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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