Wednesday, September 12, 2018

2 week difference leads to $10 million in damages in pregnancy estimator case

Church & Dwight Co. v. SPD Swiss Precision Diagnostics GmbH, No. 14-CV-585 (AJN), 2018 WL 4253181 (S.D.N.Y. Sept. 5, 2018)

Church & Dwight won an injunction, affirmed by the Second Circuit, against SPD’s advertising of its “Clearblue Advanced Pregnancy Test with Weeks Estimator,” and the court here awarded nearly $1 million in damages, but not fees, SPD’s profits, or treble damages/punitive damages under state law.

While “causation must first be established,” a court may engage in “some degree of speculation” in determining the amount of damages. “[T]he district court may take into account the difficulty of proving an exact amount of damages from false advertising, as well as the maxim that ‘the wrongdoer shall bear the risk of the uncertainty which his own wrong has created.’ ”  Thus, the plaintiff’s burden is to show
 “that its damages calculation is a ‘fair and reasonable approximation’ of its lost profits.”

“C&D’s leading home pregnancy test brand, First Response, has been the market leader for many years, and SPD’s leading brand, Clearblue, has been First Response’s primary competitor.” C&D’s damages expert used all of SPD’s sales of the accused product to estimate damages, then calculated lost profits by using C&D’s market share to estimate how many of SPD’s sales would have gone to C&D had the Weeks Estimator not been sold, and multiplying that by C&D’s per-test stick incremental profit margin, resulting in an estimate of $9,955,018.

SPD’s expert agreed that market share allocation was an appropriate approach, but calculated lost profits of only [redacted, which is annoying but not dispositive because his calculation was ultimately rejected].  The “large” difference between the two calculations came from SPD’s expert’s use of the consumer reaction survey as a proxy for loss causation and his use of a lower per-stick profit margin.

C&D’s expert assumed that all of the sales of the Weeks Estimator were connected to the false advertising of the product’s key differentiating feature, despite his admission that he cannot be sure that every person who bought the Weeks Estimator bought it because of the advertising or because they were deceived by the advertising.  C&D argued that this assumption was warranted because: (1) Every consumer who bought the Weeks Estimator was exposed to at least part of SPD’s marketing campaign, and weeks estimation was both SPD’s key message and the key feature differentiating the product, which was more expensive than C&D’s competing Clearblue product.  (2) Retailers’ decisions about whether to stock the Weeks Estimator, how much shelf space to give it, and where to place it on store shelves likely were influenced by false advertising, affecting purchasers.  C&D’s expert assumed that, but for that false advertising, the launch of the Weeks Estimator SKU “would not have had an incremental effect on [SPD’s] First Response stick sales.”

The court found C&D’s expert’s assumptions to be reasonable: “this is a competitive market in which the parties own the top two brands; and there is one key distinguishing feature between the Product and similar test sticks—a feature that was the subject of false advertising directed at both consumers and retailers.” Also, evidence suggesting that some subset of consumers were unaffected by the advertising wasn’t persuasive.

SPD offered a survey in which prospective pregnancy test buyers were asked about their willingness to purchase two product concepts, which found that 81% of respondents would “definitely purchase” the product estimating pregnancy from the last menstrual period, and 84% of respondents would “definitely purchase” the product that estimates pregnancy from ovulation, which they understood to be different from a doctor’s estimate. Thus, SPD argued, the key differentiating feature—the test’s ability to estimate the number of weeks since ovulation—would still induce purchases even in the absence of false advertising. But that survey used statements describing how pregnancy duration was measured, not how that duration was expressed, which was the key problem with Weeks Estimator. Also, the survey offered only two extremes—would definitely purchase, and would not purchase—and showed each participant only one product description, unlike the real world offering options for comparison.  It isn’t surprising that both descriptions were popular, compared to nothing else.

