Friday, October 05, 2012

The left hand of false advertising: isomer misrepresentations lead to liability

Merck Eprova AG v. Gnosis S.p.A., 2012 WL 4510668 (S.D.N.Y.)

Merck sued Gnosis, which makes and sells raw ingredients to nutritional companies, for false advertising in connection with a folate nutritional ingredient.  The court held a bench trial and found that Gnosis falsely advertised its product using a chemical name, abbreviation, chemical formula, and Chemical Abstracts Services registry number (“CAS number”) “reserved for Merck's purer folate ingredients.” The court found Gnosis directly and contributorily liable under the Lanham Act, but not under NY state law, and awarded Merck half a million dollars in damages, along with an injunction and attorneys’ fees.

The basic issue is that Gnosis marketed its folate product, a mixture of the “active” S-isomer and the “inactive” R-isomer, using terms and the chemical formula for the pure S-isomer product.  (The R-isomer in this case isn’t naturally occurring, is inactive in the body, and is arguably unhealthy.)  Gnosis argued that its terminology was an accurate use of scientific naming conventions.  It acknowledged that it used the incorrect chemical formula and CAS number on some documents, but argued that this (and some other materials) weren’t “advertising or promotion.”

Merck calls its Metafolin, which has just the S-isomer, “L-5-methyltetrahydrofolic acid, calcium salt” (common name) and L-5-MTHF (abbreviation).  Gnosis formerly used the same common name and abbreviation in connection with Extrafolate, its R,S mixture, on product specification sheets, product data sheets, material safety data sheets, certificates of analysis, emails to its agents and customers, purchase orders, and other marketing materials, though it stopped two years into this litigation.  The parties disputed the signficance of the L prefix.  Merck’s experts argued that a mixture product should use D,L or no prefix instead.  Gnosis argued that, under certain naming conventions, the same common name and abbreviation could properly be used to describe its product.

A pure S-isomer is hard to make and represented a significant investment by Merck.  Metafolin is one of Merck’s most important products, with over $100 million spent on marketing and promoting the product.  “Merck's customers often tout as a selling point the fact that their products contain the substantially pure S isomer.” 

Extrafolate entered the market in 2006.  It was far less costly to produce, and sold for 1/3 the price of Metafolin: $14,000 per kilo of Metafolin in 2005 and $4,500 per kilo of Extrafolate in 2007.  Gnosis sold by, among other things, attending trade shows, distributing brochures, making PowerPoint presentations, maintaining a website, and making in-person visits to potential clients.

Gnosis used product specification sheets in the sales process to communicate to customers the exact contents of the product being sold, and the sheets were frequently requested by potential customers.  Though Gnosis acknowledged that the chemical names for the mixed and pure products were different, its product specification sheets at one time erroneously listed the chemical name for the pure product.

In brochures, Gnosis also used the L prefix to describe its product.  And the brochures listed as product features characteristics associated with the pure product, including that it was the naturally predominant folate form, it was the nutritionally active form, and it was the essential form in which natural folates occur and are stored in the human bloodstream.  Similar things occurred with product data sheets, certificates of analysis, and material safety data sheets. 

The upshot: “By offering a product that appeared identical to Merck's 6S Isomer Product, but that was far less costly due to its mixed chemical makeup, Gnosis captured many of Merck's former customers by underselling Merck. Consequently, Gnosis was able to take a significant portion of that market from Merck.”

Because hope springs eternal, Gnosis challenged Merck’s prudential and constitutional standing.  The parties were direct competitors, and Famous Horse doesn’t even require direct competition.  As for constitutional standing, the court had no difficulty finding injury in fact.  (This argument seems frivolous to me; the court also noted that Gnosis was “apparently unconvinced” by the court’s previous rejection of an FDA preemption argument and thus renewed it.)

The court found literal falsity in the use of the wrong chemical name and CAS number on product specification sheets. These were commercial advertising, not isolated statements; they were widely distributed to attendees at a trade show and sent to potential customers.  And the falsehood about the “very nature” of what was for sale was material, especially since the chemical name was the only way to distinguish between the pure and mixed products sold by Gnosis.  The court also presumed injury because of the literal falsity.

Gnosis put up more of a fight on the common name and abbreviation, but the court still found literal falsity.  The materials at issue were widely distributed—while safety sheets accompanied shipments to existing customers, they were also sent in response to customer inquiries, and so they and the other materials were commercial advertising.

