760 F.3d 247 (2nd Cir. 2014), 12-4218-cv(L), Merck Eprova AG v. Gnosis S.P.A.

Docket Nº:12-4218-cv(L), 13-513-cv(Con)
Citation:760 F.3d 247, 111 U.S.P.Q.2d 1950
Opinion Judge:POOLER, Circuit Judge :
Party Name:MERCK EPROVA AG, Plaintiff-Appellee, v. GNOSIS S.P.A., GNOSIS BIORESEARCH S.A., Defendants-Appellants
Attorney:LAURIE A. HAYNIE, Husch Blackwell LLP, Chicago, IL (JOSEPH CWIK, Husch Blackwell LLP, Chicago, IL; WILLIAM D. CHAPMAN, Cadden & Fuller LLP, Irvine, CA, on the brief), for Defendants-Appellants. NATALIE CLAYTON, Alston & Bird LLP, (LANCE SODERSTROM, on the brief), New York, NY, for Plaintiff-Appel...
Judge Panel:Before: POOLER, RAGGI, and WESLEY, Circuit Judges.
Case Date:July 29, 2014
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit
 
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760 F.3d 247 (2nd Cir. 2014)

111 U.S.P.Q.2d 1950

MERCK EPROVA AG, Plaintiff-Appellee,

v.

GNOSIS S.P.A., GNOSIS BIORESEARCH S.A., Defendants-Appellants

Nos. 12-4218-cv(L), 13-513-cv(Con)

United States Court of Appeals, Second Circuit

July 29, 2014

Argued November 15, 2013.

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This appeal requires our Court to clarify certain aspects of our false advertising jurisprudence. We conclude that where, as here, the parties operate in the context of a two-player market and literal falsity and deliberate deception has been proved, it is appropriate to utilize legal presumptions of consumer confusion and injury for the purposes of finding liability in a false advertising case brought under the Lanham Act. We further hold that in a case where willful deception is proved, a presumption of injury may be used to award a plaintiff damages in the form of defendant's profits, and may, in circumstances such as those present here, warrant enhanced damages.

LAURIE A. HAYNIE, Husch Blackwell LLP, Chicago, IL (JOSEPH CWIK, Husch Blackwell LLP, Chicago, IL; WILLIAM D. CHAPMAN, Cadden & Fuller LLP, Irvine, CA, on the brief), for Defendants-Appellants.

NATALIE CLAYTON, Alston & Bird LLP, (LANCE SODERSTROM, on the brief), New York, NY, for Plaintiff-Appellee.

Before: POOLER, RAGGI, and WESLEY, Circuit Judges.

OPINION

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POOLER, Circuit Judge :

Defendants-Appellants Gnosis S.p.A. and Gnosis Bioresearch S.A. (together, " Gnosis" ) appeal from a September 30, 2012 Opinion After Bench Trial, Merck Eprova AG v. Gnosis S.p.A. (" Merck I " ), 901 F.Supp.2d 436 (S.D.N.Y. 2012), and a January 31, 2013 Memorandum and Order, Merck Eprova AG v. Gnosis S.p.A. (" Merck II " ), No. 07 Civ. 5898(RJS), 2013 WL 364213 (S.D.N.Y. Jan. 31, 2013), of the United States District Court for the Southern District of New York (Richard J. Sullivan, J.), entering judgment in favor of Plaintiff-Appellee Merck Eprova AG (" Merck" ) on its Lanham Act false advertising and contributory false advertising claims; awarding Merck $526,994.13 in damages, over $2 million in attorneys' fees and costs, and prejudgment interest from March 2006 until September 30, 2012; and ordering that Gnosis engage in a corrective advertising campaign.

This appeal requires our Court to clarify certain aspects of our false advertising jurisprudence. We conclude that where, as here, the parties operate in the context of a two-player market and literal falsity and deliberate deception have been proved, it is appropriate to utilize legal presumptions of consumer confusion and injury for the purposes of finding liability in a false advertising case brought under the Lanham Act. We further hold that in a case where willful deception is proved, a presumption of injury may be used to award a plaintiff damages in the form of defendant's profits, and may, in circumstances such as those present here, warrant enhanced damages. For the reasons discussed below, we therefore AFFIRM the district court judgment in its entirety.

BACKGROUND

I. The Parties and their Products

A. Folate

The nutritional ingredient at issue in this litigation is a dietary ingredient called Folate, which is a B vitamin that helps the body make new cells. Folate is considered a critical supplement for prenatal health, and low folate intake is associated with various vascular, ocular, neurological and skeletal disorders, and may pose a serious risk to individuals with diabetes. While folate does not occur naturally in large quantities it can be found in leafy green vegetables, whole grains, citrus fruits, and organ meats. Tetrahydrofolates are the predominant naturally occurring forms of folate, and in particular, the tetrahydrofolate 5-methyltetrahydrofolic acid (abbreviated as " 5-MTHF" ) is one of the predominant naturally occurring folate forms.

Stereochemistry is a branch of chemistry that studies the particular arrangement of atoms that form the structures of molecules. See Merck I, 901 F.Supp.2d at 444.

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Chemical compounds that have the same composition but differ in the chemical arrangement of their constituents are called isomers, and if chemical compounds differ only in their spatial arrangement around a carbon atom, they are called stereoisomers.

While there are several different naming conventions for the compounds in this case, two predominate: the Fischer-Rosanoff convention, which labels isomers either with an " L" or a " D," based on the isomer's relation to the glyceraldehyde molecule, and the Cahn-Ingold-Prelog convention, a more formal stereochemical naming convention that uses the symbols " S" and " R" to describe the isomer's relation to the carbon atom. In the context of folates, L is used to refer to the naturally occurring isomer and D refers to the unnaturally occurring isomer, although the more standard naming conventions would use " S" for a naturally occurring isomer and an " R" for the unnatural isomer. It is important that in nature, each tetrahydrofolate form exists in the " L" (or " S" ) stereochemical form, though it can also be synthetically manufactured. If synthetically manufactured, a folate would be " mixed," and this form would be identified as having both " L" and " D" (or " S" and " R" ) stereochemical forms: i.e., a mixed compound would be labeled as " D,L" or " R,S."

As discussed further below, these naming conventions and how particular folate forms are labeled are central to the false advertising claims in this case. Thus, for ease of reference, we use the same naming convention used by the district court: we will generally refer to the naturally occurring isomer as the " 6S Isomer Product," and the synthetically created isomer as a " 6R,S Mixture Product." 1 See Merck I, 901 F.Supp.2d at 445.

B. Merck and Metafolin

Merck & Cie (formerly Merck Eprova AG) is a Swiss corporation and producer of pharmaceutical and dietary ingredients. Since 2002, Merck has sold a folate product under the name METAFOLIN (" Metafolin" ). Metafolin is sold in bulk to customers who use it in various finished products for resale, including vitamins and dietary and nutritional supplements.

Metafolin is comprised of a naturally occurring, biologically active form of Methyltetrahydrofolate (" 5-MTHF" ). Merck was the first company to manufacture a pure and stable diastereoisomer of L-5-MTHF, a 6S Isomer Product, as a commercial source. Merck's development of Metafolin was the culmination of decades of research and the investment of tens of millions of dollars. Metafolin is one of Merck's most important products.

C. Gnosis and Extrafolate

Gnosis S.p.a. is an Italian corporation and Gnosis Bioresearch S.A. is a Swiss corporation (collectively, " Gnosis" ). Gnosis, like Merck, produces raw dietary ingredients for use in the production of nutritional supplements. Merck I, 901 F.Supp.2d at 446. Since 2006, Gnosis has sold a folate product called Extrafolate.2 Extrafolate is a tetrahydrofolate with two isomers that is a mixture of the S isomer and the R isomer. Extrafolate is a 6R,S Mixture product, or a " D,L-5-MTHF" product. D-5-MTHF does not occur in nature, and has not been found to have the same nutritional benefits to humans as the L-5-MTHF product. As a mixture product,

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Extrafolate sells for significantly less than Metafolin. ( Compare Metafolin Purchase Order, selling for $14,310 per kg [PTX 72] with AHD's Extrafolate Purchase Order, selling for $4,500 per kg [PTX81].)

Between 2006 and 2009 Gnosis printed product specification sheets, brochures and other marketing materials that used the chemical descriptions, terms, and formulas attributed to the pure 6S Isomer Product for the sale and marketing of Extrafolate, its 6R,S Mixture Product. Gnosis had six customers to whom it sold its 6R,S Mixture Product during this time: AHD, Prothera, Thorne, Aceto, Manhattan Drug, and Isochem. Gnosis sold to some of these customers directly, such as AHD and Aceto, and the others indirectly.

In 2007, Merck sued Gnosis, claiming misleading advertising in connection with its use of the pure Isomer Product chemical name and properties in its marketing materials for Extrafolate.

II. Bench Trial

Following a bench trial, the district court determined that Merck had established Gnosis's liability for false advertising under Section 43(a) of the Lanham Act, 15 U.S.C. § 1125(a). Merck I, 901 F.Supp.2d at 442. The court awarded damages, prejudgment interest, and attorney's fees, and imposed a corrective advertising injunction. We provide an overview of the conclusions pertinent to this appeal.

A. Liability under the Lanham Act

1. Literal and Implied Falsity

The district court concluded that Gnosis recognized that the 6R,S Mixture Product and the 6S Isomer Product had different chemical names. Id. at 447. Gnosis had provided (1) product specification sheets to potential customers, and (2) brochures at sales presentations, and when it delivered its Extrafolate product to customers, included (3) product data sheets, certificates of analysis, and material safety data sheets, all of which identified Gnosis's Extrafolate product by the common name or abbreviation for the pure 6S Isomer Product, rather than the 6R,S Mixture Product, and described the chemical properties of the pure product in all of this material. Id. at 446-48. Gnosis continued to distribute this advertising material until 2009, nearly two years after Merck commenced this litigation against Gnosis. Id. at 446.

From these factual findings, the district court held that Merck had demonstrated the literal falsity of Gnosis's use of the common name...

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