Merck Eprova AG v. Gnosis S.p.A., No. 12‐4218
(2d Cir. July 29, 2014)
Merck won a false advertising case against Gnosis, and the
court awarded it over $500,000 in damages, over $2 million in attorneys’ fees
and costs, and prejudgment interest, and also ordered corrective
advertising. The court of appeals
affirmed in full. The key holdings are
both clear and relatively narrow: in a two-player market, literal falsity and
deliberate deception justify legal presumptions of both consumer confusion and
injury for liability purposes. Willful
deception also justifies an award of defendant’s profits, and enhanced damages
in circumstances such as those present here.
The parties produce folate, a critical prenatal
supplement. The predominant naturally
occurring form is known as 5‐MTHF. Chemical compounds that differ only in their
arrangement around a carbon atom, as are relevant here, are known as
stereoisomers (either L and D or S and R).
In folate, L is the naturally occurring isomer; synthetically produced
folate will have both and would thus be labeled “D,L” or “R,S.” Merck was the first to manufacture a pure S
isomer (aka L‐5‐MTHF), which it sold under the
name Metafolin to customers who use it in vitamins and supplements. This was an important and
expensive-to-develop product for Merck.
Gnosis also makes raw dietary ingredients, and sold a
product called Extrafolate (the current version of which was not at issue
here). Extrafolate was a mixture of the
S and R isomer, also known as a “D,L‐5‐MTHF” product. This mixture doesn’t occur in nature and
hasn’t been found to have the same nutritional benefits as L‐5‐MTHF. As a mixture, it sells for significantly less
than Metafolin—on the order of $10,000 less per kilogram. But from 2006-2009, Gnosis used product
specification sheets, brochures and other marketing materials that used the
chemical descriptions, terms, and formulas attributed to the pure S-isomer for
the sale of the R,S mixture. Merck sued
Gnosis in 2007.
In a bench trial, the district court found that Gnosis
recognized that the mixture and the S-isomer had different chemical names, but
deliberately used the S-isomer’s common name or abbreviation, and described the
chemical properties of the pure product in its promotional material. Gnosis continued this advertising until nearly
two years after the litigation began.
The district court found that the use of the S-isomer’s common name and
abbreviation was literally false, and that the use of descriptions of the
chemical properties of the S-isomer in brochures, material safety data sheets,
and certificates of analysis was literally true but implicitly, and
intentionally, false.
“In essence, Gnosis was accurately describing a product it
was not selling.” Its statements were
literally true in that they described the chemical makeup of a pure S-isomer
product, but they were implicitly false because they were used in marketing a
mixed product. Comment: Hunh? Literal falsity isn’t limited to claims that
aren’t true of anything. If I truthfully describe something that
exists in the world, but I don’t have it to sell, selling something with that
description isn’t literally true. It’s
literally false. At the very least, the
necessary implication of what Gnosis did was a literal falsehood. No linguistically competent speaker of English
would understand the materials as anything other than a representation that the
product being sold was the pure S-isomer.
But because the literal/implicit falsity line has colonized other
aspects of the doctrine, as we’ll see, this holding takes on exaggerated
importance.
The district court found that Gnosis engaged in a “concerted
and organized campaign to deceive customers.” Gnosis’s own expert testified
that the pure isomer name is never used to refer to anything but the
S-isomer. Privately and in its patent
application, Gnosis used the correct nomenclature. The district court found Gnosis’s explanation
for the labeling “simply fanciful—and false—and discount[ed] it entirely.” Gnosis’s witness had testified that he’d read
“two or three” articles that referred to the mixture substance as L‐5‐MTHF,
but he could not recall the names of the articles. The next trial day, Gnosis’s counsel informed
the court that he’d reviewed the relevant documents, and that “[t]hey do not . . . exactly have the L‐5‐MTHF.” The court concluded
that “Gnosis’s use of the common name and abbreviation in its marketing efforts
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.”
On appeal, Gnosis challenged the district court’s
presumption of consumer confusion and injury.
But under Second Circuit doctrine, a literally false claim may be
enjoined without further evidence of impact on consumers. And even in implied falsity cases, where a
plaintiff shows intentional deception and egregious conduct, a presumption of
deception arises. Given the unchallenged
factual findings of literal falsity and intentional deception as to the implicit
falsity, a presumption of confusion was justified. The intention to mislead was clear: “Gnosis
put a description of the chemical properties of the Pure Isomer 6S product on
its Extrafolate materials in order to mislead consumers into believing that they
were, in fact, purchasing a Pure Isomer 6S product rather than the 6R,S Mixture
Product, Extrafolate.” (Query why such a
presumption of confusion wouldn’t also be justified if a middleman was unaware
that its supplier had deceived it. The
labeling and promotional materials would the same: a mixed product
misidentified as pure. At the very
least, wouldn’t you want to call that literally false?)
When a plaintiff shows deceptive intent, the burden shifts
to the defendant to show absence of confusion.
