Tuesday, March 09, 2010

Formula won: post-verdict rulings in PBM v. Mead Johnson

A couple of clean-up rulings from this case, which has already produced a number of written opinions.

PBM Products, LLC v. Mead Johnson & Co., 2010 WL 723739 (E.D. Va.)

After the jury found in PBM’s favor on its false advertising claims, Mead Johnson moved for a new trial or remittitur and PBM moved for enhanced damages and attorneys’ fees. The court left the award where it was. The jury awarded $13.5 million, an amount lower than PBM’s expert’s estimate for PBM’s lost profits and Mead Johnson’s unjust enrichment, each of which he put at $30-60 million. The court rejected Mead Johnson’s criticisms of PBM’s damages expert, even though Mead Johnson argued that there has only ever been one Lanham Act case with a higher award, $19.25 million based on allegations of $544 million in damages. I’m not sure why that’s relevant, and neither was the court. The verdict was not against the clear weight of the evidence, based on false evidence, or a miscarriage of justice. Nor was the verdict so excessive as to shock the conscience, justifying remittitur under Rule 59.

There might be some interplay between Rule 59 and 15 U.S.C. § 1117(a), which states that if, with respect to an award based on defendant’s profits, the court finds the award either inadequate or excessive, the court may in its discretion enter judgment for such sum as the court finds just. But an award based on plaintiff’s damages permits the court to increase the amount up to three times, but not to reduce the amount. So it’s easier for a court to reduce a profits-based award under the Lanham Act than under Rule 59. “The trick then is to know when an award was based on plaintiff’s damages or on defendant’s profits.” The verdict form didn’t specify, and the jury was offered both figures.

But the court found that it didn’t matter, because neither a reduction nor an increase was warranted either under Rule 59 or under §1117(a). The bottom line was that Mead Johnson failed to carry its heavy burden. The expert used a reliable regression analysis based on relevant and appropriate data, even if others would have done it differently. And Mead Johnson’s valid, nonfatal criticisms might have been reflected in the limited size of the jury’s award.

As for size, the jury heard sufficient testimony to conclude that PBM was significantly harmed, including testimony on PBM’s lost profits around the time of the false advertising, the lingering effects of false advertising in the infant formula market, and Mead Johnson’s reputation as an infant formula leader that would give its words weight.

PBM also failed in its motion for enhanced damages and attorneys’ fees, despite its arguments that Mead Johnson’s multiple encounters with PBM and the Lanham Act over the past few years justified an enhanced award to punish its willfulness. PBM argued that Mead Johnson had no real defense to the literal falsity of its ads. Among other things, Mead Johnson’s witnesses tried to claim that its ad’s reference to not “cutting back on nutrition” was not comparative vs. store brand formula, but merely a statement that mothers shouldn’t starve their babies. Moreover, given the importance to families of proper infant nutrition, the false claims did significant economic harm to consumers, which also represents lasting harm to PBM’s goodwill.

Deterring future misconduct, as well as compensating plaintiffs for actual injuries where harm is not speculative but can’t be precisely calculated, can justify enhanced damages under §1117(a). But here the damages weren’t undercounted because of insufficient information or any other reason. Mead Johnson was aggressive, but not intentional in its falsity. The award shouldn’t be punitive.

In the Fourth Circuit, a fee award is only available in the exceptional case where a prevailing plaintiff proves bad faith (though the court noted a lack of parallelism in the rules for defendants and suggested that this was inconsistent with Fogerty v. Fantasy, though still followed in the circuit). PBM didn’t show clear and convincing evidence, as required, that Mead Johnson acted in bad faith or willfully. PBM also failed in its attempt to get fees as a prevailing defendant, even though Mead Johnson’s Lanham Act counterclaim (see below) was unsuccessful—Mead Johnson’s claim survived Rule 56 but not Rule 50, making it an average case (though a case that survives summary judgment could still be found exceptional).

PBM Products, LLC v. Mead Johnson & Co., 2010 WL 723750 (E.D. Va.)

Mead Johnson challenged PBM’s “Compare to Enfamil” claim, alleging that it communicated the false messages that tests had shown equivalence and that the parties’ formulas were identical. Though the court had rejected PBM’s motion for summary judgment, after the close of testimony it granted judgment as a matter of law in PBM’s favor on the counterclaim.

First, the statute of limitations/laches barred Mead Johnson’s claims as to PBM’s “routine” and gentle formulas. Because the Lanham Act has no statute of limitations, courts borrow. The analogous state period was Virginia’s action for fraud, with a 2-year limitations period. Mead Johnson counterclaimed on May 18, 2009. PBM first made the “compare to Enfamil Lipil” claim no later than 2003 for its routine product, and in 2006 for its gentle product. As to post-May 18, 2007 claims, PBM argued laches: (1) lack of diligence by Mead Johnson and (2) resulting prejudice to PBM. A filing outside the statute of limitations leads courts to presume laches. Given that Mead Johnson knew about the “compare to” claim since at least 2006 when the parties litigated over trade dres containing the claim, it delayed unreasonably in bringing its false advertising claim, resulting in prejudice to PBM because PBM continued to use the ads on all its formulas in over a dozen retail stores for years.

Moreover, the court held that the Lanham Act claim failed on the merits.

Initially, only Mead Johnson’s claim about “compare to” on PBM’s added rice starch formula remained before the court. Mead Johnson didn’t claim literal falsity. It relied on surveys on what consumers understood about “compare to.” The open-ended question asked “Based on [the ‘compare to’] phrase, what if anything do you believe about this product in comparison to Enfamil AR LIPIL?” The close-ended question stated “Based on [the ‘compare to’] phrase, which of the following do you believe?” and the potential answer choices were (1) the formulas had the same ingredients; (2) the formulas had different ingredients; or (3) don't know or none of the above. The survey expert concluded that a substantial portion of respondents interpreted “compare to” as “same.”

The problem is that “same” was never defined in the survey. The ingredients of the parties’ products are very similar, but not identical, and the nutritional value of the products is likely nearly the same. So the critical question is whether consumers understood “compare to” to mean identicality, as opposed to some other gradation. But the survey never used the word “identical” nor probed on the meaning of “same.” Respondents who thought that 95% of the ingredients were the same might have chosen to say “same.” Without a good survey, the falsity claims failed, both with respect to ingredients and with respect to whether the formulas had “equivalent” benefits.

What about the alleged implication that “compare to” means that the products have been tested against each other? The survey expert testified that consumers received this message, but PBM’s marketing director testified that the products have been tested against each other. Without further evidence of what type of tests consumers expected, Mead Johnson’s claim failed for want of falsity.

Finally, Mead Johnson alleged that PBM’s statement on its label that its gentle formula contains “partially broken down whey protein” was false. Even assuming the survey showed that consumers believe that this statement implies that all or most of the whey protein in the product is partially broken down, or that PBM has the same amount of partially broken down whey protein as Mead Johnson’s gentle formula, that wasn’t enough. There was no scientific proof that the products differed in digestibility for infants. So the implied message couldn’t be proven true or false. (This is, I think, a judgment about materiality, which seems reasonable: what the partially broken down whey protein claim really means is that partially broken down protein is more digestible for infants; otherwise there’d be no point in making the claim; if there’s no ultimate difference in digestibility, then any differences in composition can’t be material.) Moreover, Mead Johnson couldn’t prove any damages, because its expert used an unworkable market share analysis, assuming that every PBM sale was attributable to the “compare to” claim. Without proof of causation, the Lanham Act claim couldn’t go to the jury, which would have been fatal even to the non-lached/time-barred claims.

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