Friday, April 22, 2011

PBM v. Mead Johnson affirmed; is eBay automatically satisfied by a successful Lanham Act claim?

PBM Products, LLC v. Mead Johnson & Co., --- F.3d ----, 2011 WL 1491066 (4th Cir.)

The Fourth Circuit affirmed the district court in this hard-fought litigation. There were three clusters of issues: (1) the district court’s dismissal of Mead Johnson's counterclaims; (2) the admission of expert opinion testimony and evidence of prior litigation between the parties; and (3) the injunction.

Background: PBM makes store-brand formula, and Mead Johnson makes Enfamil. Both use the same supplier for DHA and ARA, which the parties agreed are important to infant brain and eye development. Mead Johnson uses the brand name Lipil and PBM uses the generic lipids. Both companies use the same amount. PBM’s label says "Compare to Enfamil."
The parties are familiar combatants on the Lanham Act battlefield. For example, in 2001, Mead Johnson distributed brochures and tear-off notepads to patients in pediatricians' offices stating that store-brand formula did not have sufficient calcium or folic acid. PBM sued and obtained a restraining order prohibiting Mead Johnson from making similar statements. The parties settled that dispute. Then, in 2002, Mead Johnson distributed a chart to physicians stating that store-brand formula did not contain beneficial nucleotides. PBM sued and, again, the parties settled.
In 2008, Mead Johnson distributed a flyer to 1.6 million consumers, targeting parents of two- to three-month-old infants. The flyer cited studies that compared Mead Johnson's current formula with an older version of the same formula and made a number of comparative statements:
• "It may be tempting to try a less expensive store brand, but only Enfamil LIPIL is clinically proven to improve brain and eye development."
• "... before you try a store brand of formula, remember that a full year of Enfamil LIPIL goes a long way to nourishing the dreams you have for your little one."
• "All infant formulas are not the same ... Enfamil LIPIL formulas offer expert recommended levels of DHA and ARA."
• "Enfamil LIPIL's unique formulation is not available in any store brand."
• "There are plenty of other ways to save on baby expenses without cutting back on nutrition."
• "Store brands may cost less, but Enfamil gives your baby more. When it comes to nutrition and development, you want a product you can rely on."
A checklist stated that Enfamil LIPIL is "[p]roven to result in IQ scores similar to breastfed babies" and "[p]roven to enhance visual development," while indicating that the "Store Brand" does not. Finally, the mailer provided a graphic in which one half, captioned "with LIPIL," was clear and the other half, captioned "without LIPIL," was blurry.

PBM sued; the court denied a TRO; Mead Johnson counterclaimed for, relevantly, defamation and false advertising.

Mead Johnson’s counterclaims

The defamation claim was based on a press release declaring that "Mead Johnson Lies About Baby Formula ... Again." The district court granted summary judgment to PBM on this claim, reasoning that false advertising was substantially synonymous with lying, and thus the statement was substantially true. Mead Johnson argued on appeal that false advertising can occur without intent and is thus not necessarily lying, but the court of appeals found that “untruth” was a recognized meaning of “lie” and thus the statement was substantially true, given Mead Johnson’s conceded past false advertising and especially in the overall context, which made the reference to the past false advertising claims clear.

After Mead Johnson presented its case on its Lanham Act counterclaims, the district court granted PBM's motion for judgment as a matter of law, concluding that the statute of limitations and laches barred claims relating to the “compare to” statement with respect to PBM’s routine and gentle formulas, and that as to the “compare to” claim with respect to PBM’s rice starch formula, Mead Johnson failed to prove falsity or loss causation.

