Wednesday, December 30, 2020

product changes as false advertising: TM may serve as express warranty of formulation & quality

Starr v. VSL Pharmaceuticals, Inc., No. TDC-19-2173, 2020 WL 7694480 (D. Md. Dec. 28, 2020)

This putative class action is related to the longstanding trademark/false advertising litigation between the VSL parties and Claudio De Simone parties, and probably qualifies as a follow-on class action.

Plaintiffs alleged violation of RICO, breach of express warranty, unjust enrichment, and violations of various state consumer protection statutes. Many claims survive, including RICO claims—at least at the motion to dismiss stage.

The relevant proprietary probiotic formulation, aka the De Simone Formulation, was sold for many years under the name “VSL#3,” a trademark owned by VSL. Relevant VSL parties are now enjoined from (1) stating or suggesting in VSL#3 promotional materials directed at United States consumers that the present version of VSL#3 produced in Italy continues to contain the De Simone Formulation, including by stating that VSL#3 contains the “original proprietary blend” or the “same mix in the same proportions” as the earlier version of VSL#3; and (2) “citing to or referring to any clinical studies performed on the De Simone Formulation or earlier versions of VSL#3 as relevant or applicable to Italian VSL#3.” Plaintiffs allege that defendants made equivalence claims despite scientific evidence establishing that the new VSL#3 was neither the same, nor as clinically effective, as the De Simone Formulation.

In addition, plaintiffs alleged that “Defendants improperly continued to use the VSL#3 trademark to identify the new probiotic, even though that mark had become associated with the De Simone Formulation.” At some point, the packaging was changed to remove listing specific bacterial strains, but on the product information sheet inside the package, defendants allegedly continued to state that the new VSL#3 had been the subject of extensive clinical research and cited to clinical studies establishing the efficacy of the De Simone Formulation, not the new formulation. Defendant Leadiant also sent a letter to all health care providers who had previously recommended VSL#3 to their patients stating that production of VSL#3 would be moving to Italy but assuring customers that they would be receiving “the same quality product, containing the same genus and species of bacteria, in the same proportions you have come to expect.” “Other Leadiant marketing materials made similar representations,” such as that the new VSL#3 remained “the same multi-strain probiotic” and was “supported by more than 170 studies.” Defendant Alfasigma took over the distribution of VSL#3 and allegedly advertised the same message, including in an August 2016 press release asserting that the new VSL#3 “maintain[ed] the original proprietary mix of eight strains of live bacteria” and was “supported by more than 170 published studies over the past 15 years.”

The named plaintiffs alleged that they purchased the new VSL#3 in reliance on the packaging and marketing materials and the recommendation of their doctors, believing that the new VSL#3 continued to contain the De Simone Formulation.

As mentioned, the RICO claims survived because the misrepresentations were sufficiently alleged.

Express warranty: Was there an express affirmation of fact or promise as to the quality or characteristics of VSL#3? Plaintiffs identified the product information sheet statement that “VSL#3 has been the subject of extensive clinical research in the dietary management of IBS, UC, and an ileal pouch” and that seemed to be an affirmation of fact or promise about the new VSL#3.

Plaintiffs also alleged that the continued use of the term “VSL#3” on the packaging of the new VSL#3 itself constituted an affirmation of fact that the product was the same as the prior version of VSL#3. This was a more interesting argument, because defendants rejoined that this was just a trademark use, rather than a warrant of particular ingredients and of particular quality. The court was not persuaded by cases finding no warranty in the use of “Gap” on clothing or “Apple” on electronics: “[T]hese cases focus on the meaning conveyed by the use of a brand name or trademark for multiple products at the same time and do not address the present issue of whether a brand name or trademark can, over time, become so identified with a particular product that its continued use constitutes an affirmation of fact of continuity.” McCarthy holds that “a sudden or substantial change in the nature or quality of the goods sold under a mark may so change the nature of the thing symbolized that the mark becomes fraudulent.” 3 McCarthy on Trademarks and Unfair Competition § 17:24 (5th ed. 2020). In Royal Baking Powder Company v. Federal Trade Commission, 281 F. 744 (2d Cir. 1922), Royal Baking had for 60 years produced a “superior” baking powder under the brand name “Dr. Price’s Cream Baking Powder” which contained cream of tartar, rather than phosphate or alum, and had in its advertising touted the benefits of cream of tartar while warning of the dangers of phosphate and alum. When it substituted phosphate in place of cream of tartar for cost reasons, but kept the same product name and used the reference “Makers for 60 years,” the court upheld an FTC cease and desist order unless the word “cream” was omitted and the word “phosphate” included, because it was a “deception of the public” to sell an “inferior powder” “under an impression induced by its advertisements that the product purchased was the same in kind and as superior as that which had been so long manufactured by it.” Likewise, the Eighth Circuit held that “[i]f the manufacturer makes a change in the article and that change be of a character which would, considering all of the attendant circumstances, naturally affect the attitude of the purchasers of that article, fair dealing and the law require that such purchasers be effectively informed of that change.” Royal Baking Powder Co. v. Emerson, 270 F. 429, 440 (8th Cir. 1920).

The case law supported the conclusion that “a brand name can come to function as a representation of a continuity of product contents and quality that could deceive those ‘familiar with the old brand and ignorant of any change.’” Thus, the trademark-as-warranty legal theory was at least plausible, especially when accompanied by a product information sheet containing more specific false affirmations.

Defendants argued that the product information sheet wasn’t visible pre-purchase and thus couldn’t become part of the agreement. But “[t]he focus is not on any particular language at a particular point in time but whether the seller’s actions or language when viewed in light of his relationship with the buyer were fairly regarded as part of the contract to purchase the good.” No dismissal at the pleading stage.

Defendants also argued that privity was required for express warranty claims under various state laws, but the court noted that many states relax that requirement where the manufacturer makes warranties directly to the consumer on product packaging, though Tennessee and Michigan did not and so those claims were dismissed. Of the claims under the surviving state laws, where reliance was required, plaintiffs adequately pled it, based on pleading past purchases under the VSL#3 brand name.

Consumer protection claims under Florida and Texas survived, but the court thought that the Michigan, and California law claims didn’t plead reliance sufficiently, which I find a bit puzzling given that the allegations are the same. The court treated the consumer protection claims as largely resting on failure to disclose, which can be harder to plead, but I would think the affirmative misrepresentation argument is the same here: VSL#3 allegedly had a meaning and defendants did not honor that meaning. If they’d sold margarine as butter based on an undisclosed definition of “butter” that included all dairy-like spreads, we’d easily see that as deceptive. Challenges to the plaintiffs’ claims under the consumer protection statutes of Washington, Wisconsin, Illinois, Tennessee, Massachusetts, and New Jersey under the heading of causation failed; causation is typically a factual question, and plaintiffs sufficiently alleged that, where the VSL#3 packaging identified no material change to the product, they bought VSL#3 believing it to continue to contain the De Simone Formulation, “resulting in the foreseeable loss of monies spent on a product that was no longer of the quality and content that it appeared to be.” To the extent required, plaintiffs also sufficiently alleged intentional deception.

Ascertainable loss: In general, there is “no pleading requirement of a specific quantity inherent in this term.” But for New Jersey, the state supreme court emphasized the importance of the ascertainable loss requirement “as an integral check upon the balance struck” under the New Jersey Consumer Fraud Act “between the consuming public and sellers of goods.” Thus, courts applying New Jersey law have required pleading an actual quantification of the loss, even if not entirely specific. Thus, the NJCFA claim was dismissed.

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