four liability theories—monopolization, attempted monopolization, contractual restraint of trade, and exclusive dealing—each relevant to three products—safety syringes, conventional syringes, and safety IV catheters. Antitrust damages went to the jury on two bases—“anticompetitive contracting damages” (for each product) and “deception damages” (only safety syringes). The Lanham Act false advertising claim went to the jury on representations that BD produced the “world’s sharpest needle” and its syringes have “low waste space.”

The jury held BD liable only for attempted monopolization in the market for safety syringes. It rejected all damages for “anticompetitive contracting,” but found that RT suffered “deception damages” over $113.5 million, and it found liability on all the misrepresentations.  The district court trebled the damages, added statutory attorneys’ fees, declined on equitable grounds to award disgorgement of profits for BD’s false advertising, and enjoined BD.

To prevail on an attempted monopolization claim, a plaintiff must show: “(1) that the defendant has engaged in predatory or anticompetitive conduct with (2) a specific intent to monopolize and (3) a dangerous probability of achieving monopoly power.”  BD didn’t challenge specific intent, and the court of appeals assumed that (3) was satisfied, meaning that BD had market power in the relevant US market for safety syringes.

The jury verdict “significantly narrowed the factual predicate for potential antitrust liability” by rejecting RT’s claims about exclusionary contracting practices by BD. BD offered the testimony of over a dozen purchasers of safety syringes that BD’s practices did not foreclose their ability to choose among competing products. Thus, the monopolization claim had to rest on three types of “deception”: patent infringement; two persistent false advertising claims; and BD’s alleged “tainting the market” for retractable syringes in which it alone competed with RT.

Exclusionary conduct must not only impair rivals’ opportunities but also not further competition.  “If the conduct has no rational business purpose other than its adverse effects on competitors, an inference that it is exclusionary is supported.”  But not all unfair conduct violates §2, and even aggregating a bunch of unfair competitive practices doesn’t turn into legally predatory conduct for §2 purposes unless it’s especially egregious. As the Supreme Court has said, “[e]ven an act of pure malice by one business competitor against another does not, without more, state a claim under the federal antitrust laws; those laws do not create a federal law of unfair competition or ‘purport to afford remedies for all torts committed by or against persons engaged in interstate commerce.’ ”

Patent infringement isn’t a basis for imposing antitrust liability, since patent infringement is actually procompetitive (patent law conflicts with antitrust law to an extent). 
False advertising: BD falsely advertised throughout the period under litigation that BD needles were the “world’s sharpest” (a proxy for patient comfort) and had “low waste space” (allowing more medicine to be dispensed from the syringe), and that BD’s data proved the claims.  By about 2003, BD’s tests began to show that competitors were equalling or surpassing BD needles on sharpness, and it didn’t change its ads.  Likewise, while the claim “lower waste space” than RT’s needles (the only competitor) was true when made, BD’s tests in 2003, 2005, and 2008 showed that the waste space measurement was no longer accurate. BD removed the inaccurate measurement from some materials but not from all, and showed erroneous waste space comparisons on its website. BD also applied the false claim to customer-specific comparative spreadsheets, and imbedded it in a “cost calculator” that sales representatives could use to demonstrate how much money customers would allegedly save with Integra syringes. Some distributors and resellers continue to use BD’s false claims in their promotional materials.

The bar to calling false advertising an antitrust violation is high because—um, because courts don’t like antitrust claims.  Previously, the Fifth Circuit said that sales pitches “may have been wrong, misleading, or debatable,” but they were all “arguments on the merits, indicative of competition on the merits,” as opposed to, say, bribes.  If a competitor loses out on a debate on the merits, the “natural remedy would seem to be an increase in the losing party’s sales efforts on future potential bids, not an antitrust suit.”  Similarly, the Seventh Circuit rejects Sherman Act claims based on false advertising because of what the court here called “traditional free speech principles”: “If [a competitor’s statements about another] should be false or misleading or incomplete or just plain mistaken, the remedy is not antitrust litigation but more speech—the marketplace of ideas.” False advertising “hardly ever operates in practice to threaten competition” because it “simply ‘set[s] the stage for competition in a different venue: the advertising market,’” and the victim can advertise right back to expose the dishonest competitor and “turn the tables.”  “Far from restricting competition, then, false or misleading advertising generally sets competition into motion.”  Also, it’s hard to determine whether falsity induced reliance, “or whether the buyer attached little weight to the statements and instead regarded them as biased and self-serving.” The latter was more likely where, as here, the relevant consumers were sophisticated, and though RT had surveys about materiality of sharpness & waste space, “not a single buyer’s representative came forward to testify to a purchase motivated by the ‘world’s sharpest needle’ and ‘lower waste space’ claims.”

