The probiotic worm turns: previous PI loser wins $15 million in Lanham Act case

De Simone v. VSL Pharmaceuticals, Inc., No. TDC-15-1356, 2019 WL 2569574 (D. Md. Jun. 20, 2019)

Previous discussions.  The parties compete in offering a probiotic product; De Simone used to license his formulation to VSL, then went out on his own.  VSL had done well in previous iterations of this case in preventing the De Simone parties from, among other things, truthfully referring to scientific studies of the De Simone formulation where the studies used the then-current VSL trademark to identify the object of study, a restriction I think violates the First Amentment.  But before a jury, De Simone did well, and the court declined to disturb that result. The jury awarded $15 million against Alfasigma for Lanham Act false advertising.  De Simone’s new partner, ExeGi, sought a permanent injunction against defendants Leadiant and Alfasigma, and they also asked for attorney’s fees, costs, and pre- and post-judgment interest.

ExeGi asked the jury to award it nearly $28 million, representing Alfasigma’s profits from sales of VSL#3 from July 1, 2016 through the end of trial.  A court has discretion to enter judgment for a “just” sum of the defendant’s profits, as long as it’s compensation and not a penalty.  Relevant factors, derived from trademark cases, are: (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. The court declined to disturb the jury verdict.

The evidence established that the VSL parties’ senior management “knew that in producing a new version of VSL#3 in Italy (“Italian VSL#3”), they had not been able to precisely replicate the original proprietary mix,” so the false advertising was deployed with the intent to confuse or deceive. There was testimony supporting a finding of sales diversion, and the false advertising “had the effect of ‘palming off’ Italian VSL#3 as the same as the original VSL#3 product now sold by ExeGi as Visbiome.”  [VSL can’t truthfully advertise based on the older scientific studies; as I noted before, to say that ExeGi can’t use those studies either because the trademark no longer matches the formulation is perverse.]  ExeGi was a new company so its own lost profits weren’t adequate compensation; it didn’t delay in asserting its claims; there’s a public interest in not being misled “into believing that a particular product offered to address health needs will have the same efficacy as a trusted product when that has not been established.” However, there wasn’t definitive evidence that differences between the formulations rendered new VSL #3 “unsafe or clinically ineffective for all of its users,” which strikes me as a pretty high standard (would you be happy with a formulation switch that was unsafe/ineffective for 25% of users?).  The jury award wasn’t excessive, but was “sufficiently substantial,” given ExeGi’s status as a startup with limited marketing resources.

Permanent injunction: In passing off new VSL #3 as the De Simone formulation, defendants deprived the De Simone parties “of a legitimate competitive advantage and reduced consumers’ incentive” to purchase their product Visbiome, which actually contains the De Simone formulation, which constituted irreparable injury: it led consumers not even to consider switching. The monetary remedy was inadequate compensation, because past awards didn’t prevent the offender “from infecting the marketplace with the same or similar claims in different advertisements in the future.” Plaintiffs argued that Alfasigma continued to advertise a continuity between new VSL#3 and the De Simone formulation, and ExeGi’s CEO provided uncontradicted trial testimony that this false claim was hampering ExeGi’s ability “to leverage the benefits of the brand,” so money was inadequate.  The balance of hardships also favored an injunction; ExeGi, “cannot fairly compete” until Alfasigma and Leadiant “stop[ ] infecting the marketplace with misleading advertising.” And stopping false advertising is in the public interest, especially for health-related products.

However, defendants wouldn’t be required to make affirmative statements about ExeGi’s Visbiome and to issue corrective advertising. Instead, the injunction would target defendants repeated false assertions in their advertising that new VSL#3 continued to be composed of the De Simone formulation, including but not limited to statements claiming that VSL#3 continues to contain the “original proprietary blend” or the “same mix in the same proportions.”  This was false vecause new VSL#3 was an attempt to reverse engineer the original formulation and wasn’t an exact replication.  The VSL parties were also enjoined from citing any clinical study performed on the De Simone formulation or implying that any such study was conducted on new VSL#3.  [Thought experiment: assume the FTC/FDA argued that VSL couldn’t engage in such advertising.  What First Amendment standard would you expect a court to employ?  Should a court accept “they’re not the same” as enough evidence of falsity without proof that the differences made a clinical difference?]

Attorneys’ fees: ExeGi prevailed on its false advertising claims, and the VSL parties voluntarily dismissed their Lanham Act trademark/false advertising claims with prejudice, making the De Simone parties prevailing parties for all the Lanham Act claims in the case.  Still, under Octane Fitness, a fee shift was unwarranted; “there was no unusual discrepancy in the merits of the parties’ positions,” especially given that the VSL parties got two preliminary injunctions. And even though the jury didn’t credit the VSL parties’ evidence on the equivalence of the parties’ products, that didn’t mean their arguments were frivolous or objectively unreasonable, and the jury didn’t necessarily find bad faith.

