Wednesday, May 23, 2018

Suck and blow: surgical device ads lead to $12 million in compensatory and punitive damages for competitor

SurgiQuest v. Lexion Medical, Inc., No. 14-382-GMS, 2018 WL 2247216 (D. Del. May 16, 2018)

The parties, which make medical equipment, sued each other for false advertising.  A jury returned a verdict in favor of Lexion under the Lanham Act and Delaware’s Unfair Competition Law, and awarded $2.2 million in compensatory damages and $10 million in punitive damages. Here, the court rejects various motions.

If I understand the technology correctly, the parties’ devices are used during surgery to manage the gases that enter the patient’s body.  Lexion’s Insuflow device heats and humidifies gas, which reduces hypothermia by preventing the removal of moisture from the patient. In 2010, SurgiQuest told the FDA that the AirSeal System removed moisture from the patient and keeps tissues moist. SurgiQuest instructed its sales representatives that AirSeal did “essentially the same thing” as Lexion’s Insuflow system. However, SurgiQuest did humidity tests in 2012, and its engineer concluded that the AirSeal “dehydrates the abdominal cavity . . . chilling the patient,” which is the exact opposite of Insuflow. Even after SurgiQuest’s CEO and head of marketing learned about the test results, SurgiQuest still instructed its sales representatives to state that AirSeal performed essentially the same function as Insuflow.

There was evidence that SurgiQuest knew that AirSeal would suck air into the abdomen, and that gas, and surgical smoke when present in the abdomen, would leak out of the trocar (a surgical instrument used for withdrawing fluid from a body cavity).  Surgical smoke is a dangerous byproduct of energy-based surgical instruments.  SurgiQuest called its product an “AirSeal” despite its knowledge that the AirSeal didn’t preclude the passage of fluids, even though surgeons expected that trocars had seals to preclude fluid passage. SurgiQuest claimed that the AirSeal maintained stable pneumoperitoneum when it had advertised that this meant no gas could escape during a procedure.

SurgiQuest trained its sales representatives that the AirSeal did not suck air into the abdomen and that gas and smoke did not escape from the AirSeal trocar due to the “AirSeal” functionality. When customers inquired, the sales representative did demonstrations to show that no air could get sucked into the abdomen. Evidence at trial indicated that SurgiQuest knew that this capability was an important selling point and if they told the truth there would be “doctors that look at you like you just ran their mother over in a car” and it would lead to a decline in sales. A potential acquirer backed out of a potential acquisition of SurgiQuest, calling the air entrainment issue a “serious problem,” indicating that their sales numbers would be much less if people knew the truth.

SurgiQuest also knew that air could exacerbate subcutaneous emphysema, and altering the concentration of carbon dioxide gas in the abdomen is “typically undesirable for the safety of the patient” and even increases the risk of a fire or explosion.

SurgiQuest also knew that smoke could escape through the top of the trocar and that its filter was a particle filter that could not filter out toxic and carcinogenic gasses. Nonetheless, SurgiQuest trained its sales reps that AirSeal removed carcinogenic gasses from the smoke and advertised that AirSeal provided “smokeless laparoscopy,” and that surgeons and operating personnel were protected from the danger of surgical smoke.

However, the court indicated that concerns over patient safety were “baseless,” given that the FDA reviewed and approved a number of the statements Lexion pointed to at trial and that surgeons from top hospitals use the AirSeal device routinely, including top robotic surgeons at the hospital at which Lexion’s own expert practiced.

SurgiQuest argued that no reasonable jury could have awarded monetary damages because Lexion failed to provide sufficient evidence that its false statements had a causal link to Lexion’s lost sales.   But Lexion presented a witness who testified that, as a result of being “misled” by SurgiQuest’s false statements that its AirSeal product wouldn’t draw operating room air into the abdoment, he stopped using Lexion’s Insuflow product and switched to AirSeal product. Though he stopped using the AirSeal immediately once he learned the truth, Lexion never got the account back. Similarly, a “robotic coordinator” [great job] at a hospital testified that she was told AirSeal did not suck air into the abdomen, which partially affected the hospital’s purchasing decision.  Another witness identified multiple consumer accounts that believed AirSeal heated and humidified, and stopped buying or reduced their purchases from Lexion as a result; a witness who testified that his hospital system purchased fewer Insuflow devices because they were using AirSeal, which did the exact same thing as Lexion’s products; and a SurgiQuest sales representative who testified SurgiQuest targeted Lexion’s customers by telling them AirSeal performed identically to Insuflow, and that they could justify the cost of their purchase by getting rid of Insuflow. At one hospital, Lexion lost an account that produced revenue of $100,000 per year.  Thus, the evidence at trial was sufficient to support a verdict that the false advertising had a causal connection to Lexion’s loss.

The court also rejected challenges to the jury instructions.  These included: “[i]f literal falsity is found, Lexicon does not need to prove actual deception of consumers to recover damages for false statements made by SurgiQuest.” SurgiQuest argued that this wasn’t a correct statement of the law for money damages, but the court noted that Lexion provided evidence of actual deception and of a causal connection between the false statements and damages.

