Monday, February 04, 2013

The left hand of false advertising: counting to $11.6 million

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

The court awarded Merck lost royalties based on what it would have charged to license the pure product to Acella, then trebled the damages because the proven damages weren’t full compensation and because Acella’s violations were willful.  However, the court didn’t award Acella’s profits.

Merck showed that its royalty calculations were a fair and reasonable approximation of its lost profits, which was all that was required.  Acella argued that Merck didn’t prove that lost sales were attributable to Acella, but that argument was “contradicted by Acella's entire business strategy.” Plus, the record showed that sales of Metafolin-containing products declined “for the first time, and markedly, when Xolafin entered the market.”  Merck calculated damages by multiplying Acella units sold by the net sales price of the corresponding Merck-licensed products, then multiplying that by .048, its net royalty rate, and subtracting variable expenses, for a total of nearly $3.9 million.

Acella’s damages expert contended that this ignored cross-price elasticity—the market-growing effect of a lower-priced product.  But given that Acella didn’t show that it marketed its products in any way other than database linkage, and thus that its sales depended on substitution for a prescribed Metafolin-containing product, elasticity was irrelevant. 

Acella also argued that Merck didn’t account for the market entry of another competitor, Trigen, whose products were also linked—in Acella’s view, all or much of its sales would have gone to Trigen rather than to Merck’s licensee because Trigen’s products were also cheaper.  But that wasn’t important, because Merck based its lost profits claim on Acella’s sales, not on sales lost to its licensee.  Unlike a typical competitive market, in this one Acella’s very presence depended on direct substitution.  So while a portion of those sales might have gone to Trigen in Acella’s absence, the close nexus between Acella’s sales and Merck’s losses, along with the established principle that doubts on the amount of damages should be resolved against the Lanham Act violator, meant that Xolafin sales were an appropriate measure of damages.

Plus, Merck’s royalty-based calculation reflects the profit Merck would have made from licensing to Acella, regardless of Trigen’s presence in the market.  (Wait, that can’t be completely right: there’s at least some chance that paying the license fee would have raised Xolafin’s price above Trigen’s price, shifting sales.)  Acella shouldn’t be rewarded with a windfall for its activity.  “[A]t a minimum, Merck is entitled to the amount it would have received had Acella legitimately licensed its product and not falsely claimed its likeness.”

The Lanham Act allows trebled damages as long as that’s compensatory, not a penalty.  However, trebling can serve a compensatory purpose when the damages are hard to quantify along with a deterrent purpose where the violation was willful.  Given the equities, Merck was entitled to treble damages.  First, awarding only lost royalties would amount to a forced license despite Merck’s rejection of Acella’s licensing attempt.  (How does that make the damages hard to quantify?)  Second, Acella’s “staggering volume” of sales, resulting in $50.2 million in profit, suggested that a similar volume of sales of higher-priced Metafolin-containing products would have resulted in even greater royalties for Merck.  (OK, I’m lost.  If the only sales effort was linking, then—subject to Trigen’s presence and whatever sales would’ve been lost to Trigen—why can’t we just figure this out from pure sales volume?  At a minimum, it seems to me that the only argument for damages being hard to quantify for this reason stems from Trigen’s presence.)

Furthermore, Acella was able to gain a foothold in the lucrative supplement market, the profits of which funded its development of a cost-effective folate supplement that, if properly labeled, could compete with Metafolin-containing goods.  “Thus, Acella's rise as a legitimate competitor today was premised on the production and false advertising of a willfully infringing product prior to this action.” These intangible benefits weren’t fully reflected in a calculation of damages, so the court trebled the damages to roughly $11.6 million.

The court declined to award Merck Acella’s profits.  Profits can be awarded after a finding of bad faith, in order to deter, to prevent unjust enrichment, and to compensate the plaintiff for harm.  Here, disgorging Acella’s profits would be an impermissible windfall to Merck.  “As the supplier of raw folate, Merck never stood to gain profit from the sale of a finished consumer product.” To the extent that any entity deserved an accounting, it would be Merck’s licensee.

Merck also requested a permanent injunction preventing Acella from (1) labeling its Xolafin and Xolafin–B products with the name “L-methylfolate” or any synonyms thereof, and (2) selling any methylfolate product for a period of five years and ordering a corrective advertising campaign.  The court granted part of the requested relief.

Irreparable harm for permanent injunctive relief can be established by showing competition plus a logical causal connection between the false advertising and the plaintiff’s sales position, both of which had been shown.  Damages couldn’t compensate Merck for Acella’s market position acquired due to false advertising.  The court ordered a corrective advertising campaign to explain to the relevant consumers that Xolafin products contain a mixture of the D- and L-isomers. But Acella wasn’t permanently enjoined from using the name of the L-isomer.  Instead, Acella had to “label its methylfolate products in the future in a way that alerts consumers to the presence and relative amounts of both the D- and L-isomers in the products.”  Truthful use of the L-isomer’s name was allowed.  Nor would the court ban Acella from selling any methylfolate product for five years, as requested.  Courts don’t ban noninfringing products; this remedy wouldn’t be narrowly tailored to fit the specific legal violations (even though above, the court accepted the argument that Acella’s position is based on past illegalities), and would harm the public interest in lower-cost, truthfully labeled products.

The court then found that there was sufficient bad faith to constitute exceptional circumstances justifying an award of attorneys’ fees.  “Acella's defense—premised as it was on a post hoc rationalization of its willfully infringing conduct—smacked of disdain for this Court.”  Acella’s testimony about its labeling decision “directly conflicted with FDA guidance, Acella's own practice with respect to all ingredients other than D,L-methylfolate, and Acella's internal communications.”  Though the FDA guidance isn’t mandatory, Acella identified all the compounds in its supplements, including D,L-prefixes, except the racemic folate mixture, so that one label read “dl-alpha tocopheryl acetate” and then “L-methylfolate” (which to me confirms the falsity by necessary implication argument).  The “glaring conflicts” between Acella’s private and public statements convinced the court that Acella’s practices were deliberately misleading and that a fee award was justified.  (In a related case, the fee award was $1.9 million; hard to imagine it will be lower here.)

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