Monday, November 27, 2023

Earnings calls, recall notices not "commercial advertising or promotion," but could be "of and concerning" largest market player

In re SoClean, Inc., Marketing, Sales Practices & Products Liab. Litig., 2023 WL 8006602, MDL No. 3021, No. 22-542 (W.D. Pa. Nov. 17, 2023)

Because this is MDL with lots of claims, the facts are a bit complicated. SoClean is a dominant player in the market for medical devices that sanitize continuous positive airway pressure machines (CPAPs), which treat sleep apnea and respiratory conditions. It alleged that the Philips defendants, who make such devices, engaged in false advertising about one of SoClean’s devices in order to deflect blame for the Philips devices’ design defects. SoClean and the FDA have been back and forth about what kind of medical device SoClean’s product is; as part of their interactions SoClean dropped “claims pertaining to the cleaning, sanitizing, or disinfection of CPAP machines” from its website. SoClean has submitted a de novo application for its latest product, which is under review.

In 2020, the FDA issued a safety communication about “potential risks associated with the use of ozone and ultraviolet (UV) light products for cleaning CPAP machines and accessories” focusing only on the issue of potential risk of ozone leakage, but SoClean alleged that its products don’t leak ozone at unsafe levels. (In its press release, the FDA referred to its own testing on “several of those illegally marketed products,” although SoClean alleged that it believed in good faith that it didn’t need preapproval.)

Meanwhile, Philips allegedly knew for years that the polyester-based polyurethane foam used to dampen sound in Philips’ ventilator, CPAP, and other respiratory care devices was susceptible to degradation and off-gassed potentially harmful volatile organic compounds (VOCs). Philips allegedly misled the FDA by telling it that foam degradation may be “exacerbated” by ozone cleaners, without any reliable testing or other valid scientific evidence to validate those statements. Philips repeated similar statements elsewhere. One Philips entity’s CEO said, on an earnings call, that ozone was a problem for foam, and that “[t]he FDA observed this and also put out a safety notice to say, don't use ozone for CPAP machines,” which allegedly misrepresented the reasoning for the safety notice. As in other instances, he used the opportunity to promote the next-generation Philips product, which had a more stable foam.

A number of Philips devices were recalled for foam degradation, giving two reasons to customers and users: foam off-gassing and foam degradation from use of “unapproved” ozone cleaning devices, which could “exacerbate[e]” the problem; anti-ozone cleaning claims were disseminated in various ways, including Philips’ website FAQ about the recall and another earnings call.

Philips also allegedly blamed SoClean at the largest 2021 home medical equipment trade show and conference in the United States, telling distributors and resellers during meetings that “SoClean was the problem.” Resellers and distributors allegedly cited these statements as the reason for not placing orders with SoClean, leading all but one of SoClean's top distributors and resellers to stop placing orders with SoClean.  Because the disparagement was successful, and actual and prospective customers and distributors believed that SoClean devices were the reason for the product recall, sales to distributors, resellers, and end-users allegedly plummeted.

The Philips defendants argued that there was no statutory Lanham Act standing because they weren’t even indirect competitors, but the court here found that Lexmark removed any requirement even of indirect competition (including by blessing lawsuits across the distribution chain, e.g. manufacturer v. dealer). All SoClean needed was to show that it suffered commercial injury proximately caused by defendants’ violations of the Lanham Act, which it plausibly alleged.

However, the Philips defendants argued that SoClean wasn’t within the zone of interests protected by the Lanham Act because the only commerce protected by the Lanham Act is lawful commerce. And, they continued, SoClean was illegally marketing its devices. This argument couldn’t be resolved at the present stage, when SoClean alleged that it marketed and sold its device “with the knowledge of the FDA,” including having an FDA inspection of its manufacturing facility without FDA raising concerns. However, other documents integral to the complaint indicated that the FDA thought there was a potential FDCA violation. So the court wanted to hear from FDA experts about whether the FDA’s knowledge that SoClean planned to continue marketing the challenged device for a limited period of time gave it a “legally protected interest” during the relevant timeframe.

Commercial advertising or promotion: A separate problem. Quarterly reports and earnings calls, “without allegations that defendants intended to influence the consumers and the communication was disseminated to the consumers,” aren’t commercial advertising or promotion for these purposes. (The court says they’re not “commercial speech,” but since that’s a First Amendment term, I’m using the more statutorily precise “commercial advertising or promotion.”) Here, the allegations were insufficient to show that the earnings calls and quarterly report were advertising or promotional; rather, they primarily served their typical function: to influence investors. Although the statements “may have had an incidental effect of promoting goods, i.e., to deflect blame for the recall and promote Philips’ goodwill so that the consumers would continue to purchase Philips’ devices,” that wasn’t sufficient: they weren’t primarily made to advertise or promote Philips’ products. Nor did SoClean plausibly allege sufficient dissemination of the earnings calls and quarterly report; there were no allegations that any consumers listened to the calls or read the report.