Literal falsity: Merck presented evidence that the common name and abbreviation Gnosis used refers only to the S-isomer under existing conventions in the scientific community and the industry.  (Note that in specialized industries, courts often allow expert testimony to establish meaning to the relevant community; this converts potentially ambiguous terms to terms with a literal meaning and allows the plaintiff to avoid presenting a consumer survey.  I think courts should be more willing to do this with expert testimony instead of surveys even in cases involving the meaning the general public gives to a term.)  Merck pointed to documents from UN, WHO, and the European Food and Safety Authority using the term in the way it did, as well as various scientific articles.  The court rejected Gnosis’s argument that the articles were authored or “influenced” by Merck and were therefore not worthy of weight; that wouldn’t change the fact that the terms were “consistently used in the manner that Merck promotes.”  Gnosis’s own expert conceded that he wasn’t aware of scientific or scholarly articles in which the terms were used to refer to anything other than the pure isomer.  Gnosis even referred to Extrafolate by a different nomenclature, which Merck argued was right for mixtures, in its own internal documents and patents.

Gnosis relied on the testimony of one expert, Dr. Siegel, who argued that Gnosis’s use of the common name and abbreviation was “reasonably derived” from existing conventions.  The court characterized this as “a largely esoteric and at times metaphysical discussion of the intricacies of scientific nomenclature and the limits of language to approximate and explain the chemical composition of stereoisomers. Although at times fascinating, the testimony was largely beside the point for the simple reason that the Lanham Act and the law generally require inquiry into whether a particular use is ‘susceptible to more than one reasonable interpretation.’”  

But Siegel’s testimony failed to demonstrate such an ambiguity.  Though he was credible, his testimony “spoke to a theoretical use of the contested terms that bordered on the aspirational, not to how those terms are actually used.”  He criticized misuse of nomenclature in articles and inconsistent use of various terms.  “But, even if some terms are misused, he ultimately did not dispute that these terms are consistently used in the way Merck contends that they should be.”  Gnosis couldn’t show a single organization or article that used the common name or abbreviation the way Gnosis did.  Gnosis’s use alone couldn’t render the meaning of the terms ambiguous.  The court also specifically found Gnosis’s explanation of how it came to use the name to be fanciful and false.  The witness upon whom Gnosis allegedly relied in naming the product testified that he relied in part on two or three articles that used the term for the mixed product, but he couldn’t produce any such articles.

Gnosis argued that it was improper for courts to impose definitions and naming conventions on scientists, and that a ruling in favor of Merck would contradict leading stereochemistry treatises.  But the court held that it was not dictating terms to scientists or cutting off debate on nomenclature at conferences and in scientific papers, which aren’t advertising.  This case involved the common name and abbreviation “as they are used today in the advertising of folate products.”  

Gnosis’s use of the common name and abbreviation “was a calculated decision to copy Merck's advertising and capture a portion of Merck's market share, knowing full well that its 6R,S Mixture Product was materially distinguishable from Merck's pure 6S Isomer Product.”  The other elements of a Lanham Act claim were satisfied as well.

Separately, the court addressed Merck’s claim that Gnosis falsely claimed that its mixed product had the attributes of the pure isomer in the same documents.  Statements that the product was the natural form of folate and the essential form in which folates are stored in the human body, and statements describing chemical properties of the pure isomer, were literally true applied to the pure isomer but impliedly false when applied to the mixture.  The statements were also intended to mislead.  Thus, there was a presumption of deceit given Gnosis’s egregious misstatement. 

Comment: This presumption may well be justified, but I don’t see why it’s in any way necessary.  If the natural form is the pure isomer, and so on, then making these statements about the mixture seems literally false.  I think the court is saying that the statements are literally true as factual statements—that is, “the pure isomer is the natural form of folate” is true—but if they’re on ads for something that isn’t the pure isomer, surely that’s falsity by necessary implication: it’s as if I said “organic apples are grown without pesticides” on my jug of conventionally grown, pesticide-residue-having apple juice.  The only way for a reasonable human reader to understand that statement is as a statement about the actual contents, not as an interesting but irrelevant observation.  Regardless, Merck established another Lanham Act violation.

Merck didn’t succeed in having Gnosis’s use of the terms on purchase orders declared a violation of the Lanham Act, though, because those weren’t ads.  Purchase orders weren’t ever used in marketing, only included with shipments.

Contributory false advertising was an available cause of action under the Lanham Act: intentionally inducing false advertising, or continuing to supply a product to one the defendant knows or has reason to know is engaging in false advertising, results in contributory liability.  Gnosis’s false use of the common name caused its distributors to also falsely advertise.  (Interesting question in some circuits whether Merck would have standing, since it’s not necessarily competing with distributors, though here there was an exclusive US distributor for at least part of the relevant period.)

