Second Circuit Clarifies the Use of Presumptions in Lanham Act False Advertising Cases | Practical Law

Second Circuit Clarifies the Use of Presumptions in Lanham Act False Advertising Cases | Practical Law

In Merck Eprova AG v. Gnosis S.P.A., the US Court of Appeals for the Second Circuit held that it is appropriate to legally presume consumer confusion and competitor injury to find liability in false advertising cases under the Lanham Act. These presumptions are warranted in cases that involve two-party product markets if the challenged advertising and marketing is literally false and deliberately deceptive.

Second Circuit Clarifies the Use of Presumptions in Lanham Act False Advertising Cases

by Practical Law Commercial
Published on 31 Jul 2014 • USA (National/Federal)
In Merck Eprova AG v. Gnosis S.P.A., the US Court of Appeals for the Second Circuit held that it is appropriate to legally presume consumer confusion and competitor injury to find liability in false advertising cases under the Lanham Act. These presumptions are warranted in cases that involve two-party product markets if the challenged advertising and marketing is literally false and deliberately deceptive.
On July 29, 2014, the US Court of Appeals for the Second Circuit held in Merck Eprova AG v. Gnosis S.P.A. that it is appropriate to presume consumer confusion and competitor injury to determine liability in false advertising lawsuits brought under Section 43(a) of the Lanham Act (15 U.S.C. §1125(a)), if:
  • The parties operate in a two-party market.
  • The advertising and marketing materials were both:
    • literally false; and
    • deliberately deceptive.
(12-4218-CV, (2nd Cir., July 29, 2014).)

Background

Merck & Cie, formerly Merck Eprova AG (Merck) and Gnosis S.P.A. and Gnosis Bioresearch S.A. (Gnosis) are the only two competitors that produce and sell 5-MTHF, a form of Vitamin B used as a nutritional ingredient in foods and dietary supplements. 5-MTHF can be produced either:
  • In its pure, natural form.
  • As a composite that contains both the natural and unnatural form.

Merck

Since 2002, Merck has sold Metafolin, a 5-MTHF compound, to customers who use it in various finished products for resale (such as vitamins and dietary and nutritional supplements). Metafolin is comprised only of a pure, naturally occurring and biologically active form of 5-MTHF.
Merck was the first company to manufacture a pure 5-MTHF compound, Metafolin, stable enough for resale.

Gnosis

Gnosis, like Merck, produces raw dietary ingredients for use in the production of nutritional supplements. Since 2006, Gnosis has sold Extrafolate, which is a composite of the forms of 5-MTHF that occur both naturally and unnaturally. Extrafolate has not been found to have the same nutritional benefits as Metafolin.
Gnosis entered the market for 5-MTHF products four years after Merck introduced Metafolin.
Between 2006 and 2009, Gnosis printed product specification sheets, brochures and other advertising and marketing materials for Extrafolate that only used the chemical descriptions, scientific terms and formulas attributed to pure, naturally occurring 5-MTHF. Gnosis' advertising and marketing materials:
  • Did not disclose that Extrafolate contained both the natural and unnatural forms of 5-MTHF.
  • Made it seem as though Extrafolate was as pure as Metafolin.

Lawsuit and Appeal

In 2007, Merck sued Gnosis for misleading advertising under Section 43(a) of the Lanham Act, in connection with Gnosis' use of the pure 5-MTHF descriptors in its marketing materials. In its lawsuit, Merck:
  • Alleged that Gnosis intentionally advertised and marketed Extrafolate to mislead consumers into believing it had the same properties as Metafolin (the only product wholly comprised of naturally occurring 5-MTHF).
  • Claimed that consumer confusion caused it to lose sales.
  • Sought damages and injunctive relief.
Following a bench trial, the US District Court for the Southern District of New York determined that Merck established Gnosis' liability for false advertising under Section 43(a) of the Lanham Act. According to the district court, Gnosis' advertising and marketing materials were:
  • Literally and impliedly false. The district court found that Merck established:
    • literal falsity by demonstrating that Gnosis only identified Extrafolate by the common name, abbreviation and chemical properties of the pure, naturally occurring 5-MTHF and did not include information about its unnatural components; and
    • implied falsity by demonstrating Gnosis had made statements that were intended to, and did in fact, mislead customers about Extrafolate, even though certain descriptions may have been literally true.
  • Purposefully intended to confuse consumers. The district court determined that Gnosis made a calculated, purposeful effort to capture a portion of Merck's market share by copying Merck's advertising and marketing.
The district court:
  • Presumed that:
    • Gnosis' advertising and marketing materials caused consumer confusion; and
    • Merck was injured by Gnosis' false advertising.
  • Awarded Merck:
    • damages in the form and amount of Gnosis' proceeds from all Extrafolate sales during the relevant time period;
    • treble damages because equity dictated that enhanced damages would best reflect the intangible benefits Gnosis accrued from entering the 5-MTHF market through its deception; and
    • attorneys' fees and court costs.
  • Ordered Gnosis to engage in a corrective advertising campaign to explain the differences between the compounds used in Metafolin and Extrafolin.
On appeal, Gnosis challenged the district court's use of legal presumptions, award of damages and grant of injunctive relief. Gnosis did not challenge any of the factual determinations on which the presumptions were based.

