materiality dispute avoids sj in literal falsity case (also no seller standing against ingredient supplier)

World Nutrition Inc. v. Advanced Enzymes USA, 2023 WL 4105345, No. CV-19-00265-PHX-GMS (D. Ariz. Jun. 21, 2023)

WNI and defendants AST/Specialty sell enzyme supplement products. WNI and AST sell directly to consumers, while Specialty is a wholesaler that sells to other businesses, including AST. Each side alleged false advertising by the other, primarily that each falsely advertised their products as containing enteric coating, which protects an enzyme from the stomach’s acidic environment and preserves its activity until it reaches the small intestine. WNI had some additional claims of false advertising by AST (that AST is a manufacturer, that it uses a Bioactive Protein Peptide System, that it employs a formulator and master enzymologist, and that it conducts in-house laboratory testing). AST also contended that WNI falsely advertised its products as containing buffer enteric coated serrapeptase, and falsely advertised the efficacy of its two liquid products as well as its compliance with “Good Manufacturing Practices” (GMP), as established by federal law.

Relevant background: more than 20 years ago, WNI purchased an enzyme blend in bulk from Specialty; it got sued for falsely advertising a product sourced from as containing enteric coated serrapeptase. “WNI lost at trial and ceased purchasing products from Specialty.”

Previously, the court dismissed Specialty’s Lanham Act claim against WNI on standing grounds. Specialty then moved for summary judgment on WNI’s claims on the grounds that WNI didn’t have Lanham Act standing, since it was a wholesaler and WNI sells directly to consumers. The court agreed that Specialty fell outside the relevant zone of interests.

Although vicarious liability may be possible, there was no evidence that Specialty exercised control over AST or its advertiser. Nor was there evidence that Specialty induced AST to falsely advertise or knew that AST was engaging in false advertising of its products. “The mere existence of a supplier relationship does not give rise to vicarious liability.” Likewise, Arizona’s unfair competition law requires a plaintiff to “either show that it was engaged in competitive business with [defendant] or that [defendant’s] actions were likely to produce public confusion,” so the state law claims also failed.

Unclean hands couldn’t be resolved on summary judgment because of “genuine disputes of material fact underpinning most aspects of both party’s claims.” The only undisputedly false statement was WNI’s statement that its products contained buffer enteric coated serrapeptase. But “even if these statements constitute inequitable conduct that relates to the subject matter of the claims” the court couldn’t balance the parties’ wrongdoing while many disputes remained for trial.

In addition, as to that undisputedly false statement, there was a genuine dispute over materiality. Although the court gave AST a presumption of materiality, WNI sufficiently rebutted it for purposes of avoiding summary judgment: (1) Because the products are digestive enzymes, which do not require enteric coating at all, the statement was meaningless; (2) the products at issue were WNI’s digestive products, which didn’t compete with AST’s products, which are systemic products, which would rebut likely harm. Sort of weirdly, the court concludes that these put other elements into dispute, rebutting the presumption of materiality—but it seems like (2) at least would merely make the presumption of materiality insufficient for liability.

Whether advertising GMP compliance, including adjacent to statements about quality control, falsely advertised that the products themselves are high quality and safe or merely indicated that the products are manufactured in GMP compliant facilities was for the jury, as was materiality/harm.

Declining to use ordinary conversational principles, the court also found that a jury would have to resolve whether AST’s advertising of a product as containing “enteric coated serrapeptase and nattokinase” when only the former was enteric-coated. (After it allegedly resumed the enteric coating, AST changed the advertising to say “enteric-coated serrapeptase and enteric-coated nattokinase.”) Whether “enteric coated” modified both terms was a jury issue. AST also did say, during the relevant period, “the serrapeptase and nattokinase in Serracor NK are enterically coated,” but AST urged that these statements were “buried in [two] additional informational tabs and a blog post” which sufficiently challenged deception and materiality. (I’d have gone for falsity by necessary implication, myself.)