Recall notice: Eli Lilly & Co. v. Roussel Corp., 23 F. Supp. 2d 460 (D.N.J. 1998), found that a recall notice wasn’t commercial advertising or promotion because it wasn’t designed to influence customers to purchase defendant’s goods, but rather to inform consumers that the goods will no longer be available for sale. Did alleged blame-shifting in these recall notices change the analysis? No. “[A]ny effect of promoting defendants’ products (by deflecting blame to SoClean to promote the Philips defendants’ goodwill) was incidental to the primary purpose of the recall notice, which was to inform consumers about the recall.”

Recall FAQ on website: Same thing.

Update to physicians and health care providers: This one said that “[t]he foam degradation may be accelerated by environmental conditions of high temperatures and humidity. Unauthorized cleaning methods such as ozone cleaning may exacerbate potential degradation….” It ended: “Philips is recommending that customers and patients do not use ozone-related cleaning products.” Again, this wasn’t an ad but an informational document about the recall, and it didn’t promote Philips’ newer devices.

2022 press release: The stated purpose of the update was to “provide healthcare providers, patients, and other stakeholders with updated information on the testing results to date.” A press release can be an ad, but not this one. It didn’t promote any Philips product—the only one it mentioned was the recalled product which could not be sold—or explicitly propose a commercial transaction. The general economic motive of being a for-profit business was not enough. “This is not a case in which the press release compared two products, touted one product as superior to another, or promoted the defendant’s product.”

Statements to distributors: First, did Rule 9(b) apply? The court didn’t reach the issue, because even if it did, SoClean could satisfy the heightened pleading standard by pleading “information and belief” about what defendants said to third parties.

But were they commercial advertising or promotion, or nonactionable “oral statements disseminated to a small group of people.” While “purely private” communications cannot be “commercial advertising or promotion,” this “is a matter of degree based upon specific facts of a case, including facts about the pertinent industry.” Here, the allegations about the size and influence of the trade show, including that the parties’ largest distributors and resellers were there, sufficed to plead commercial advertising or promotion.

[Pause for harm causation questions: Was too much damage already done by then? The allegations about losing big distributors after that seem enough to defeat that argument.]

Falsity/misleadingness: The Philips defendants argued that the “gist” was true: according to the FDA itself, foam might degrade both on account of high heat humidity as well as ozone, and customers shouldn’t use ozone cleaners because they are unapproved, potentially harmful, and might harm their CPAP devices. The FDA, they argued, was investigating SoClean and issued its public Safety Communication warning against the use of ozone cleaners more than a year before the recall at issue in this case, which was more than a year before the Philips defendants could have allegedly influenced or misled the FDA.

The court reasoned that SoClean plausibly alleged that the recall had nothing to do with ozone cleaners or off-gassing during ozone cleaning, so the statement to resellers and distributors was at least misleading.

New Hampshire Consumer Protection Act: Same analysis. But must the conduct have occurred in New Hampshire to be actionable? The trade show wasn’t there. Still, since this was allegedly a nationwide campaign, that was enough to show plausibly that the offending conduct took place within the state.

Tortious interference claims also survived.

New Hampshire defamation: The Philips defendants argued that their allegedly defamatory statements concerned a class of products and how those products CPAP products, and, therefore, were not “of and concerning” SoClean. But it was plausible that the alleged statements to the resellers and distributors specifically referred to SoClean. As for the rest of the statements (which weren’t covered by the Lanham Act/state consumer protection law), SoClean plausibly pled that the recipients of those statements understood that defendants were referring to SoClean. But, defendants argued, SoClean was really alleging trade libel, not defamation, and trade libel isn’t recognized in New Hampshire. Still, if SoClean’s own reputation was injured, not just its product’s reputation, that could be the basis of a defamation claim.

Other issues, like whether SoClean was a limited-purpose public figure, needed more information; “if SoClean’s devices were legally marketed and safe (as SoClean alleges) and the Philips defendants provided the FDA erroneous information about ozone’s role in the foam degradation, then the controversy would not be about the safety of SoClean’s ozone-generating devices.”

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