Friday, September 10, 2021

expert admissibility, literal falsity receive close review in drug disposal case

In re C2R Global Manufacturing, Inc., No. 18-30182-beh, 2021 WL 1347193 (E.D. Wis. Bkrcy. Mar. 30, 2021)

Previous denial of injunctive relief. There are a number of opinions in this case—the judge spent time on this rather unusual false advertising analysis in a bankruptcy case, including taking care with the expert evidence. I’m only going to discuss a few highlights, but it makes useful reading for those seeking a review of case law on admissibility for experts in false advertising cases.

The parties compete in the market for drug disposal devices. Plaintiff Verde designated its current CEO, Sundby, as a non-retained expert witness. C2R sought to exclude his testimony with respect to any opinions about “consumer perceptions,” that is to say, consumers’ mental impressions when presented with C2R’s advertisements, including how consumers are likely to interpret those advertisements, whether the advertisements are likely to confuse or deceive consumers, and whether consumers are likely to rely on the advertisements in making purchasing decisions. Examples from his declaration: “[C]ustomers rely and depend on drug deactivation products to actually deactivate the pills and tablets that the products are advertised as being able to deactivate.” “[T]he drug-deactivation market as a whole is harmed by C2R’s continued misrepresentations regarding the Rx Destroyer™ product capacity” because “when C2R advertises a product using activated carbon that does not work as represented, that casts doubt on all products using activated carbon” and “customers lose faith that any products are capable of deactivating medications as advertised.” “Cost is a central factor in the purchasing decision and it is directly related to the capacity of the products available to the customer.” “As a result”—because consumers read C2R’s capacity advertisements to indicate that Rx Destroyer products deactivate medication at a lower price-per-pill than the Deterra system—“consumers choose to purchase RX Destroyer™ rather than Deterra.”

The court granted C2R’s motion in part, and reserved ruling on the remainder until trial, which would be to the bench, making the Daubert motion more of a matter of allowing the parties to prepare for trial more efficiently than of protecting a jury.

Sundby had expertise in the drug disposal industry. Lanham Act cases (primarily trademark and trade dress infringement cases) have “excluded expert opinions on customer perception—opinions such as what a word in an advertisement means, whether customers are (or are not) likely to be misled or confused by advertising, and whether customers would recognize a party’s trade dress—when the expert was an industry expert, but not a perception expert, and therefore did not base his or her opinion on a valid consumer survey or similar empirical data.”

Verde rejoined that an expert need not conduct consumer surveys or consumer market research before offering any opinions related to customer reliance or perceptions. While this is true, it doesn’t mean that “an expert may offer his own opinions about likely consumer deception or consumer mental impressions in place of a properly conducted consumer survey.” Verde argued that surveys/market research were less relevant  “where the customers at issue are not predominantly individual consumers,” but instead are organizations and institutions who make purchasing decisions through businesspeople, nurses, doctors, pharmacists, and public health professionals. But the case law is to the contrary. It is true that an expert can be qualified purely based on experience in the industry, but that didn’t mean Sundby could testify about everything. He wasn’t the same as a consumer or dealer testifying about their own deception.

Thus, Sundby was not qualified to offer opinions on consumer perceptions— “opinions typically offered by experts with training and experience in conducting and interpreting consumer surveys.” This covered at least his statements that C2R’s capacity overstatements led consumers to think that C2R’s product had a lower price per pill than Verde’s system, and that “as a result,” consumers chose the former over the latter. “Both of these assumptions involve predictions about a consumer’s thoughts and impressions after reviewing C2R’s advertisements—in other words, how consumers perceive the statements at issue in this litigation.” However, the other statements in the declaration were about the effect of false advertising on the drug deactivation market in general (and Verde in particular), and product features relevant to customer purchasing decisions. “Sundby’s lack of expertise in consumer perceptions or behavioral linguistics is not, by itself, a reason to exclude these additional opinions.” (Note that the second—what’s material to consumers—is a matter of consumer reaction, but one that people in the industry might be particularly able to know in general.)

