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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