Monday, February 04, 2013

The left hand of false advertising: liability phase

Merck Eprova AG v. Brookstone Pharmaceuticals, LLC, --- F.Supp.2d ----, 2013 WL 363382 (S.D.N.Y.)

Merck sued Acella, which sells low-cost vitamins and nutritional supplements, and two of its officers.  It alleged that Acella falsely labeled its folate products, leading customers to believe that Acella’s mixtures were the same as Merck’s purer product (pure here refers to a specific ingredient, of which more in a moment, not to manufacturing impurities or the like).  The labeling prompted pharma databases to link the parties’ products, which then led to large-scale substitutions by pharmacies and others, despite their different compositions.  After a bench trial, the court found Acella and its two employees liable for false advertising and contributory false advertising, though it rejected Merck’s NY GBL §§ 349 & 350 claims.  The court awarded over $11.6 million plus interest in damages, as well as injunctive relief and attorneys’ fees.

Merck's customers use Merck’s ingredients to make their own consumer products. Acella sells its own lower-cost consumer products.  The relevant ingredient here is folate.  Background: stereoisomers are molecules with the same atomic composition that may differ in the arrangement of atoms.  Even with identical molecular formulas, molecules’ physical, chemical, and biological properties may differ, with resulting difference in effects on the human body.  While stereoisomers can be identified by several prefixes, here we’ll use D- and L-. 

The predominant naturally occurring form of folate, L-tetrahydrofolate, is more easily metabolized and processed by the human body than the easily-synthesized folic acid.  But when it’s synthetically manufactured, it comes out with its other stereoisomer, the D-version.  The mixture created in the synthetic manufacturing process is known as D,L-5-MTHF.  Unlike the friendly L-version, D-tetrahydrofolate isn’t active in the body, isn’t easily absorbed, and its impact on the body is unclear.

Merck was the first company to offer a substantially pure L-product.  Its Metafolin contained at least 99% L-5-MTHF. Metafolin “both set and satisfied the international standard for L-5-MTHF purity,” a standard adopted by the FDA, WHO, and the European Food & Safety Authority.  Metafolin began to outpace competitors who’d previously offered D,L-products with an approximately 50-50 balance.  Merck built a following of customers who touted Metafolin’s inclusion in their products as a unique selling point.

Acella initially tried to license the L-version from Merck; when Merck rejected this, Acella began to develop its own folate source.  They followed an internet ad (seriously, those work?) from a Chinese manufacturer for the “racemic” form—that is, a D,L-mixture with equal parts D and L—to China, and bought it.  Acella entered into a supply agreement with the Chinese producer, specifying the racemic form. Acella then developed its own folate product, Xolafin, with that mixture.  Despite the mixed contents of its product, Acella labeled its folate source as L-methylfolate, without acknowledging the presence of the D-version.  Other products on the market using a 50-50 mixture used “D,L-methylfolate” on the label, as Acella knew.  (In 2010, Acella introduced Xolafin-B, which contains between 90-95% of the L-version.)

After Acella entered the market, sales of Merck-licensed products plummeted for the first time.  This apparently occurred because of pharmaceutical substitution, in which a less expensive generic is substituted for the product specifically prescribed by a healthcare professional.  Pharmacists use databases which collect information from manufacturers, such as labels and package inserts, and decide whether to link products.  Databases generally don’t link products whose active ingredients differ.  Pharmacies and health care professionals use the databases, often subject to state law governing pharmaceutical substitutions, to decide whether to substitute one product for another.

Acella provided databases with the labels and package inserts for its Xolafin-containing products for the admitted purpose of being linked to higher-priced Metafolin-containing products.  If the labels had differed, there’d be a significant risk that databases wouldn’t link the products—a risk of which Acella was quite aware given at least one database’s refusal to link its product with a brand name version due to a temporary label difference.  Thus, Acella actively monitored the labels of Metafolin-containing products and made sure its labels were identical.  “Every single time a Metafolin-containing product changed its label, Acella made a corresponding change to the labels of its products to avoid ‘delinkage.’”