The court of appeals affirmed the statute of limitations/laches period. Borrowing Virginia’s analogous state limitations period of two years, pre-May 18, 2007 claims were time-barred, and the continuation of those claims was not actionable because of laches. “When a false advertising plaintiff files suit outside of the statute of limitations, both elements of laches--unreasonable delay and prejudice--are strongly presumed.” Mead Johnson’s delay was unreasonable because it knew about the “compare to” claim “since at least 2006 when the parties were involved in trademark litigation over a label that contained the exact same claim.” This delay prejudiced PBM because PBM continued to use the ads for years, and by alleging that PBM had been unjustly enriched by over $27 million thereby, Mead Johnson conceded that permitting the suit to go forward would enable it to benefit from its own unreasonable delay.

As to the rice starch “compare to” claims, Mead Johnson argued that they impliedly communicated the false message that the products’ equivalence had been tested and verified. It relied on two surveys, but its expert assumed that respondents who said the products were the “same” meant “identical,” while admitting that some respondents who thought that the products were nearly the same would have chosen “same” instead of “different.” The testimony showed that the ingredients were very similar, but not identical, and that the nutritional value of the products were likely nearly the same. Moreover, the products had actually been tested against each other. Mead Johnson thus failed to prove falsity.

In addition, even if the “compare to” messages were false, the court of appeals held that Mead Johnson properly lost for another reason: it didn’t prove damages. Its expert assumed that every sale made by PBM was attributable to the “compare to” statement, but failed to show this.

Evidentiary issues

The court also denied Mead Johnson’s motion to exclude two PBM experts, Joseph Ridgway and Douglas Schoen. Ridgway conducted a survey showing consumers received two implied but false messages from the mailer. Similarly, Schoen conducted a survey showing that the mailer would dissuade consumers from purchasing store brand formula. Though Mead Johnson argued that the surveys failed to sample the proper group because they included parents of infants older than the targeted two-to three-month olds, the district court concluded that "while the survey sample may not exactly match the audience that received the disputed advertisement, it is a sufficiently close approximation of the recipient pool."

Admission of expert testimony: surveys may occasionally be completely unhelpful and therefore inadmissible, but this is rare. Flaws in methodology should generally be weighed by the trier of fact. Schoen’s online survey had participants pre-screened to ensure that they were (1) new parents or expecting a baby in the next six months, (2) were open to considering purchasing infant formula, (3) were not participating in the Women, Infants, and Children Nutrition Program, and (4) were or would be the primary or shared decision maker in choosing infant formula brands. Ridgway’s survey used new and expectant mothers, showing them either the disputed ad or a control ad. This was one appropriate method to investigate materiality, and the district court didn’t abuse its discretion in concluding that the objections, including objections to the universe, went to weight and not admissibility.

The district court also permitted PBM to introduce testimony about the prior false and misleading advertisements and the fact the parties settled the prior litigation, but not settlement amounts. Mead Johnson argued that the evidence of the older Lanham Act lawsuits lacked relevance (FRE 401) and was more prejudicial than probative (FRE 403); the court of appeals disagreed. It’s not easy to overturn a Rule 403 ruling on appeal; probative evidence should generally be admitted. Prior litigation between the parties is probative because it speaks to Mead Johnson’s intent in making its current misleading claims. (The opinion is not pellucid on this point, but it might be holding what the Fourth Circuit previously only “assumed,” that a history of false advertising could operate to relieve the plaintiff of presenting extrinsic evidence of consumer confusion.) Mead Johnson argued that only individual corporate agents can have intent to deceive, but the court disagreed.

Moreover, the probative value of the evidence was not outweighed by the danger of prejudice. “Any unfair prejudice was limited by the court's exclusion of specific evidence regarding the settlements in the cases. Further, a jury limiting instruction was never sought.” So the district court didn’t abuse its discretion.

PBM’s victory and the resulting injunction

The two express statements litigated at trial were: (1) "mothers who buy store brand infant formula to save baby expenses are cutting back on nutrition compared to [Mead Johnson's] Enfamil" and (2) "only Enfamil has been clinically proven to improve infants' mental and visual development." The two implied messages were: (1) Enfamil contains two important fatty acids, DHA and ARA, and PBM's store brand formulas do not; and (2) Enfamil has been clinically tested and shown to be superior to PBM's formula with respect to brain and eye development in infants.

