Antitrust Law Daily Wrap Up, ADVERTISING—2d Cir: Damages award based on presumption of injury upheld; willful deception proven, (Jul 29, 2014)

By Linda O’Brien, J.D., LL.M.

In an action by a raw dietary ingredient producer against a competitor for Lanham Act false advertising and contributory false advertising claims, a federal district court properly used a presumption of consumer confusion and injury to award the plaintiff nearly $527,000 in damages where willful deception was proven, the U.S. Court of Appeals in New York City has ruled (Merck Eprova AG v. Gnosis S.P.A., July 29, 2014, Pooler, R.).

Merck & Cie (formerly known as Merck Eprova AG) produced pharmaceutical and dietary ingredients, including a folate product under the name of Metafolin, using naturally occurring pure compound. Folate is a B vitamin essential to creating new cells. While folate does not occur naturally in large quantities, can be synthesized and has become the primary folate form used in nutritional and dietary supplements. Similar to Merck, Gnosis S.P.A. produced raw dietary ingredients for use in the production of nutritional supplements and sold a folate product called Extrafolate. Extrafolate was a mixture of synthetically created compounds and sold for significantly less than Metafolin.

Between 2006 and 2009, Gnosis printed product specifications sheets and other marketing materials that used chemical descriptions, terms, and formulas attributable to the pure compounds in its marketing of Extrafolate. Merck sued Gnosis, alleging misleading advertising in connection with the marketing materials for Extrafolate. Following a bench trial, a district court determined that Merck established Gnosis’ liability for false advertising under the Lanham Act, awarded treble damages, and imposed a corrective advertising injunction. Gnosis appealed.

Literal falsity. The trial court properly awarded damages based on a presumption of customer confusion and injury where Merck proved that the defendant’s advertising claim was false and was intended to deceive the public, according to the appellate court. To receive damages under the Lanham Act, a plaintiff must show either actual consumer confusion or deception resulting from the violation, or that the defendant’s actions were intentionally deceptive to give rise to a presumption of consumer confusion. The trial court was correct to presume consumer confusion in light of its finding that Gnosis’ marketing materials were literally false—its use of the common name for the pure folate compound for its Extrafolate product.

Implied falsity. Gnosis’ intention to mislead was also clear when it used a description of the chemical properties of the pure compound on its Extrafolate marketing materials to mislead consumers into believing they were purchasing a pure compound product rather than synthetic mixture product. The court noted that there was sufficient evidence in the record that Gnosis’ customers were in fact confused by the product they were buying, thereby supporting the trial court finding that a significant number of customers were misled by Gnosis’ false advertising.

Injury. A presumption of injury to Merck was appropriate, since the trial court found literal falsity in Gnosis’ advertising materials, according to the court. In this case, there was a market of only two direct competitors. The record supported a finding the Gnosis capitalized on consumers desire to purchase a pure compound product and Merck was damaged by Gnosis’ false advertising of a mixed product for a pure one. Since Merck proved deliberate deception in the context of a two-player market, it was appropriate to presume injury.

Damages. The trial court award of lost profits, treble damages, and imposition of a corrective advertising injunction was not an abuse of discretion. Its finding that, due to Gnosis’ willful deception, an award of profits was necessary to deter future unlawful conduct and compensate Merck for lost business as a result of the false advertising. The court also had discretion to enhance the profits award by trebling the damages to sufficiently reflect the total harm caused by Merck. Finally, an award of damages and a corrective advertising injunction did not constitute an unfair double recovery because the injunction was narrow in scope and appropriately designed to explain the differences between the pure and mixed product to consumers, the court concluded.

The case is No. 12-4218.

Attorneys: Natalie Clayton (Alston & Bird LLP) for Merck & Cie. Laurie A. Haynie (Husch Blackwell LLP) and William D. Chapman (Cadden & Fuller LLP) for Gnosis S.P.A. and Gnosis Bioresearch S.A.

Companies: Merck & Cie; Gnosis S.P.A.; Gnosis Bioresearch S.A.

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