Outcome

The Second Circuit affirmed the district court's decision and held that, for the purposes of determining liability, it was proper to presume:
The Second Circuit also upheld the damages, awards and injunctive relief granted by the district court (see Damages, Awards and Injunctive Relief).

Presumption of Consumer Confusion

The Second Circuit affirmed the district court's presuming consumer confusion. According to the Second Circuit, using the presumption was appropriate because Merck established that Gnosis' advertising materials were:
  • Literally false.
  • Deliberately intended to deceive consumers.
The Second Circuit noted that, while Merck presented two theories of false advertising (literal and implied), establishing literal falsity and purposeful deception was sufficient to trigger the presumption of consumer confusion.

Presumption of Injury to Merck

The Second Circuit affirmed the district court's presuming that Merck was injured because:
  • The parties were direct and sole competitors in the 5-MTHF market.
  • Merck established that Gnosis deliberately intended to confuse consumers.
In reaching this holding, the Second Circuit distinguished the following types of false advertising cases:
  • Noncomparative. In noncomparative cases, plaintiffs have the burden of proving injury because:
    • the injury accrues equally to all competitors; and
    • any award of damages would be speculative.
  • Comparative. In comparative false advertising cases, injury can be presumed from purposeful consumer deception because there is no speculation that the plaintiff was deprived of a legitimate competitive advantage.
According to the Second Circuit, treating this two-party market situation like a comparative false advertising case by presuming injury, is proper:
  • Even though Gnosis did not disparage or mention Merck's name or products in any advertisement.
  • As there was no speculation that Gnosis harmed Merck's competitive advantage.

Damages, Awards and Injunctive Relief

The Second Circuit upheld the district court's awarding Merck money damages in the form of Gnosis' Extrafolate sale proceeds. Specifically noting that Gnosis continued to use the deceptive advertising at issue for two years during the pendency of the case, the Second Circuit found Gnosis' practices were wilful and deliberate.
The Second Circuit also upheld the district court's trebling of damages, affirming that Gnosis:
  • Was unjustly enriched from the market share it gained from its false advertising, beyond any profits earned from selling Extrafolate.
  • Needed to be deterred from wilfully deceiving consumers in the future.
Both courts noted the following facts when deciding the treble damages issue:
  • Merck was the only manufacture of the pure, natural 5-MTHF compound prior to Gnosis' entry into the market.
  • Two years after Merck initiated its lawsuit, Gnosis:
    • continued to market Extrafolate with the misleading marketing materials at issue; and
    • settled a separate false advertising case with one of its customer's sales agents.
  • A reseller voluntarily decided to stop distributing Gnosis' product because of the confusion caused by Gnosis' false advertising.
The Second Circuit also rejected Gnosis' challenges to the district court's:
  • Injunction compelling Gnosis to undertake a corrective advertising campaign.
  • Awards to Merck of:
    • prejudgment interest; and
    • attorneys' fees.

Practical Implications

To avoid liability under the Lanham Act, companies should accurately advertise and market their products. This case follows two recent Supreme Court cases concerning false advertising under the Lanham Act and will make it easier for companies to bring lawsuits against their competitors for misleading advertising and marketing.
The Second Circuit clarified that comparative false advertising actions do not require naming a competitor's product in a two-party market.
For more information on misleading advertising and the Lanham Act, see Practice Notes:
For information on two recent Supreme Court decisions that concern Lanham Act false advertising claims, see Legal Updates: