Efforts to destroy competition end with damages award

Pedinol Pharmacal, Inc. v. Rising Pharmaceuticals, Inc., --- F.Supp.2d ----, 2008 WL 3287932 (E.D.N.Y.)

A jury heard Pedinol’s and Rising’s Lanham Act claims against each other and found that both sides engaged in false advertising. The jury awarded only $1 in nominal damages against Rising. Rising’s damages claims against Pedinol were reserved to the court. The court quickly disposed of both parties’ Rule 50 motions, praising counsel on both sides for their presentation of the evidence.

Under the Lanham Act, a successful plaintiff is entitled, subject to equitable principles, to recover (1) defendant’s profits, (2) plaintiff’s damages, and (3) costs. Rising sought an award based on Pedinol’s profits. The plaintiff must prove defendant’s sales, and defendant must prove deductions. If the court finds that profit-based recovery is either inadequate or excessive, it may enter a judgment for a just amount, subject to the principle that recovery must be compensatory and not a penalty.

Willfulness is not mentioned as a prerequisite for recovery, in contrast to the recent addition to the Lanham Act of trademark dilution remedies, which do explicitly require a willful violation before damages may be awarded. However, before the dilution amendment, the Second Circuit required willfulness before awarding lost profits. Courts in the Second Circuit have split on whether this rule remains good law. This court agreed that it did. The dilution amendment evinced no congressional intent to change the law governing the other damages provisions.

The court thus turned to willfulness, and found ample evidence of intentional deception. The facts involved Pedinol’s Lactinol 10% lactic acid product, which competed with Rising’s non-name brand lactic acid product. Rising’s version sold at a fraction of the price. Pedinol spent several years attempting to destroy Rising’s ability to compete, using the “aptly named” “Sinking Rising” campaign. Pedinol sent a series of false and deceptive letters to Rising’s customers. Pedinol’s management knew that Lactinol was not a “single source” product as understood by the relevant customers, but nonetheless sent thousands of letters, to everyone from small neighborhood pharmacists and large chain stores, falsely claiming that Lactinol was “single source,” which precluded any generic substitution.

These letters weren’t just false. They were threatening. The letters warned that substituting a generic for Lactinol “violates laws that govern the substitution of prescription pharmaceuticals,” and that failure to halt substitution would lead to “corrective action such as notifying the Office of Professional Discipline [and] New York State Medicaid....” Evidence at trial showed that these were empty threats, but it required no “leap of faith” to find that pharmacists were likely to rely on them. Pedinol’s knowing use of pharmacists’ fear of losing a license or being charged with Medicaid fraud established willfulness.

A court may award defendant’s profits using three different rationales: (1) unjust enrichment; (2) damages to the plaintiff; (3) deterring willful wrongdoing. The Second Circuit has emphasized that awarding defendant’s profits may be an inappropriate measure of the harm to the plaintiff; a windfall is not to be awarded. Relevant factors include: (1) the degree of certainty that the defendant benefitted from the unlawful conduct; (2) availability and adequacy of other remedies; (3) the role of a particular defendant in effectuating the wrongful conduct; (4) plaintiff's laches; and (5) plaintiff's unclean hands.

The court found that Pedinol was unjustly enriched by its false statements. Pedinol’s own records listed 21 large retailers that had left off substitution as a result of Pedinol’s threats, while 5 continued to do so, and CVS was mixed. Moreover, Rising’s evidence showed that Pedinol’s false statements were directly responsible for shutting Rising out of CVS. A CVS buyer who received the letter and was visited by Pedinol management refused to carry Rising’s product, costing $400,000 in sales; this evidence also showed damage to Rising’s reputation.

Rising argued that Pedinol’s unclean hands should enhance the award, while Pedinol argued that Rising’s unclean hands barred recovery of profits. The burden of showing unclean hands is on the party asserting the defense, who must show “truly unconscionable and brazen behavior.” A court may weigh the magnitude of the parties’ misdeeds against each other.

Here, Rising’s false advertising was insufficient to justify finding unclean hands. “Even the jury that found against Rising was unimpressed with the magnitude of its behavior, deciding to award Pedinol only nominal damages of $1.” At worst, Rising wrongly stated that the brand name of its product was Lactinol, which may have led to some confusion. This “pales” in comparison to Pedinol’s “barrage of false letters.”

Thus, the court awarded Pedinol’s profits during the three-year period in which the false statements were disseminated. Unsurprisingly, the parties disagreed on that amount, by an order of magnitude. Rising used a variant of the model Pedinol used at trial, at which point Pedinol was seeking Rising’s profits. When Pedinol sought an award of profits it claimed a profit rate of 66%; Rising cut that in half in its request; but at this point Pedinol claimed 8.5% profit. The court agreed that Rising’s showing was reasonable based on the trial evidence. However, there were various deductions, and awarding Rising all of Pedinol’s profits from every sale of Lactinol during that period would result in a windfall. Thus, the court awarded roughly $775,000 in lost profits.

Pedinol also sought an injunction barring Rising from advertising that its products are

“generic drugs, therapeutic alternatives, the pharmaceutical equivalent, of, or ‘bioequivalent’ of Lactinol,” and from stating that its product contains 10% lactic acid or that it can be compared to Lactinol. The court declined. First, Pedinol’s unclean hands, meaning its conduct aimed at destroying Rising’s ability to compete, barred relief. But more importantly, the evidence at trial didn’t justify such an order. There wasn’t sufficient evidence to disprove Rising’s 10% lactic acid claim. And the evidence was that “therapeutic equivalent,” “pharmaceutical equivalent” and “bioequivalence” were ambiguous; it was not clear how particular audiences would interpret “generic.” The proposed order was too broad and non-specific, which would create compliance and monitoring difficulties. Moreover, the court refused to bar nonmisleading comparative advertising.

Rising also sought injunctive relief barring Pedinol from stating that Lactinol is a “single source” product or is otherwise an FDA-approved drug, and from claiming that dispensing Rising’s product violates state or federal law or is not reimbursable by Medicaid. The court declined, ruling that the statements had been discontinued and that there was no reason to believe Pedinol would resume them, given that Rising has been compensated by the lost profits award.