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False Advertising Found in Using Chemical And Common Names That Suggest Purity

Friday, December 21, 2012
Merck Eprova AG v. Gnosis S.p.A., S.D.N.Y., No. 1:07-cv-05898, 9/30/12

  • Case Summary: Egregious litigation conduct leads a judge to come down hard on a nutritional supplement maker that falsely claimed chemical purity.


By Tony Dutra

A maker of nutrition supplements made literally false statements in its product literature by claiming to make a pure isomer product when in fact it was selling a less beneficial and less expensive to make mixture, the U.S. District Court for the Southern District of New York ruled Sept. 30 (Merck Eprova AG v. Gnosis S.p.A., S.D.N.Y., No. 1:07-cv-05898, 9/30/12).

The court further determined that the defendant's corporate witnesses lied in court, justifying an enhanced award, attorneys' fees, and additional expenses that will spent on a corrective advertising campaign.

The court's enhanced award totaled over $525,000, three times the sales of the defendant's product during the period it was falsely advertised.


Pure vs. Mixture Products
Tetrahydrofolates are stereochemicals that promote prenatal health for expectant mothers and their fetuses and lessen the risks of some cancers and cardiovascular diseases. Manufacturing tetrahydrofolate yields a mixture of two isomers, only one of which is active in the body, while the other is arguably unhealthy. It is therefore beneficial but costly to make a product with only the active isomer.

Merck Eprova AG and Gnosis S.p.A. are competitors that make raw dietary ingredients used in the production of nutrition supplements. Merck sells the “6S Isomer” product Metafolin, which is essentially pure. Gnosis sells Extrafolate, a “6R,S Mixture Product,” which is not.

Merck sued Gnosis in the New York federal court claiming federal and state false advertising and unfair competition charges. The charges stemmed from Gnosis's marketing materials indicating that Extrafolate was a pure S-isomer product.


False Representation of Chemical Name
Judge Richard J. Sullivan found in favor of Merck on all federal charges under the Lanham Act.

First, the evidence showed that Gnosis's product specification sheet for its 6R,S Mixture Product, distributed at a trade show in Anaheim, Calif., and distributed to customers thereafter, used the chemical name and the Chemical Abstracts Services (CAS) registry number for the pure 6S isomer.

Product specification sheets are “commercial advertising,” the court said, the chemical name was literally false, and it was material because “the very nature of what a manufacturer is selling is material.”

A false advertising claim under 15 U.S.C. §1125(a)(1)(B) also requires a showing of actual deception, but, citing Time Warner Cable Inc. v. DirecTV Inc., 497 F.3d 144, 153 83 USPQ2d 1897 (2d Cir. 2007), the court said, “When a plaintiff demonstrates the literal falsity of an advertisement, consumer deception is presumed.”

The court thus concluded that the product specification sheets violated the Lanham Act.


Common Stereochemistry Nomenclature Matters
Merck claimed that Gnosis had further falsely represented its product by using common names and abbreviations of the pure isomer chemicals. These uses were also on brochures and material safety data sheets.

The court acknowledged a lively debate in the stereochemistry industry over nomenclature, describing testimony by one of Gnosis's witnesses as “metaphysical” and “at times fascinating.” However, the court said that while the debate is proper “at conferences and in scientific papers,” those arguments and documents could not possibly be construed as advertising.

Further, Gnosis had not consulted this witness prior to creating the brochures and other documents, the court noted. The witness's testimony was thus “an after-the-fact rationalization for a scheme that was animated by purely commercial, and not scientific, motives,” the court declared.

Finally, the court looked at the descriptions of the 6R,S Mixture Product in the same literature and concluded that those descriptions, while true of pure product, were stated as being true for the mixture.

Again, the court said, “though a claim of deceptive advertising generally requires extrinsic evidence of consumer confusion to prevail, a presumption of deceit arises where a defendant is shown to have intended to mislead consumers and acted egregiously to that end.”


State Law Claims Need Showing of Harm, Though
The court rejected Merck's argument that purchase orders, which included the misleading CAS numbers, are false advertisements as well.

The court did, however, find contributory false advertising in that Gnosis caused its Extrafolate distributor to falsely advertise when the distributor used Gnosis's materials.

Merck's state law claims--deceptive trade practices and false advertising under Sections 349 and 350, respectively, of the New York General Business Law--were dismissed, though. The state claims require a showing of harm to the public, the court said. “Instead, Merck's allegations focus almost entirely on losses suffered by Merck itself, not to the eventual--and theoretical--harm suffered by the public at large.”


Damages Award Severe
The court's award of damages was severe, reflecting its dissatisfaction with Gnosis's conduct throughout the litigation. As but one example, the court asserted that two Gnosis executives clearly lied on the stand.

The Lanham Act, at 15 U.S.C. §1117(a), allows an award of (1) defendant's profits, (2) any damages sustained by the plaintiff, and (3) the costs of the action.

The court awarded lost profits of over $175,000, equal to the entire amount of revenues Gnosis realized for sales of Extrafolate from 2006 to the point in 2009 when it corrected its false materials. The court rejected Gnosis's estimates of its costs “given the Court's findings about the credibility of Gnosis's witnesses.”

Though Section 1117(a)(3) allows trebling the award as an enhancement of damages only, it also allows the court to enhance the award “for such sum as the court shall find to be just, according to the circumstances of the case.” Indeed, this court trebled the award on those grounds, to reflect Gnosis's ill-gotten increase in market share, which extended beyond the period in which Gnosis falsely advertised.

“Though an award of three times profit is an imprecise measure of compensation, the impossibility of gauging Merck's losses along with the undeniable existence of those losses makes it a proper, if crude, measure,” the court said. “Further, while an award under the Lanham Act must promote a compensatory and not punitive purpose, it is no small matter that Gnosis may be deterred from again engaging in such brazen behavior by being required to fully account for its actions.”

Prejudgment interest will also be added to the award, the court ruled.


Injunction, Attorneys' Fees, Too
The court further determined that Merck had also shown irreparable harm going forward, justifying injunctive relief. While the court acknowledged that Gnosis stopped using the terms at issue here, it said it “has no confidence that Gnosis's wrongdoing will not be repeated absent a prohibitory injunction.”

The court did not go so far as Merck requested--a five-year ban--but it did “order Gnosis to engage in a campaign of corrective advertising.”

Finally, in light of “Gnosis's utter lack of respect for the judicial process,” the court awarded attorneys' fees as well.

Robert Elliot Hanlon of Alston & Bird, New York, represented Merck. William Donald Chapman of Julander, Brown, Bollard & Chapman, Irvine, Calif., represented Gnosis.

By Tony Dutra


Opinion at /uploadedFiles/Content/News/Legal_and_Business/Bloomberg_Law/Legal_Reports/false-advertising(1).pdf

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