While the district court should’ve explained why Gnosis didn’t rebut the
presumption, the record strongly supported a finding of actual consumer
confusion. There were only a few
customers in this market, and there was evidence that several of them (as well
as their own customers) were confused. Even assuming that some of Gnosis’s
direct consumers weren’t confused, the record readily supported the conclusion
that a significant number were misled.
Plus, the court of appeals noted, the district court’s finding of
confusion could be based on literal falsity alone.
What about presuming injury to Merck? Gnosis argued that this was only appropriate
in cases of comparative advertising. But
in literal falsity cases, the Second Circuit doesn’t require extrinsic evidence
of injury to consumers or to the plaintiff.
In McNeilab, Inc. v. American Home Prods. Corp., 848 F.2d 34 (2d Cir. 1988),
the court of appeals held that misleading comparisons necessarily harm the
victim in consumers’ minds, but misleading positive claims by the defendant
injure all competitors equally, thus requiring some evidence of actual injury
and causation. The Time Warner case found that disparaging references to “cable” fell
in the former category because Time Warner was
cable in the relevant market. The court
of appeals now concluded that this rationale extends beyond disparagement when
there is only one competitor in the market and when the deception is
intentional. “Because its only
competitor for such a pure product at the time was Merck, it follows that Merck
was damaged by Gnosis’s false advertising of a mixed product as a pure one.” There was no risk that injury to Merck would
be too speculative. (I can’t see why
intentional falsity is required here. Falsity would seem to work the same
damage in a two-player market.)
Under the Lanham Act, a prevailing plaintiff can, subject to
the principles of equity, recover defendant’s profits. Damages can be trebled, as long as the award
is compensatory and not punitive.
Willfulness is a prerequisite for a profit award in the Second
Circuit. And an award of profits may be
made based on deterrence rationales, even though that’s not compensatory. Under these standards, the district court
didn’t abuse its discretion. It reasoned
that awarding profits was necessary to deter future unlawful conduct, prevent
Gnosis’s unjust enrichment, and compensate Merck for its lost business, all of
which are acceptable goals. And where
the parties directly competed in a two-player market, and literal falsity and
willful deception have been proved, no more evidence was needed of injury and
consumer confusion other than the resulting presumptions. “‘Having established
falsity, the plaintiff should be entitled to both injunctive and monetary
relief, regardless of the extent of impact on consumer purchasing decisions’” (citation
omitted).
The district court also found that a profits award didn’t
sufficiently reflect the total harm to Merck and trebled the damages. This wasn’t a punishment or penalty, but
reflected the intangible benefits to Gnosis, in particular its usurpation of
Merck’s market share. The court of appeals found no abuse of discretion. Although the statutory provision was intended
to deal with hard-to-prove damages, deterrence of willful infringement is also
an acceptable rationale. The facts of the case—including Merck’s exclusive
control of the market prior to Gnosis’s entry, Gnosis’s continued false
advertising for two years after the lawsuit began and after Gnosis’s sales
agent settled Merck’s lawsuit against it and stopped distributing the mixture
product—made this case “particularly appropriate” for enhanced damages. “Gnosis
was unjustly enriched as a result of its false advertising, and, in light of
Gnosis’s demonstrated deceptive and willful conduct—manifested by its stubborn
persistence—the court’s conclusion that enhanced damages were needed to deter
Gnosis from any future willful infringement was not an abuse of
discretion.” Other cases with less
egregious, willful conduct might not warrant such an award.
The court of appeals also affirmed the grant of prejudgment
interest (justified by willfulness again) and mandatory corrective
advertising. The corrective ads had to
disclose that the campaign was court-ordered, but not that Gnosis was found to
have acted willfully. The ads had to
link to the court’s opinion for context, and had to run on Gnosis’s homepage as
well as product sale pages, as well as on third‐party industry websites and in
trade magazines where the offending products were or are presently advertised
by Gnosis. Gnosis argued that this was unfair double recovery, but the court
didn’t award Merck any damages for corrective advertising.
The court of appeals also affirmed the district court’s
finding that this was an exceptional case warranting a fee award of nearly $2
million. The district court not only found that the false advertising was
willful, but that “Gnosis’s litigation strategy was conducted in bad faith,
with senior officials, including [CEO] Berna, frustrating the litigation
process at every turn, from withholding documents in discovery and obstructing
depositions to testifying falsely under oath at the bench trial in this
action.” The court of appeals noted that
Gnosis had been found to engage in “egregious discovery violations,” including
coaching of a witness during a deposition by the CEO, and commented that the
litigation was clearly prolonged by Gnosis’s conduct. This award was appropriate even though the
fees outstripped the damages; the district court found the hours (and
rates, after a reduction) reasonable.
The district court also pointed out that the actual stakes of the
case (market share for one of Merck’s flagship products), as well as the level of
success counsel achieved, helped justify a fee award that was substantially
larger than the award of profits. Merck
didn’t get fees and costs on appeal, however, because Gnosis conducted itself
appropriately in the appeal and its arguments were nonfrivolous.
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