Similar analysis applied to the reliability of his opinions:

Sundby can testify about his own experiences with customers over the years—provided such testimony is not inadmissible for other reasons—but Verde has not persuaded the Court that any opinions Sundby intends to offer about the likely thoughts or perceptions of Verde’s target consumers are sufficiently reliable to be admitted. To the extent Sundby intends to rely on his “industry experience” rather than a consumer survey to opine on likely consumer perceptions—and, more particularly, that consumers in general would interpret “capacity” in C2R’s advertisements to mean “capacity to deactivate” and, as a result, would be more inclined to purchase C2R’s products over the competition—Sundby has not adequately explained why his chosen methodology (apparently based on experience including conversations with others in the industry) is appropriate or reliable.

Sundby could offer testimony “on subsidiary factual issues relevant to the question of deception, such as typical advertising and marketing channels in the industry, the types of consumers in the target market, the sales process, and other circumstances helpful to providing a full context for the advertising at issue—provided that Sundby is able to lay a proper foundation for such testimony at trial.” For the same reasons, he could testify on the effect of false advertising on the drug deactivation market, or product features relevant to customer purchasing decisions, at least for now and subject to cross-examination.

Nor could Sundby offer the excluded testimony as lay testimony, because that would exceed the scope of his personal perceptions. He could, however, offer “specific examples of consumer deception that he has witnessed” along with the admissible testimony described above, if given a proper foundation. 

In re C2R Global Manufacturing, Inc., No. 18-30182-beh, 2021 WL 1347160 (E.D. Wis. Bkrcy. Mar. 30, 2021)

Here, Verde won partial summary judgment on the literal falsity of certain capacity statements about its competitor’s drug disposal product. 

C2R’s advertisements claimed that the Rx Destroyer “destroys” and “[d]issolves, adsorbs, and neutralizes” medications. C2R also advertised that its products meet DEA disposal standards by making drugs “scientifically irretrievable.” And it advertised specific pill capacities by size, though sometimes with asterisks saying this was approximate. Its capacity claims were based on calculations and other tests of activated carbon in the medical literature, not on actual testing with pharmaceuticals, which it deemed impractical given the variety out there. Unfortunately, its expert’s calculations assumed that the products contained more activated carbon than they actually do, and plaintiff Verde had a number of other criticisms. Verde’s Director of R&D also conducted multiple tests of C2R’s products using different drugs and concluded that they were “incapable of deactivating medications up to their capacity claims.” After litigation began, C2R also retained another expert, whose tests showed varying levels of adsorption, but who also concluded that there were other deactivating ingredients in the products besides activated carbon.

C2R also posted a document on its website appearing to summarize the results of a test conducted on C2R’s NarcGone product, by an unidentified lab described only as DEA-certified. According to this one-page summary, “Based upon 5 grams methamphetamine, 65% adsorbed in 2 hours, 86% adsorbed in 24 hours, 94% adsorbed in 4 days and 100% in 7 days.” C2R omitted additional test results: “When 12.5 grams of methamphetamine was added 70% was absorbed in 7 days.” When relevant witnesses were questioned, C2R was not able to provide additional detail about the testing.

Verde argued that the challenged advertisements conveyed the message that C2R’s products had the capacity to deactivate or neutralize approximate amounts of medication and that this deactivation or neutralization was accomplished by adsorption to activated carbon, regardless of the medication placed inside—that is, regardless of whether a given sized pill contained 5 mg of drug or 200 mg. C2R instead argued that its ads conveyed that its products render approximately the stated number of pills “safe for disposal” (not fully deactivated) using a variety of mechanisms, activated carbon adsorption being one. Some of its advertisements—not all of which contained “capacity” representations—stated that the products contain, and operate using, more than just activated carbon. So, C2R said, its ads were ambiguous about what they did. C2R argued that its ads were also ambiguous about pill size, and that it was more plausible to read the capacity representations as referencing 5 mg or 30 mg tablets, rather than 200 mg tablets. Its pre-suit expert made assumptions based on 5 mg and 30 mg pill sizes, and his calculations were linked on its website and sent to customers with C2R’s advertising.