Pause to note that the empirics are all against this: corrective advertising, especially by an inherently-less-credible-because-self-interested competitor, is unlikely to fix all the damage of false advertising.  [Now that we’re post-truth, is this problem worse?  Or is it not a problem because no factual claim would be believed in the first place?]  Also, the First Amendment doesn’t protect false or misleading commercial speech; if it did, it would threaten the Lanham Act even more than the Sherman Act, but the same Seventh Circuit that said “the remedy is more speech” accepts Lanham Act false advertising claims.  Similarly unpersuasive are the claims about reliance and materiality, which we consider ordinary matters capable of factual proof in the Lanham Act context (and which the jury found were proven here).  If the court were serious about its arguments, it wouldn’t allow Lanham Act false advertising claims either.  This is about the remedy, not the right, and it would be a lot more honest to admit that.

Still, the court here says, the broader point is that there’s a difference between business torts, which harm competitors, and “truly anticompetitive activities,” which harm the market. So an antitrust plaintiff has to show that a competitor’s false advertisements had the potential to eliminate, or did in fact eliminate, competition.  “RT may have lost some sales or market share because of BD’s false advertising, but it remains a vigorous competitor, and it did not contend that BD’s advertising erected barriers to entry in the safety syringe market.”

Moreover, there were no facts showing that BD’s ads in fact harmed competition, because RT remained dominant in the retractable syringe sub-market, selling up to 67% of all retractable syringes. Further, competition within the overall safety syringe market—particularly between BD, Covidien, and Smiths—remained robust. Some customers increased their purchases of RT syringes after being shown BD’s erroneous “waste space” comparisons.

“Tainting the market”: this theory was that BD produced flawed Integra retractable needles during the years covered by this litigation in order to persuade purchasers that all retractable syringes—including those of RT—were inherently unreliable, until RT’s patent expired and BD could take over the market.  The beginning of this theory had some record support, but the rest was illogical and incoherent (why would BD destroy its own future market?); even if true, the last part wasn’t anticompetitive, because “it is precisely the type of activity to be expected from competitors when valuable patent rights expire.”  The flaws in Integra needles, while apparently real, didn’t prevent them from getting 33% of the market, while RT’s market share increased and its sales nearly doubled. 

Bye-bye antitrust claim.

Lanham Act claim: BD sought judgment as a matter of law based on the affirmative defenses of res judicata and laches. The district court was correct that res judicata didn’t bar the claim because RT didn’t release claims for conduct post-settlement, and there was no indication that RT was on notice before the 2004 settlement that BD would continue to utilize the “sharpest needle” and “waste space” comparative advertisements in sales pitches and marketing materials.  

Laches: Without opining on the right statute of limitations to borrow, the court of appeals found that the district court didn’t abuse its discretion in concluding BD suffered no undue prejudice. “BD obviously knew from the parties’ just-concluded litigation that RT objected to the needle sharpness and waste space claims, and BD had every reason to know that its ongoing advertisements of the same claims, which continued through 2011, were inaccurate.”

Disgorgement under the Lanham Act: Also reviewed for abuse of discretion.  In the Fifth Circuit, willfulness isn’t required, but courts consider: “(1) whether the defendant had the intent to confuse or deceive, (2) whether sales have been diverted, (3) the adequacy of other remedies, (4) any unreasonable delay by the plaintiff in asserting his rights, (5) the public interest in making the misconduct unprofitable, and (6) whether it is a case of palming off.”  Even if disgorgement is appropriate, a plaintiff “is only entitled to those profits attributable” to the false advertising.

There was no clear error in the district court’s conclusion that at least some portion of BD’s profits were attributable to the false advertising. There was an expert witness’s opinion that $7.2 million in profits—netting to $560,000 after deductions for costs and expenses—could be attributable to the waste space advertisements. Nor was there clear error in the finding that BD had the intent to confuse or deceive by continuing to use advertisements it knew were false. Anyway, willfulness is not a prerequisite.

The district court declined to impose disgorgement because RT was adequately compensated by a $340 million antitrust award. This required remand “for a thorough re-weighing of the remaining factors and the entirety of the record to determine whether and how much profit BD should disgorge to compensate for the Lanham Act violations.”  The court cautioned that, in assessing sales diversion, “speculative and attenuated evidence of diversion of sales will not suffice.”

BD finally objected to the injunction requiring BD to “notify customers, distributors, and other market participants” that it “wrongfully made false and misleading advertising claims” in its “needle sharpness” and “waste space” advertisements. BD didn’t object to bans on use of the relevant advertisements or to required implementation of a training program to instruct employees and distributors not to use the old marketing materials.  Given that the district court’s order suggested that injunctive relief was granted to remedy antitrust violations, it was an abuse of discretion.  “It remains theoretically possible, while bearing in mind that equitable relief is normally appropriate only in the absence of an adequate remedy at law (i.e., money damages), that a viable injunction might still be an appropriate remedy for the Lanham Act violations.”  So remand on that too.

No comments:

Post a Comment