SPD also argued that international versions of the same product were successful absent the false advertising, and that C&D understood even without looking at the ads that the Weeks Estimator would take business from it regardless of the false advertising.  As for the different international marketing, “the absence of a formal finding of falsity by a court does not necessarily mean that the international advertising was not false or misleading.” While some international versions had more descriptive names—principally, “Clearblue Digital Pregnancy Test with Conception Indicator”—and/or contained a chart on the packaging that compared the product’s measure of weeks since ovulation to a doctor’s estimate, other foreign ads touted the product as being “As Accurate as a Doctor’s Test” and featured language and imagery similar to those found misleading in the US.  As for the impact of the innovative nature of the product itself, C&D argued that its documents and internal discussions reflected its fear of the commercial strength of the product with attendant misleading advertising. The court agreed.

Finally, SPD tried to use C&D’s survey, conducted by Hal Poret, which C&D used to show an actionable level of consumer confusion, as a measurement of how many sales were attributable to the at-issue advertising or at least as evidence that not all sales of the product were attributable to false advertising. But given that every purchaser and retailer was exposed to intentionally misleading advertising about the key differentiating feature of the product, and that the evidence about other reasons for purchase was speculative, considering all the sales was not just reasonable, it was the most reasonable assumption.

The Poret survey wasn’t intended as a proxy for tying the false advertising to the lost profits. It found roughly 20% net deception, defining deception as answering both that the product estimates the number of weeks a woman is pregnant and that the product’s estimate is the same as a doctor’s estimate of weeks pregnant.  Poret had never taken the position that the results of a study like this could be used to predict the percentage of actual purchasers who were deceived.  He contended that you can’t treat prospective purchasers as if they were actual purchasers; it is even possible, though unlikely, that 100% of the actual purchasers could have fallen within the subset of prospective purchasers who were misled. He further testified that his survey didn’t account for the impact of non-package advertising, and that survey likely understates the degree of deception among respondents. For example, the control package he used still identified the product as the “Clearblue Advanced Pregnancy Test with Weeks Estimator,” which might have led some in the control group to make the same mistake as confused people in the test cell.  It is possible to use survey results as a proxy for damages causation, but C&D’s market share was a better proxy in this litigation.

SPD also argued that the Weeks Estimator disproportionately cannibalized Clearblue products rather than harming C&D’s products in proportion to its market share.  C&D offered a regression analysis reaching the opposite conclusion. SPD’s criticisms were “atmospherically compelling in that they lay bare some of the difficulties in finding a way to calculate the effect of the unlawful activity—SPD’s false advertising—while controlling for all other forces affecting market share.” But these criticisms were undermined by its own expert’s reliance on a market share allocation methodology, which “inherently accounts for a range of market factors.”  In any event, C&D’s expert’s conclusions, backed by his regression, were reasonable.

“While it is likely that some consumers bought the Weeks Estimators for reasons disconnected from the false advertising, SPD has not supported any one of these alternative reasons, or even the totality of these other reasons, with evidence sufficient to overcome the evidence of the reasonableness of [C&D]’s core market share assumption. SPD pervasively falsely advertised the Product from its launch, never advertised it in a truthful manner, and has not affirmatively offered any of its own data regarding the number of purchasers who were not deceived ….” Most crucially, the false advertising was about the key feature differentiating the Weeks Estimator from other products, making this methodology and core assumptions that much more reasonable.

The court denied disgorgement in addition to lost profits, because that would be overcompensatory. Nor did the court treble the award under the Lanham Act, even assuming that the false advertising was willful (at the liability stage the court found that SPD knew that consumers would misunderstand the weeks estimation claim).  “Whatever the ‘intangible’ harm caused by SPD’s false advertising, the Court finds that its award of nearly $10 million is both adequate compensation to C&D for all harm done and adequate deterrence against any future false advertising by SPD.” Punitive damages under N.Y. Gen. Bus. Law § 349 likewise require “clear, unequivocal and convincing evidence that [the defendant’s] conduct was gross, involved high moral culpability, and was aimed at the general public,” and SPD’s conduct wasn’t sufficiently egregious. Nor was this an exceptional case for fee purposes. SPD’s litigation positions were reasonable and the court previously rejected C&D’s attempt to get sanctions for disobeying the injunction.

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