Supplier doesn't have protectable Lanham Act interest against manufacturer

Enzymotec Ltd. v. NBTY, Inc., --- F.Supp.2d ----, 2010 WL 4959883 (E.D.N.Y.)

Enzymotec sells a raw material called phosphatidylserine (PS), and has also sold soft-gel capsules containing PS to wholesalers, distributors and retailers. NBTY is the nation’s largest manufacturer, marketer and distributor of various nutritional supplements, including Neuro-PS and store brand formulations. The principal ingredient of these is PS-20, 20% PS by weight. NBTY buys raw PS-20 that it processes into soft-gel capsules.

According to Enzymotec, it is one of four major PS suppliers, and from 2005 through 2007 it was the only supplier that could provide stable PS-20. It thus sought to become NBTY's exclusive PS-20 supplier. The parties disputed the facts relating to approximately two and a half years of negotiations. Enzymotec promoted itself by, among other things, telling NBTY that it had tested Neuro-PS and found it to have much less PS-20 than indicated on the label, at a time when NBTY was buying raw PS-20 from Lipogen. NBTY bought PS-20 from Enzymotec for a year, but also maintained a relationship with Lipogen, allegedly resulting in product on the shelves not containing stable PS.

Enzymotec sued for various contract-related claims, which I will not discuss.

The Lanham Act claim: Enzymotec alleged that NBTY violated the Lanham Act by misrepresenting the character, nature, and quality of its products when it was aware that the label on the Neuro-PS products misrepresented that they contained 100mg of PS-20, and yet continued to sell the products without disclosing the problem to its customers and recalling the product.

Enzymotec could not produce evidence of any entities that reduced their purchases of PS-20 from Enzymotec as a result of NBTY’s alleged mislabeling or otherwise show decreased sales. Its theory of harm was that it supplied raw PS to NBTY’s competitors, and, absent the misrepresentation, NBTY’s sales of Neuro-PS would have decreased, causing competitors’ sales to increase and thus causing Enzymotec’s sales of raw materials to those competitors to increase. Enzymotec argued that this was not an attentuated causal chain because it was relying specifically on the theory that NBTY should have recalled the Neuro-PS on shelves, creating a big gap in the market.

Under Famous Horse, Lanham Act standing requires (1) a reasonable interest to be protected against the alleged false advertising and (2) a reasonable basis for believing that the interest is likely to be damaged by the alleged false advertising. A reasonable interest includescommercial interests, direct pecuniary interests, and even a future potential for a commercial or competitive injury. A reasonable basis requires both likely injury and a causal nexus to the false advertising. Where the plaintiff isn’t obviously in competition with the defendant, and there’s no comparative advertising, a plaintiff must make a more substantial showing of injury and causation to satisfy prong (2).

The parties agreed that Enzymotec had a reasonable interest: it was a commercial actor with a pecuniary interest potentially affected by the false advertising. There was at least a possibility of direct competition in the sale of PS-20 to retailers, by way of Enzymotec’s sales of raw PS-20 to wholesalers and distributors who in turn directly competed with NBTY: even if the parties themselves were not in direct competition, their products were. This was directly analogous to the situation in Famous Horse. There was also some evidence that Enzymotec sold soft-gel capsules directly to retailers, thus creating direct competition.

However, Enzymotec was not entitled to a presumption of injury and causation just because it might be in direct competition with NBTY. The proof required to show injury and causation varies with the circumstances; literally false comparative advertising creates a presumption of both, as does a situation where the parties are “obviously in competition” so that even without a specific name a false ad is clearly directed towards the plaintiff’s product, such as where there are only two major players in the market. This was not that situation. “[I]t is not simply direct competition that relieves a plaintiff of the burden to present evidence of a reasonable belief of injury and causation, but direct competition coupled with a false advertising claim based on comparative advertising.”

Enzymotec didn’t provide enough evidence to raise a genuine issue of fact as to whether it had a reasonable basis to believe its interest was damaged by the alleged false labeling. Although Enzymotec might have raised an issue of fact as to whether Enzymotec's sales would have increased if the alleged mislabeling had led to a void in the market, Enzymotec failed to show “a causal link between the mislabeling and the decrease in NBTY sales that would have led to the potential increase in Enzymotec's sales.”

Enzymotec argued that it was one of four major PS-20 manufacturers, with a 30% market share, and the only one from 2005-2007 that could supply stable PS. But it didn’t provide evidence on market share or unique stability, and it didn’t provide any evidence that it would have increased sales to retailers had NBTY recalled Neuro-PS. However, the court found that, had NBTY recalled Neuro-PS, NBTY might have bought more PS from Enzymotec. Thus, there was a genuine issue of fact on whether Enzymotec would have had increased sales had there been a recall-induced void in the market.

However, a reasonable basis also requires that the injury not be speculative, which requires a causal connection between the alleged mislabeling and the potential injury. But Enzymotec couldn’t prove that NBTY’s direct competitors were injured by the mislabeling (that is, that market share would have gone to them if customers were aware of the mislabeling) or that a recall should have occurred. The only evidence in support of the former theory is an allegation that one of Enzymotec's distributors told Enzymotec that one of their customers had chosen not to purchase NBTY's product because of the low quality of PS-20, but this vague hearsay about an unnamed customer was insufficient to defeat a motion for summary judgment. Likewise, Enzymotec could not show that the recall was more than hypothetical—it couldn’t show that NBTY promised to recall the mislabeled products or that any rule or regulation required a recall.

Finally, the court was troubled that Enzymotec knowingly kept the mislabeling quiet in order to protect NBTY from losing customers, therefore protecting its future financial interest. The fact that Enzymotec deliberately chose not to act at the time undermined its claim of injury.