Though Merck wasn’t Acella’s direct competitor, the court found Lanham Act standing an easy question, because they both produce competing sources of folate for use in dietary supplements—Acella just carries that further in-house.

Next, the court found that Xolafin’s labels weren’t literally false, since they did contain the L-methylfolate on the label, and properly identified the net amount of that isomer, even if they did not identify the presence and amount of the inactive D-isomer. Because the labels were thus “susceptible to more than one reasonable interpretation,” there wasn’t literal falsity.  (I do not understand why the court didn’t at least analyze falsity by necessary implication.)

Still, the court found implied falsity, based both on consumer surveys and on Acella’s intent to deceive (that intent is why I think there’s a good case for falsity by necessary implication—Acella relied on the ordinary functioning of implicature under the circumstances).

Merck’s first survey showed physicians and pharmacists Acella labels/package inserts using “Folate (L-methylfolate as Xolafin 600 mcg)”; the control group saw instead labels that read “Folate (D,L-methylfolate as Xolafin 600 mcg).”  The survey asked, “What, if anything, does this communicate to you about the folate ingredient termed Xolafin contained in this vitamin?”, and, “Do you think that the folate ingredient termed Xolafin contained in this vitamin is or is not a substantially pure isomer?” Among pharmacists, 45% answered that the L-version was a substantially pure isomer, and 9% said it wasn’t.  In the control group, 24% said the D,L-version was a substantially pure isomer, leading to a net 21% who were deceived by the label (and, it seems, a majority who have no idea what an isomer is). The physicians did worse (or maybe I mean better, in that slightly more seemed to admit their ignorance): in the test cell, 37% said the L-version was a substantially pure isomer and 4% said it wasn’t, whereas 26% in the control group said that the D,L-version was a substantially pure isomer, netting 11%.

The second survey was of retail pharmacists, attempting to determine whether they treated Acella products as pharmaceutical equivalents of Merck products, which would result in substitution. The survey asked how similar the products were based on their labels, and whether mixture products would be an appropriate substitute for pure products.  Based on one survey, the expert concluded that over 45% of respondents believed that Acella products could appropriately be substituted for Merck products, most often because they believed that the products had the same ingredients.  (It would be interesting to know why the others rejected substitution.)  When asked whether a mixture product would be an appropriate substitute for the pure product, only 10% of respondents said that it would be without contacting the prescribing physician.  In a second survey, over 75% of respondents believed that Acella was an appropriate substitute, while only a third of pharmacists said that they’d substitute a racemic mixture product for the Merck product without contacting the prescribing doctor.

The court found both surveys reliable; they used adequate control groups and showed real labels.  The 21%, 11%, and higher levels of confusion showed that a substantial percentage of consumers received the misleading message.  Indeed, the labels were “plainly false and designed to confuse.”  As evidenced by others’ labeling practices, “in the context of folate sales, mixture products customarily identify the presence of the D-isomer. Acella's labels pointedly failed to do so.”  Its deliberate search for a racemic mixture underscored the deceptive nature of its labels.  Even a sophisticated target audience was deceived, “an unsurprising result given labeling customs and database linkage.”

Indeed, Acella’s deliberate misconduct justified a presumption of deception.  Although a high level of evidence is required to show the egregious misconduct required to trigger this presumption, Merck satisfied that requirement by showing Acella’s intentionally misleading marketing. The substances are distinct; Acella sought out the mixture knowing its differences; in internal communications, Acella referred to it as a mixture; but it labeled its mixture product as if it were pure.  The intentional deception was further proved by Acella’s continual labeling changes to avoid delinking.  Moreover, when questioned by the databases on the specific chemical makeup of the folate products, one of the key individuals “deliberately avoided answering the question, knowing that a truthful response would likely result in delinking.”