The court agreed with Verde that some of the ads relied on claims about the activated carbon alone, not the accompanying liquid, but not all the ads. As for pill size, the evidence didn’t show that the expert’s assumptions about pill size were conveyed with each ad, and even if a link to those assumptions were provided, “it would be insufficient to change the plain language of the advertisements at issue—particularly the former ‘Q&A’ webpage, which expressly states that ‘[c]apacity [is] based upon 200mg Advil™ tablet[s].’” C2R used to advertise that “[c]ombinations of medications added to the Rx Destroyer are limitless.” “C2R now wants to walk back the unqualified language of its advertisements, urging the Court to find its message equivocal…. That the statement at issue is broad—and not limited to pill sizes of 30 mg or less, as C2R now may wish it were—does not make it ambiguous.”

However, ads about pill “capacity” or how much a product “holds” were more ambiguous, since the ads didn’t explicitly define capacity or hold to mean ability to adsorb/deactivate. But did they necessarily imply adsorption/deactivation? The Seventh Circuit has neither adopted or repudiated the doctrine. [I’d say that by emphasizing what an ad means to any “linguistically competent” person, it has adopted the doctrine, but sure.] The doctrine has never been rejected by any other court of appeals, and is readily used in district courts around the country. The court here would use it, but carefully: there must be no more than one plausible reading for necessary implication to apply.

Relevant considerations include the surrounding context, which includes the nature of the business at issue and the product being sold. (Citing Avis Rent A Car System, Inc. v. Hertz Corp., 782 F.2d 381 (2d Cir. 1986), for the nature-of-the-business/product factors; that case wasn’t explicitly a necessary implication case, but falsity of the claim “Hertz has more new cars than Avis has new cars” did turn on whether you counted only cars for rent or also counted cars that were available for sale after their rental lives ended.)

“Here, the text of the advertisements that surrounds the ‘capacity claims,’ as well as the nature and purpose of the Rx Destroyer products, provide relevant context for the Court’s analysis.” The court concluded that, with respect to one webpages, “[t]he clarity of the statement of purpose, combined with the statement of capacity (using the word ‘hold’), conveys the single message that the product will perform its advertised function—neutralization and adsorption of active medication ingredients by activated carbon—up to the stated capacity.” Nothing in the ad suggested that “hold” meant, for example, mere storage—in context, it meant neutralization. Other pages/flyers weren’t quite as clear.

Verde didn’t show that consumers would see the flyers together with other C2R ads. Nor has Verde offered any evidence of the nature and sophistication (or lack thereof) of the “audience to which the statement[s] [are] addressed.” Thus, the court wouldn’t assume or infer that consumers reading the flyers would go to the website and learn more that would put the pieces together for them—not for literal falsity by necessary implication.

Were those literal messages false?  The initial predictive model “cannot prove or disprove the falsity of C2R’s capacity claims; they merely predict, rather than measure, the actual performance of the Rx Destroyer products.” So his predictions wouldn’t allow a reasonable factfinder to find that the products do, in fact, have the represented capacities. In a footnote, the court commented that it would be different if the ads had included an express disclaimer within the body of the advertisement, e.g., “product capacity numbers are based on theoretical modeling performed by Dr. Henry Nowicki, in which he predicts adsorptive capacity of the Rx Destroyer carbon based on pills of up to 30 mg.”

However, it wasn’t enough for summary judgment that Sudafed and Claritin tests showed deactivation levels of only 59% and 68%, respectively. These two tests standing alone weren’t enough when other (hotly contested) test results of ibuprofen, Advil, and aspirin showed 90% deactivation.

It was concerning that the math showed that there wasn’t enough carbon to adsorb the advertised pill capacity when using 200mg pills, which was one of the pill sizes C2R chose to advertise. Still, there wasn’t literal falsity. (I really don’t see why the 200mg claim wasn’t literally false.)

Lesson: Even strong claims can fail to win summary judgment.

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