The court also instructed that “[e]vidence of actual[ ] confusion is difficult to find and even a few incidents may[,] therefore[,] be probative,” relying on analogous trademark cases.  Even if that wasn’t ok (which it should be), this wasn’t a damages instruction but a liability instruction for misleadingness, and SurgiQuest was only challenging the damages award. Likewise, the instruction “[i]f a party demonstrates that the defendant has intentionally set out to deceive the public and its conduct in this regard is of an egregious nature, a presumption arises that consumers are, in fact, being deceived” was also about misleadingness, and Lexion showed literal falsity, making presumptions irrelevant.

SurgiQuest also argued that the court improperly allowed Lexion sales representatives to testify about what customers told them, but this wasn’t hearsay because the statements weren’t provided for the truth about the AirSeal’s capabilities, but rather for what consumers thought the AirSeal could do (which evidenced their confusion).  Likewise, the court instructed the jury that evidence that SurgiQuest sales reps misunderstood the device’s capabilities “may be probative to establish customer or purchasing deception or other evidence.”  The court again reasoned that trademark precedents could apply, making salesperson confusion probative of consumer confusion because salespersons are in the position to influence a purchasing decision.  Given the evidence, the jury didn’t need to infer confusion, though: the  salespersons made literally false statements.

Under Delaware law, punitive damages are available when the defendant’s conduct exhibits a wanton or willful disregard for the rights of the plaintiff, which requires a conscious indifference or an “I don’t care” attitude.  SurgiQuest argued that there was little evidence of deception, particularly given the disclosures about the product to the FDA and in the Instructions for Use (“IFU”) provided to customers. SurgiQuest argued that most of the challenged statements were isolated incidents, from a handful of sales representatives to a very limited number of customers.  Given the evidence of knowing falsity recited above—and the harm that falsity could cause—the court found the evidence sufficient for punitive damages.

However, the court denied Lexion a permanent injunction.  Lexion argued that its loss of market share was sufficient evidence of irreparable harm, but SurgiQuest rejoined that because the jury found that it did not violate the Delaware Deceptive Trade Practices Act, which requires that there be a pattern of deceptive conduct not merely isolated statements or conduct, that the false statements couldn’t be the cause of on-going or irreparable harm. The court agreed, even though those two things (isolated statements and hard-to-measure lost market share) don’t contradict one another.  [Compare to the recent Adidas v. Skechers case, which does accept lost market share as irreparable harm.]

The balance of hardships also weighed against the injunction because enjoining the use of the tradename “AirSeal” would require SurgiQuest to change the registration of the device with government agencies, including the FDA, and the registration and use of the name dates back to 2009, but Lexion did not plead any claims on this tradename until 2016, nor any damages before 2013.

Lexion argued that the public interest would be served by an injunction because the false advertising related to patient and OR staff safety. SurgiQuest responded that prominent laparoscopic surgeons in top United States hospitals use AirSeal, and that an injunction could impact the surgical community’s access to the relevant equipment, which could impact the quality of laparoscopic surgeries, including robotic surgeries that are performed with the AirSeal each day. “Because surgeons across the country are using both products, the court finds this factor weighs against a permanent injunction.”

The court also denied disgorgement of profits. The Third Circuit considers: “(1) whether the defendant had the intent to confuse or deceive, (2) whether sales have been diverted, (3) the adequacy of other remedies, (4) any unreasonable delay by the plaintiff in asserting his rights, (5) the public interest in making the misconduct unprofitable, and (6) whether it is a case of palming off.” Intent and public interest in making misconduct unprofitable weighed in favor of disgorgement, and palming off was inapplicable, but sales diversion weighed against disgorgement. “Lexion’s trial evidence showed a wide variety of reasons completely independent of SurgiQuest, such as cost, contracts, product failures and surgeon preference that contributed to Lexion’s declining revenues.” And the fact that the parties’ products were incompatible “is a legitimate and lawful business fact, which cannot support damages or a theory of diverted sales for false advertising.” Moreover, testimony from both parties’ witnesses demonstrated that the selection of which device to use was a matter of surgeon preference.  

Adequacy of other remedies also weighed against disgorgement. Lexion never achieved more than a 4-5% market share, even when SurgiQuest was not on the market. Only 1-2% percent of surgeons even want the heated and humidified gas that Lexion’s accessories provide. Thus, the jury rejected Lexion’s claim for 95% of SurgiQuest’s revenue as damages.

Plaintiff’s delay also weighed against disgorgement. Lexion didn’t plead any false advertising claims concerning air entrainment (including the trademark AirSeal) or smoke statements until May 2016, more than 2 years after the litigation began, yet claimed that the false statements began at least as early as 2012, and relied on information publicly available in 2009-2010.

Nor was this case exceptional in terms of the substance or SurgiQuest’s litigation behavior. “While the case has been hotly contested, and has been marked by a tremendous number of disputes, these are typical realities of high-stakes litigation between competitors in a market presenting an opportunity for enormous profits. For the most part, both sides defended their respective positions throughout this litigation in apparent good faith.” For similar reasons, there was no prejudgment interest award.

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