Acella argued that its labels merely reflected that the active ingredient was the L-isomer, and the D-isomer was just an impurity that didn’t need to be disclosed.  Its rationalizations were contradicted to its own internal references to the racemic product, as well as its use of subcomponents in other product labels.  Acella was aware of the FDA etc. labeling standard for pure folate products, which limits the presence of D-isomers to 1%.  Also, it would have been illogical for Acella to initiate development of Xolafin-B, with its purer makeup, if the amount of D-isomer were irrelevant.  The great lengths Acella went to in order to capture Merck's market also justified a presumption of consumer deception, from contracting with the Chinese purchaser to making labeling decisions (this, I don’t get—contracting to buy raw materials is something you’d do even with a truthful strategy; why does investing in a product count?).  Acella didn’t meet its burden of showing the absence of likely confusion.

Acella brazenly disputed materiality.  But the two isomers have different effects in the human body, and databases link products based on the apparent pharmaceutical equivalence of the products.  Acella’s own labeling practices, done to avoid delinking, themselves revealed that, at a minimum, consumer perception about L-isomer content was material.  The databases’ inquiries about whether the products were pure or mixtures also revealed materiality: “Though Acella avoided responding directly to the inquiry, the inquiry itself clearly suggests that the chemical makeup of Acella's products was material to databases. Moreover, had [the database] been given a direct and honest response, it likely would have considered delinking. Indeed, Acella's deliberate efforts to skirt the issue and avoid a direct response to [the] inquiry suggest Acella's awareness of the D-isomers's materiality.”  Even defense witnesses admitted that the difference was important to treatment decisions, making correct labeling important.  A Merck witness testified that he didn’t want his patients consuming any amount of D-isomer because of its potential biological effects, and that Acella’s labeling had deceived him.

In a footnote, the court clarified that there was no evidence here “to conclusively demonstrate the negative health consequences of consuming D-methylfolate,” but the fact that certain consumers attached significance to its presence made it material. (Compare the cases on milk from rBST-fed cows; the First Circuit has held that consumers’ desire to know of a difference, without a basis in health claims, can’t justify a disclosure requirement under the First Amendment. Given the result on the state claims, this holding is of particular interest.)

In addition, when the Acella labels led databases to link the Acella and Merck products, the law often required substitution.  Thus, the mislabeling “was material in every imaginable way: to the doctors prescribing it, the databases linking it, the pharmacists dispensing it, the patients consuming it, and, most importantly to Acella, to its own bottom line.”

The court next found that Acella engaged in contributory false advertising for intentionally inducing the databases to engage in false advertising.  (The analogy to trademark doesn’t really work here, except maybe in the Second Circuit with its less rigid standing test. Merck doesn’t compete with the databases, does it? Contributory liability requires an underlying liability, and I’m not sure even the Second Circuit would find the databases liable under §43(a)(1)(B).  Perhaps we implicitly attribute defendant’s standing to the databases, so that as long as they satisfy all the other elements of Lanham Act false advertising then contributory liability can attach even in the absence of direct liability—the same way that an individual can be liable for a company’s false advertising even though the individual doesn’t compete with the competition—but it is a bit of a conceptual lacuna.)

However, the court rejected the state law claims, which require a consumer-directed injury.  When the core of a claim is harm to another business, §§ 349-350 claims fail. While Merck’s experts posited potential health consequences from the D-isomer, “they offered little evidence to conclusively support such assertions,” especially as applied to a mixture—and given that Merck used to sell a mixture product itself, the court wasn’t going to speculate.

The court then found two individual employees personally liable, given the testimony that they directed, controlled, and otherwise orchestrated the false advertising.  Though Acella argued that most such individual liability occurs in counterfeiting cases or one-person corporation cases, the principle of individual liability is broader than that, and was satisfied here, where the named defendants were moving, active, conscious forces behind the false advertising.  Both testified that one of their considerations for using the L-isomer labeling was their desire to ensure that Acella products would be substituted for Metafolin-containing products.  No finding of intent to create confusion was required, though the evidence suggested that the individuals did indeed intend their products to be seen as identical to Metafolin-containing products.

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