Willful Deception Supports Presumption Of Injury for Profits, Enhanced Damages

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By Anandashankar Mazumdar  

July 29 — When a defendant in a false advertising action is found liable for willful deception, a presumption of injury supports an award of profits and possibly enhanced damages, the U.S. Court of Appeals for the Second Circuit ruled July 29.

Furthermore, if the false advertising takes place in a two-player market, presumptions of consumer confusion and injury may support a finding of liability, the court said.

These holdings were issued in the context of a dispute between two suppliers of ingredients used in supplements for expectant mothers and their fetuses.

Suppliers of Folate for Supplements

The false advertising claim began as a dispute between Merck & Cie. f/k/a Merck Eprova AG of Switzerland and Gnosis S.p.A. of Italy, which produce ingredients used to make nutritional supplements. Merck sells an ingredient called Metafolin, used to provide Folate, a B vitamin critical to prenatal health. Gnosis sells Extrafolate, which is not pure.

Merck sued Gnosis, alleging false advertising and unfair competition under federal and state laws, based on marketing materials suggesting that Extrafolate was pure.

Following a bench trial, Judge Richard J. Sullivan of the U.S. District Court for the Southern District of New York ruled in favor of Merck on the federal claims and awarded Merck $2.5 million in treble profits, attorneys' fees, costs and prejudgment interest. The district court also ordered a corrective ad campaign.

Presumptions Affirmed

Gnosis appealed, arguing that the district court had erred in presuming consumer confusion and injury in awarding damages in the absence of actual consumer confusion and evidence of actual injury.

The court rejected this argument. Given that the district court had found that Gnosis's marketing specification sheets had promulgated literal falsity, in addition to the “egregious nature” of the intent to deceive, there was no error in the presumption of confusion.

Furthermore, in the context of a two-player market for Folate, the court said that there was no need for the district court to find extrinsic evidence of consumer confusion and injury in order to find liability for false advertising:

We hold that were, as here, a plaintiff has met its burden of proving deliberate deception in the context of a two-player market, it is appropriate to utilize a presumption of injury. This is the case even if it is not a classic instance of comparative advertising where one company's advertisement mentions a competitor's product by name. In the context of the market at the time of this lawsuit for a pure folate—a market created by Merck and entered into and exploited by Gnosis through its false advertising of a mixed product as pure—the district court's utilization of a presumption of injury carries no risk of speculative injury to Merck.

The court also affirmed the remedies awarded by the district court, including the trebled damages based on profit by Gnosis.

The court's opinion was authored by Judge Rosemary S. Pooler and joined by Judges Reena Raggi and Richard C. Wesley. Gnosis was represented by Husch Blackwell LLP, Chicago. Merck was represented by Alston & Bird LLP, New York.

To contact the reporter on this story: Anandashankar Mazumdar in Washington at amazumdar@bna.com

To contact the editor responsible for this story: Naresh Sritharan at nsritharan@bna.com

Text is available at http://www.bloomberglaw.com/public/document/Merck_Eprova_AG_v_Gnosis_SPA_Docket_No_1204218_2d_Cir_Oct_18_2012.