The state law deceptive trade practices/false advertising claims failed because of the requirement that the challenged act or practice must be consumer-oriented.  Cases in which the core of the harm is to another business, not to consumers, fall outside the scope of the law.  Though Merck’s experts posited some negative health consequences associated with the R-isomer, they hadn’t been definitively established as associated with the mixture.

Merck sought damages in the form of three times Gnosis’s profits.  Profits are awarded to deter, to prevent unjust enrichment, and to compensate.  Willfulness is required to recover profits, but isn’t sufficient; other equitable factors must be considered.  The court was convinced that Merck was entitled to an award of profits.  “Gnosis's conduct during its advertising campaign and this litigation reveals its disdain for the law and this Court that is nothing short of appalling.”  (I’ve omitted mention of some previous sanctions.)  The court had little reason to believe that Gnosis would comply with anything short of a full accounting.  And, though Gnosis stopped using the false terms, “it had long used these terms to gain a valuable entry into the folate market, all while enhancing its ability to manufacture a pure 6S Isomer Product.”  Disgorgement was necessary to deter it, and other pharmacos, from trying to gain an “enviable” market position with minimal cost.  The record of deliberate and willful false advertising was clear, and Gnosis had no reasonable explanation for it, only a post-hoc justification “divorced from scientific conventions.”  The court made particular note of the fact that Gnosis’s internal documents, by contrast to its ads, used the conventional terms. 

Gnosis continued to use the false terms for almost two years after Merck sued.  Continuing a claim once challenged in court is not necessarily bad faith, but where the evidence shows that the defendant “gave short shrift to plaintiff's claim out of arrogance,” a finding of willful infringement is appropriate, as it was here.  Among other things, Gnosis failed to issue a litigation hold and deliberately flouted court orders during the course of discovery.  And the court found that Gnosis’s principal officers lied at trial.  Equity supported an award of profits.

Gnosis failed to prove its costs to deduct from its sales, since it only showed its costs from years after the profits at issue in this case.  And it didn’t provide any breakdown, only a total number.  “[G]iven the Court's findings about the credibility of Gnosis's witnesses, the Court is not prepared to accept these figures without justification.”  But the profit calculation didn’t sufficiently reflect the harm in this case.  Plaintiff’s damages may only be trebled, but an award of profits may be increased without an identified limit to “such sum as the court shall find to be just” if “the amount of the recovery based on profits is ... inadequate.”  The only limit is that the award should be compensatory, not a penalty. 

Here, the award had to be increased in order to compensate Merck for Gnosis’s improved market position as a result of its false advertising.  Merck was the only manufacturer of the pure product when Gnosis entered; “Gnosis's very existence as a competitor was predicated on its misdeeds. Consequently, Gnosis's sales in that market even after it corrected its advertising—and therefore after the window for accounting—stemmed from its initial deception.”  A profits award only from the period of false advertising didn’t capture that, or Merck’s loss of market share, customer loyalty, and potential customers.  Merck asked for an award of three times Gnosis’s profit, and the court thought that was appropriate, albeit crude.  Moreover, though the goal was compensation, deterrence was also relevant, especially since the court wasn’t going to grant much of Merck’s requested injunction.  (Given how overbroad Merck’s request was, as we’ll soon see, I think this would be better cast as: deterrence was also relevant, and money would be combined with injunctive relief.)

Merck wanted the court to enjoin Gnosis from misusing the terms at issue and from selling any methylfolate product for five years, and also wanted a corrective advertising campaign.  Irreparable harm requires a showing of competition plus a logical causal connection between the false advertising and the plaintiff’s own sales position; this had been shown.  Damages were only partial compensation for the change in market position.  Thus, Merck was entitled to an injunction.  Gnosis argued that no equitable relief was appropriate because it stopped using the terms at issue, but the court wasn’t confident that it wouldn’t repeat its misbehavior in the absence of an injunction.

The court enjoined Gnosis from labeling its mixture with names for the pure isomer.  Merck wanted an injunction against the use of the chemical names/abbreviation on any product, but there was no reason to preclude Gnosis from using those terms “so long as they accurately reflect the product they advertise.”  Nor would the court ban Gnosis from the methylfolate market, given the injunction and damages; a market ban wouldn’t be narrowly tailored to the unlawful conduct and would put an unnecessary burden on lawful conduct, and would harm the public by artificially inflating prices.  But the court did order corrective advertising, to be approved by the court with input from Merck; the parties could also elect to have Merck do the corrective advertising, compensated by Gnosis.  (I’m betting Gnosis wants to do the corrective ads.)

Merck also got its fees, because the false advertising was willful and much of the litigation was conducted in bad faith.

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