As for the manner of litigation, neither party covered itself in glory.  Nor was a fee award necessary for compensation and deterrence given the damages and injunctive relief achieved.

De Simone v. VSL Pharmaceuticals, Inc., No. TDC-15-1356, 2019 WL 2570068 (D. Md. Jun. 20, 2019)

Here’s the related Rule 50/Rule 59 decision, rejecting defendants’ motions.  Along with the $15 million to ExeGi from Alfasigma, the jury awarded almost $1 million to De Simone from VSL for breach of contract and almost $1.9 million for unjust enrichment from VSL and defendant Leadiant, and rejected VSL’s counterclaim against De Simone alleging breach of fiduciary duty.

Rule 50: A district court may overturn a jury verdict by rendering judgment as a matter of law only if there is no “legally sufficient evidentiary basis to find for the [prevailing] party on that issue.”  Alfasigma argued that none of its challenged ads met all the elements of a Lanham Act claim. The claim turned largely on three challenged items: a page of the VSL#3 website entitled “VSL#3: new formula dairy-free,” a similar press release, and statements made on the VSL#3 Facebook page.  Viewed in the light most favorable to ExeGi, the evidence was enough to show that, at a minimum, the webpage satisfied all the elements of false advertising, since it claimed that the manufacturer had “revert[ed] back to an established process that removes all dairy while maintaining the original proprietary mix of eight strains of live bacteria.” Likewise, Leadiant’s letter to healthcare providers, which was sent to hundreds of doctors around the United States, also constituted false advertising when it stated that “VSL#3 is the same quality product, containing the same genus and species of bacteria, in the same proportions that you have come to expect.” Both the webpage and the letter “were disseminated in a manner sufficient to constitute commercial advertising placed in interstate commerce.”  There was sufficient evidence of literal falsity. ExeGi submitted expert testimony that the new version of VSL#3 had only seven strains of live bacteria, not eight, and that based on a fermentation analysis, the two products would degrade compounds differently and thus function differently. VSL’s president/CEO also acknowledged that in reverse engineering the formulation, “you can determine a certain range of the presence of the strains but you cannot precisely assess the exact quantity of the strains,” so its scientists were “not able to give a precise indication of the percentage of each strain[ ] contained” in VSL#3, or a “formal” range for such proportions, but instead could only measure the amount of each strain with a margin of error of 30 percent.

Alfasigma argued that, under the terrible In re GNC Corp., 789 F.3d 505 (4th Cir. 2015) decision, “when the statement underlying a Lanham Act false advertising claim is based on scientific representations, the statement cannot be found to be literally false unless ‘all reasonable experts in the field agree that the representations are false.’” VSL’s expert testified that VSL#3 had eight strains of bacteria, and that the relative ratios of strains was “indistinguishable within one percent,” but he didn’t testify that the ratio of the strains in Italian VSL#3 were the same as the “original proprietary mix” of the De Simone formulation.  The court misdescribed GNC as involving a Lanham Act false advertising claim—it was a California state law claim and thus GNC’s mangling of Lanham Act distinctions was dicta as to Lanham Act claims—but also emphasized the language that “[w]hen litigants concede that some reasonable and duly qualified scientific experts agree with a scientific proposition, they cannot also argue that the proposition is ‘literally false.’ ” The court here concluded: “GNC thus does not broadly hold that a false advertising claim based on a statement grounded in science must fail if the defendant presents an expert witness supporting its position. In the absence of a concession that the statement is the subject of reasonable scientific debate, that question is properly decided by the jury.” 

Indeed, the court [unnecessarily] gave a defendant-friendly jury instruction that: “If an alleged false statement states a scientific proposition, and you find that there is a reasonable difference of scientific opinion about that proposition, that is, duly qualified experts in the field have a reasonable disagreement about the accuracy or validity of the proposition, the challenged statement is not ‘literally false.’” The jury could reasonably conclude that to the extent there was a disagreement about the number of strains in Italian VSL#3, or whether Italian VSL#3 contained the same original proprietary mix as the De Simone formulation, it wasn’t a reasonable disagreement. The plaintiffs presented other evidence and experts beyond those already described: an expert in the field of proteomics, the study of how genes produce proteins and what proteins they produce, stated that based on his comparative proteomic testing of VSL#3 and Visbiome, “the two products were very different,” with a 25 percent difference in the protein expression of new VSL#3 and Visbiome, meaning that of the approximately 4,000 proteins identified in the two products, about 1,000 of them were different. The expert concluded that this difference in protein expression would “result in different performance.” A Professor of Gut Physiology and Pediatric Gastroenterology at Harvard Medical School who testified as an expert in the use of probiotics for the management of gastroenterological and immunological disorders stated that based on his review of various scientific studies comparing the De Simone formulation with new VSL#3 that “the new formulation from Italy is not ... comparable to the formulation that is from the United States.”

