Even more cocaine

Genus Lifesciences Inc. v. Lannett Company, Inc., 2019 WL 4168958, No. 18-cv-07603-WHO (N.D. Cal. Sept. 3, 2019)

Pleading survey evidence of misleadingness can be pretty helpful, but it can't help you past theories that target the wrong defendant.

Discussion of previous opinion. Genus alleged that its competitors in the market for cocaine hydrochloride nasal spray, defendants Lannett and Cody (Lannett’s wholly owned subsidiary), falsely advertised their unapproved product. Genus also sued First Databank, a pharmaceutical pricing list company. The court previously found that some of Genus’s claims against Lannett and Cody were plausibly stated but that none of its claims against First Databank were; Genus filed an amended complaint and a motion for reconsideration, neither of which changed the basic situation.

Additional allegations in the amended complaint: Genus conducted a survey of Lannett’s customers, which showed that 73.4% of them falsely believe that C-Topical is FDA approved and that 70.4% falsely believe that Lannett only sells FDA approved products. It also alleged new survey data related to whether C-Topical’s unapproved status is material.  Genus added new false advertising allegations based on Lannett ads describing C-Topical as a “pre-1998” drug and Lannett’s product catalog identification of C-Topical as generic, as well as other allegations that don’t turn out to matter.

The previous order held, among many other things, that Genus could plead false advertising based on the false implication that C-Topical is FDA-approved using survey data that 91% of pharmacists believe that all products pharmacists dispense are FDA approved, but statements in SEC filings and investor calls that C-Topical is “grandfathered” or sold under a “preliminary new drug application” couldn’t support a Lanham Act claim without specific allegations that they were made for the purpose of influencing customers of cocaine hydrochloride solutions to buy C-Topical, or were disseminated sufficiently to the relevant purchasing public (pharmacists, hospitals, and doctors) to constitute “advertising” or “promotion” within the pharmaceutical industry.  Finally, the appearance and content of C-Topical’s labeling and packaging didn’t support a Lanham Act claim because they weren’t literally false and Genus failed to allege that they actually conveyed the implied message that C-Topical was FDA approved to a significant number of consumers.

  

Genus now argued that its claim wasn’t based on the statements in SEC filings or investor calls alone, but rather in combination with the advertisements describing C-Topical as a “pre-1938” product, which would render the statements contained in the SEC filings and investor calls actionable. But “Lanham Act claims must be evaluated on a statement-by-statement basis.”  Factfinders must analyze the message conveyed in context, but courts “may not assume context” and shouldn’t necessarily assume that consumers would be exposed to every ad in a campaign. “There is no indication that consumers would have observed the SEC filings and statements in the investor calls along with the pre-1938 ads.” Thus, the SEC filings/investor calls remained outside the scope of the Lanham Act.

As for the “pre-1938” statement itself, Lannett disclosed that “Cocaine HCL is a pre-1938 drug that has not been approved by the FDA” and ENT Journal ads stated that Cocaine HCL “has not been proven safe and effective by the FDA.”  The court agreed that the complaint sufficiently alleged meaning: Genus alleged “that the only reason Lannett would advertise C-Topical as ‘pre-1938,’ or that they had submitted an NDA, would be to convince consumers that C-Topical is an unapproved ‘grandfathered’ drug product or otherwise authorized by FDA.”

(Separately, Genus argued that “C-Topical is a pre-1938 drug” and “Cocaine HCL has not been proven safe and effective by FDA” were literally false because the approval of its competing Goprelto product shows that Cocaine HCL has been proven safe and effective by the FDA. Those claims survived.)

Genus argued that Lannett’s immateriality argument based on its disclaimers failed, because a “pre-1938” drug, or one that has a submitted NDA, is FDA-authorized even though it is not FDA approved, so Lannett’s ads still falsely suggested FDA authorization. And on materiality, Genus alleged that the FDA approval status of a prescription drug is material to customers “since approved drugs provide customers assurance concerning the quality of the product not afforded to unapproved prescription drugs.” Genus also pointed to its survey evidence allegedly showing that the majority of Lannett’s customers would not buy C-Topical if they knew it was unapproved. However, that didn’t show that consumers care whether the FDA authorizes a manufacturer to sell an unapproved drug (though presumably they would be less likely to buy it anyway if they understood that it was unapproved). Just because consumers care about FDA approval doesn’t mean they care about FDA authorization. Anyway, the claim based on the pre-1938 ads was dismissed with leave to amend for failure to allege materiality.

