Monday, October 19, 2020

lack of irreparable harm dooms injunction against false advertising of drug disposal product

In re C2R Global Manufacturing, Inc., No. 18-30182-beh, 2020 WL 5941330 (E.D. Wisc. Bkcy Oct. 6, 2020)

Verde sought a preliminary injunction against C2R, its direct competitor in the drug disposal market, from engaging in false and misleading advertising in violation of the Lanham Act, and an order requiring corrective advertising. Despite likely success on the merits, lack of irreparable injury precluded an injunction. The court applied eBay, as it predicted the Seventh Circuit would, and also relied on Verde’s delay.

Verde sued C2R in March 2018 for false advertising and patent infringement; a few months later, C2R filed for Chapter 11 protection, and Verde timely filed a nearly $7 million proof of claim. After a Markman hearing and decision, the parties settled their patent claims. In February 2020, Verde sought both preliminary and permanent injunctive relief; the court considers only the former.

The technical details are complex, but the core of the claim is that C2R falsely advertised how much drug content its products could render inert. Although it removed specific pill number claims from its website, at the time of the motion it still included the statement that its containers could be filled until contents are two inches from the cap, which was allegedly false. C2R based its claims on various analogies/evidence about the product components/similar competitors; Verde’s tests of C2R’s product yielded at most a 30% adsorption rate, and its experts persuasively critiqued the assumptions on which C2R's claims relied.

After Verde sued, C2R commissioned independent testing that found that the Rx Destroyer deactivated 90-99% of the pills in his experiments. Among other criticisms, however, Verde’s expert critiqued the testing methodology, which included filtering out material that included drug residue (paste), which (Verde’s expert argued) improperly altered the drug deactivation conclusion, and critiqued C2R’s expert’s technique of constant agitation, which was both not realistic and not consistent with the product use instructions.

Verde argued that, based on the testimony of its Chairman and CEO, “if unused drugs are tossed in the trash, they risk being inadvertently diverted by neighbors, children or pets,” and that the “toilet flushing of drugs is now also discouraged, owing to environmental contamination risk to the nation’s watershed.” He asserted that customers purchase C2R’s product over Verde’s because the Rx Destroyer cost-per-pill appears lower due to C2R’s capacity representations compared to its price point. In addition, he opined that “when C2R advertises a product using activated carbon that does not work as represented, that casts doubt on all products using activated carbon.”

C2R, by contrast, argued that Verde wasn’t its primary competitor, though it acknowledged that the fact that Rx Destroyer has a larger capacity is a competitive advantage over Verde, or over anything else on the market. C2R has advertised Rx Destroyer as being more affordable on a cost-per-pill basis. The parties also submitted dueling declarations about whether the damages were merely financial and not irreparable. C2R’s expert, for example, found no meaningful customer overlap, “noting that Verde does not offer product data sheets that are required by many hospitals, and thus cannot sell to those entities, while C2R does provide such data sheets and has such hospitals as customers.” Plus, he indicated that “Verde has enjoyed faster growth and higher annual revenues than C2R during the relevant time period,” suggesting lack of harm.

Verde’s expert disagreed that financial evidence enabling partial quantification of the damages was the same as an adequate remedy at law. [Can a company in bankruptcy be assumed to be able to provide an adequate remedy at law?] Verde identified twenty-five customers to which both Verde and C2R sell. And Verde’s growth could have been greater: the entire market for drug disposal products offered by these parties “dramatically increased during the 2015-2019 period.”

On the merits, when advertising explicitly or implicitly represents that tests prove the claim, a plaintiff can prevail by showing that the tests did not establish the proposition for which they were cited. Even if there is no industry standard test for deactivation capacity, “when advertisements purport to rely on testing, the presence or absence of a government certified test is not relevant.” Predicting capacity for drug disposal products may be challenging, “that does not absolve the manufacturer—here, C2R—from fashioning truthful advertising statements, even if on relatively short notice.” Verde showed likely success on the merits.

Irreparable harm: First, no presumption applies; the Seventh Circuit has yet to say so in the Lanham Act context but likely would apply eBay, given that it has already done so in copyright cases. “But certainly, all of the cases cited above recognize the particular difficulty in assessing harm when a competitor engages in false advertising.”

Verde argued: (1) the parties compete directly; (2) effectiveness and cost are two of the most important factors in a purchase decision; and (3) the false representations were “critical” to effectiveness and cost. However, the Chair/CEO’s testimony didn’t identify specific facts such as survey data or sales reports to show lost sales, and if his opinions were based on statements made to him by customers, those statements would be inadmissible hearsay. “Courts in this circuit consistently have rejected vague summaries of hearsay statements by unidentified consumers.”  His testimony didn’t meet the requirements of Rule 701 for non-expert testimony.

The fact that the parties compete didn’t prove harm. This wasn’t express comparative advertising, and the record didn’t show a two-party market. Trademark cases are different because confusion about source can show irreparable harm because of lost control over reputation; harm to reputation is inherently intangible/impossible to quantify. [Sigh.]

Verde’s expert couldn’t help because he didn’t provide alternative evidence of harm, just criticized C2R’s expert. It wasn’t enough to infer that any customers who knew of both companies would purchase more from Verde absent C2R’s advertising.

Separately, delay proved lack of irreparable harm. The pertinent measurement is from the time the plaintiff discovers the trademark infringement (or false advertising) until the injunctive relief motion is filed, or from the time plaintiff first sent its cease-and-desist letter until filing its motion. “Here, that time frame would be June 2014 to January 2020, or 67 months.” Verde argued that, while it had experimental evidence undermining C2R’s capacity claims prior to filing suit, it had not yet conducted any discovery, and it moved promptly but prudently only after completing that discovery. Verde also argued that “it was not in a position at the time of its earlier testing to expend significant funds on legal fees in pursuit of litigation.”

But this delay was “longer than prudence can bear.” Verde had test results for years. “[T]he span of time during which Verde at least possessed test results discrediting C2R’s website statements is far beyond any duration accepted by courts as reasonable and could well have allowed C2R to relax its defenses and continue its advertising expenditures.” Its reference to the costs of litigation was “an internal cost-benefit assessment Verde made, and when weighed against the amount of time between the first testing in 2014 and the motion in 2020, does not justify the substantial delay in seeking a preliminary injunction.”

Belt and suspenders: It hadn’t been shown that Verde lacked an adequate remedy at law [which I still wonder about—C2R is in bankruptcy!]. Also, harm to the environment or public safety “is not of a degree warranting a preliminary injunction.” Indeed, official websites say that putting unused medications in the trash is not ideal but don’t definitely nix it, mitigating the public interest at this stage.

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