Plus, the jury could have concluded that the number of strains or the proportion of those strains were different based on “non-scientific evidence,” to wit, regulatory filings made by VSL to Health Canada in 2013 and 2018 describing the composition of VSL#3 differently (with eight strains and seven strains respectively).  What makes this “non-scientific”?  GNC is nonsense, and nonsense decisions create nonsense distinctions.

Anyway, there was also evidence that the challenged materials were literally false when they said that the manufacturing of VSL#3 would be “moving back to “the original manufacturing facility in Italy,” and produced “in the same facility that [VSL#3] was originally produced,” since VSL#3 had “always” been produced for commercial sale in manufacturing facilities in the United States.

Materiality: The false statements on the number and proportions of strains were “plainly” material because they related to an “inherent quality or characteristic” of VSL#3. Plaintiff’s expert testified that new VSL#3 was not comparable to the De Simone formulation; that, based on those differences it was “not appropriate” to conclude that Italian VSL#3 is the same product studied in prior clinical trials; and that no doctor would prescribe a product that was not itself the subject of clinical tests. And the jury could reasonably infer that the false claim that new VSL#3 was being made in the “original manufacturing facility” could influence purchasing decisions by causing purchasers to mistakenly believe that new VSL#3 and the De Simone formulation were actually the same and that new VSL#3 was supported by the history of clinical trials relating to the De Simone formulation.  Because of the literal falsity, deception was presumed.

Injury/proximate causation: The jury could reasonably find this too. ExeGi’s CEO testified that Alfasigma’s advertising made it hard for ExeGi to leverage the fact that it had the “real” De Simone formulation.  Plaintiff’s expert testified that the change in manufacturing locations for VSL#3 and the move to a dairy-free formulation meant it was neither appropriate nor accurate to claim that VSL#3 continued to be the “same quality product containing the same genus and species of bacteria in the same proportions that you have come to expect,” and that to make such a claim would require VSL#3 to be subjected to efficacy testing to ensure continuity of outcomes. In total, it was reasonable to conclude that false advertising about the continuity between original VSL#3 and new VSL#3 was leading physicians to continue to prescribe VSL#3, and thereby fail to prescribe ExeGi’s product.

Alfasigma argued that ExeGi showed only correlation, not causation.  But the evidence about doctors’ demand for clinical trials, and evidence that it was important to dieticians to know what strains of bacteria were in VSL#3 and whether those strains matched up with the product that was the subject of clinical tests so that they could make informed recommendations to her clients, was enough for the jury to reasonably find injury/likely injury.  Unlike in cases cited by Alfasigma, there was no evidence from purchasers about other reasons they chose new VSL#3 over Visbiome, or other competitors over Visbiome.  More fundamentally, unlike in those cases, the false statements at issue weren’t just one reason among many to buy the product; they were “passing off” of one product for another. The jury could conclude that there was demand for the De Simone formulation specifically and that Alfasigma falsely promised to satisfy that demand.

The profits award was also ok.  A plaintiff who seeks defendant’s profits must show that the defendant benefited from the false advertising, and the evidence supported such a finding.

The court likewise upheld the unjust enrichment verdict based on continued sales of original VSL#3 past the exclusive license date. Under Kimble v. Marvel Entertainment, LLC, 135 S. Ct. 2401 (2015), licensing provisions providing for “post-expiration royalties are allowable so long as tied to a non-patent right—even when closely related to a patent.” Here, the situation was exactly like Kimble’s example of a post-patent royalty tied to trade secrets. De Simone’s exclusive licenses covered first his patent and later his know-how even after the expiration of the patent; although the royalty amount didn’t decrease post-patent, at most that would render the royalty provision unenforceable. But the jury found defendants liable not for breach of contract, but for unjust enrichment, because they were able to continue to sell VSL#3 without paying royalties to De Simone for his know-how.

For similar reasons, the court declined to grant defendants’ motion for a new trial. Alfasigma argued that it was error for ExeGi’s false advertising claim to be submitted to the jury because, as ExeGi sought disgorgement, the claim was equitable in nature. But Dairy Queen, Inc. v. Wood, 369 U.S. 469 (1962), held that the plaintiff in a trademark infringement claim who sought the remedy of an “equitable accounting” of the defendant’s profits was entitled to a jury trial. “Although disgorgement may have some history in equity, ExeGi’s claim required nothing more than the adding up of unjustly earned profits, a task well within the ken of the jury.”