The jury returned a general verdict in favor of PBM awarding PBM $13.5 million in Lanham Act damages. The court enjoined all four advertising claims.

An order granting an injunction is reviewed for abuse of discretion, with factual findings judged under the clear error standard and legal conclusions de novo.

Without any discussion, the court applied eBay: an injunction requires a showing that (1) there is irreparable injury; (2) remedies available at law are inadequate; (3) the balance of hardships favors the party seeking the injunction; and (4) the public interest would not be disserved by the injunction. But its application of eBay suggests that an injunction will still issue almost as a matter of course in a Lanham Act case.

The district court found irreparable harm because Mead Johnson’s ads misled consumers, and both parties presented testimony that false advertising harms a company’s reputation and goodwill as well as its sales. (Can anybody tell me what goodwill is, other than “sales we can’t quantify”?) Irreparable harm is the most difficult element to demonstrate in a false advertising case, because it’s virtually impossible to quantify lost sales or goodwill, given the market variables involved. Thus, if a plaintiff does prove lost sales, it will be entitled to an injunction even if other factors cause most of the sales decline; in fact, an injunction is appropriate even without an actual loss or sales diversion, as long as the plaintiff offers something more than a mere subjective belief of likely harm—proof of reasonable basis for the claim of likely harm. (Compare this approach to the Phoenix of Broward approach to standing—causation uncertainty is here a matter of remedy, not of standing.)

The jury’s verdict that Mead Johnson misled consumers and the evidence at trial supported the district court’s conclusion. Indeed, the testimony revealed that the entire goal of the flyer was to "deter moms from considering evaluating commodity brands" and to influence them to not even "consider a switch to a store brand formula."

For the same reasons, PBM showed that remedies at law were inadequate. The damage judgment compensated PBM for direct harm from the flyer, but the injunction prevents Mead Johnson from "infecting the marketplace with the same or similar claims in different advertisements in the future” (quoting the district court). Mead Johnson on appeal sought the opportunity to make the same claim again, arguing that it "should be entitled to advertise the true fact that its Enfamil formula is the 'only' product 'clinically proven' to improve brain and eye development versus the same unsupplemented formula."

The balance of hardships also favored PBM. Mead Johnson has no equitable interest in perpetuating false and misleading claims. “[D]espite having twice been restrained from disseminating misleading advertising, Mead Johnson continued to do so. PBM cannot fairly compete with Mead Johnson unless and until Mead Johnson stops infecting the marketplace with misleading advertising.”

And the district court didn’t err in finding that the public interest “heavily favors” an injunction, since preventing false advertising is in the public interest. “This interest is perhaps heightened when, as is the case here, the misleading information pertains to issues of public health and infant wellbeing.”

After this result, is there any instance in which a Lanham Act plaintiff could succeed on the merits and not be entitled to a permanent injunction, unless the court was completely convinced that the conduct could not be repeated (and of course voluntary cessation usually isn’t sufficient to show that)?

Scope of the injunction: the scope should be no broader than necessary. Mead Johnson argued that, because the general jury verdict did not specify which of the four statements in the flyer the jury found to be false and/or misleading, the injunction must be limited only to the flyer or other advertisements not colorably different from the mailer. The court of appeals disagreed. The injunction only reaches the specific claims the district court found literally false.

Mead Johnson relied for its “clinically proven” claim on a group of government-funded clinical studies. The district court concluded that this reliance was unjustified because the studies’ conclusion was not limited to Mead Johnson formula, but covered any formula with similar amounts of the same ingredients. Moreover, since the studies it relied upon were completed, the Mead Johnson formula at issue had undergone at least 19 changes. The district court’s conclusion that the “only clinically proven” claim was misleading was not clearly erroneous.

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