On C-Topical’s labeling and packaging: Genus previously alleged that there were misleading similarities between it and the labeling and packaging of an FDA approved drug. Genus now pled that it conducted a survey of Lannett’s customers and alleged that 73.4% of them falsely believed that C-Topical was FDA approved after reviewing its packaging. Lannett argued that this allegation was still insufficient because Genus didn’t allege that specific information on the label or package was false.  Using Mead Johnson, Lannett argued that Genus was at best alleging misunderstanding, and that a survey can’t be used to ascribe a “misleading” meaning to an otherwise accurate statement. Further, it argued that it was required by federal law to include the various statements on the packaging and label.

The court found that it was sufficient to allege that the overall combination of C-Topical’s packaging misled consumers to believe that it is an FDA approved product. Mead Johnson was inapposite. “Genus is not using survey data to parse a particular phrase and establish that it is misleading.” And the alleged federal requirements weren’t controlling.  Lannett’s “supposed dilemma could be remedied by including a statement that C-Topical is not FDA-approved without running afoul of FDA labelling requirements.”

This time, Genus successfully pled that general statements on Lannett’s website that it complied with FDA regulatory requirements were misleading because they conveyed the implied message that C-Topical was grandfathered or sold with FDA approval and deceived a significant portion of recipients. Genus pled that survey evidence showed that after reviewing Lannett’s homepage for its www.lannett.com website, 70.4% of Lannett’s customers falsely believed that Lannett sells only drugs that are FDA approved.  (Verbatims to “What makes you say Lannett sells only drugs that are FDA approved?” included “Website mentions generic medications, giving impression that they are selling already FDA approved pharmaceuticals” and “based on the first page, it is a generic drug manufacturer. Generic drugs still require FDA approval.”)

Statements in Lannett’s catalog characterizing C-Topical as “generic,” however, made until 2016, couldn’t have harmed Genus because Genus didn’t enter the market until after the catalogs were distributed. Thus, without pleading more of an explanation of harm, the catalogs didn’t plausibly proximately cause “an injury to a commercial interest in sales or business reputation[.]” Genus argued that was able to find Lannett’s 2016 catalog as late as April 2019 and that Lannett hadn’t produced more recent marketing materials.  But that didn’t successfully plead that the catalogs were currently used in advertising or promotion.

The court also got rid of Sherman Act claims based on alleged false advertising. For reasons that, whatever their formal justification, clearly depend on the treble damages available in antitrust claims, antitrust law generally refuses to consider false advertising to constitute an antitrust violation. Thus, in antitrust cases, false advertising is presumed to have a de minimis effect on competitition. To implicate antitrust law, false advertising must be explicitly false, clearly material, clearly reliance-inducing, directed at buyers who don’t know the subject matter, long-lasting, and not subject to neutralization (perhaps by counteradvertising) or other measures by competitors.  Thus, Genus had to explain why it couldn’t have engaged in its own advertising promoting its product as the only FDA approved cocaine hydrochloride product and telling customers that C-Topical is unapproved or that its route of administration is misleading.  Genus argued that coutneradvertising wouldn’t work because the false and misleading statements were being presented to the market through third-party price lists that appeared to provide objective and unbiased information. The court disagreed. The main previous case invoking the third party principle involved a third party, a swimming coach, who disparaged the quality of the plaintiff’s swim gear.  But here there was no disparagement of Genus’s product, only allegedly false description of C-Topical.  So it would be easier to rebut.  Nor did it successfully plead that expending time and money on neutralizing the false advertising would be a disproportionate burden. And its own pleadings on materiality suggested that an ad campaign on this theme would be effective, given that roughly 60% of Lannett customers thought that approval would influence a purchasing decision.

Genus’s amendments to its complaint also didn’t save its claims against First Databank because there was still no sufficient allegation that First Databank was engaging in commercial speech when it listed C-Topical.  There was still no facts supporting a finding that First Databank had any monetary interest in whether customers of cocaine hydrochloride choose to buy C-Topical rather than Goprelto.

Genus alleged that First Databank falsely advertised that its database is “reliable” and “accurate.” But that was puffery, and anyway there was no causal link plausibly alleged between those general statements and Genus’s alleged injuries sufficient to confer standing on Genus.

Nor did the court reconsider its conclusions on Genus’s contributory false advertising claim. Genus argued that, under VHT, Inc. v. Zillow Group, Inc., 918 F.3d 723 (9th Cir. 2019), all that was required for contributory liability was “material contribution” to the legal violation. Under that standard, First Databank allegedly controlled the means of dissemination and was a main channel for Lannett’s false claims. But the court rejected the copyright treatment. “To do so would open up a vast and currently non-existent scope of liability for all publishers of non-commercial information.”  [It’s all right for copyright owners, though!]