Antitrust Law Daily Wrap Up, ADVERTISING—SDNY: Low-Cost Vitamin, Supplement Maker Found Liable for False Advertising, Ordered to Pay Over $11.6 Million, (Feb 4, 2013)

By E. Darius Sturmer, J.D.

A developer/marketer/seller of low-cost vitamins and nutritional supplements, along with two of its officers, violated the Lanham Act by falsely labeling its folate products, the federal district court in New York City has ruled following a bench trial (Merck Eprova AG v. Brookstone Pharmaceuticals, LLC, January 31, 2013, Sullivan, R.). Folate is a B vitamin essential to creating new cells. The most recognizable form of folate is folic acid, which does not occur naturally in large quantities, but is relatively easy to synthesize and has become the primary folate form used in food fortification and dietary supplements.

The defending company—Acella Pharmaceuticals, LLC, formerly known as Brookstone Pharmaceuticals, LLC—was assessed damages in the amount of $11,608,380 for false advertising and contributory false advertising. It was also ordered to label its methylfolate products in a way that accurately reflects the presence and relative amounts of both the D- and L-isomers, and to engage in a campaign of corrective advertising.

Acella’s request for a declaratory judgment that it did not engage in false advertising and counterclaim alleging that the complaining competitor—Merck & Cie, formerly known as Merck Eprova AG—improperly marketed its own folate products were denied.

In the action, Merck claimed that Acella’s labeling of its mixed folate products, Xolafin and Xolafin-B, misled customers to believe that those products were identical to Merck’s chemically pure folate product, Metafolin. Merck contended that this false labeling prompted pharmaceutical databases to “link” the cheaper Acella products to the more expensive Merck product, inducing pharmacies and others to believe that Acella’s folate could be substituted for Merck’s, despite their different chemical compositions.

Lanham Act Claims. Merck did not prove by a preponderance of the evidence that Acella’s use of the term “L-methylfolate” or “6(S)-5-MTHF” on its products’ labels and package inserts was literally false because the labels were susceptible to more than one reasonable interpretation. However, it could still prevail on an implied falsity theory, given evidence of consumer deception or confusion that was revealed in sufficiently reliable consumer surveys of pharmacists and physicians. Even without the consumer surveys, the court found that Merck was entitled to a presumption of consumer deception because it demonstrated that Acella intentionally set out to deceive its customer base, the court decided. Despite the knowledge that its products were comprised of chemically distinct substances from Merck’s, Acella deliberately labeled its mixture product identically to the pure product. The intentional nature of this decision, the court said, was obvious from the continual labeling changes Acella made to track the ingredients of Metafolin-containing products and thereby avoid de-linking.

Acella’s misrepresentations involved an inherent or material quality of the product, the court found. The evidence presented by Merck at trial led “inescapably to the conclusion that the inaccuracy in the statements at issue [affected] the purchasing decisions of customers.” The purity of a product’s folate source “defines the product at issue, as well as the market in which it is sold,” according to the court, and purity was an “inherent and important characteristic of a folate supplement.” Additional evidence and testimony confirmed that the L-methylfolate content of Acella’s products mattered to the relevant market, the court noted.

Further, to the extent that the Acella labels led pharmaceutical databases to link Acella’s generic products to Metafolin-containing brand products, the law in many cases required pharmacists to substitute Acella products for prescribed Metafolin-containing products. “Thus, Acella’s decision to mislabel its folate source was material in every imaginable way,” the court concluded. Finally, there was little question that Acella had engaged in an organized campaign to disseminate its misleading labels throughout the nutritional supplement industry.

In addition, by showing that Acella induced at least two national pharmaceutical databases to engage in false advertising through its description of the Acella products as pharmaceutically equivalent to and substitutable for Metafolin-containing products, Merck prevailed on its contributory false advertising claim.

Individual liability. Acella’s Chief Operating Officer and Director of Business Development were individually liable for the Lanham Act violations, the court also ruled. The evidence in the case indicated that they were the “moving forces” behind the development, marketing, and labeling of both Xolafin and Xolafin-B. One of the officers had initiated contact with the company’s Chinese supplier, and both traveled to China to meet with that supplier and ultimately approved the resulting labels and package inserts. The record belied the officers’ claim that they merely participated in a team effort to develop the products at issue.

State Law Claims. Merck failed, however, to meet its burden to prove that Acella engaged in a deceptive trade practice or false advertising in violation of New York law. Merck did not allege a public harm sufficient to state a claim for deceptive trade practices under New York General Business Law Section 349 or false advertising under Section 350.

The case is No. 09 Civ. 9684 (RJS).

Attorneys: Robert Elliot Hanlon (Alston & Bird) for Merck & Cie. Brian Andrew Bender (Harris Beach PLLC) for Acella Pharmaceuticals, LLC. Catrina Celeste Creswell (Miller & Martin, PPLC) for Harold Arthur Deas and Thomas Jeffrey Bryant.

Companies: Acella Pharmaceuticals, LLC; Merck & Cie.

Cases: Advertising StateUnfairTradePractices NewYorkNews