Recent Developments In False Advertising Law

Sunday, October 19, 2014 - 20:57

The Editor interviews Danielle DeFilippis, an Associate at Norris, McLaughlin & Marcus, P.A. specializing in complex commercial and intellectual property litigation, and Ami Bhatt, an Associate at the firm focusing on intellectual property enforcement and prosecution. 

Editor: There were three key false advertising cases decided this year. Pom Wonderful LLC v. The Coca-Cola Company, 134 S.Ct. 2228 (2014) (Supreme Court), Lexmark International, Inc. v. Static Control Components, Inc., 134 S.Ct. 1377 (2014) (Supreme Court), Merck Eprova AG v. Gnosis S.P.A., 760 F.3d 247 (2d Cir. 2014). Let’s start with Pom v. Coca-Cola.

DeFilippis: POM Wonderful LLC, which produces POM WONDERFUL® pomegranate juice, filed suit against Coca-Cola, alleging that Coca-Cola’s label, which prominently stated “pomegranate blueberry,” was false and misleading because the product contained only scant amounts of pomegranate and blueberry juices – less than one percent total. Coca-Cola argued that its label met the requirements of the federal Food, Drug & Cosmetic Act for identifying the juices in a juice blend, and therefore POM could not bring a federal action.

The Supreme Court considered the interplay between two federal statutes and held that this was not a preemption case whereby a federal statute or federal agency action preempts state law on that subject. Rather, this case involved whether one federal statute precluded the operation of another federal statute.

In its analysis, the Court articulated that the statutes were meant to be complimentary. Critically, neither statute explicitly precluded the other, and the two statutes coexisted for nearly seventy years without Congress ever adding a preclusion provision. The Court concluded that this was “powerful evidence” that Congress did not intend the FDA to be the exclusive means of ensuring proper labeling.

Notably, the Supreme Court determined that because the FDA does not police competition in the market, the regulations are not a ceiling on the regulation of food labeling. Rather, businesses have a better understanding of competition in the marketplace and how consumers react to advertising strategies.

Editor: What is the impact of this ruling in the false advertising space?

DeFilippis: We are already seeing courts apply the POM holding in determining that federal statutes may be read together and do not preclude one another. In fact, courts have begun to apply this reasoning to various scenarios, even outside of the false advertising context.

For example, a judge in a concurring opinion in Michigan state court evaluated the Federal Employers’ Liability Act’s interplay with the Federal Railroad Safety Act, and its accompanying Federal Railroad Administration (FRA) regulations, with respect to railroad safety. The judge opined that the purpose of the FRSA, to promote safety in railroad operations and reduce railroad-related accidents, is consistent with the goal of the FELA – to promote employee safety and hold railroads accountable for their negligence – and thus they can be implemented together. (Trout v. Grand Trunk W. R. Co., 312727, 2014 WL 4792201) (Mich. Ct. App. Sept. 25, 2014).

We expect that courts will continue to evaluate whether federal statutes are complimentary and also whether the regulations of federal agencies should act as a “ceiling.” What this ruling may also mean is that whereas a plaintiff may have been deterred from filing suit because a competitor’s label satisfied the requirements of the FDA, now we may see an increase in litigation between competitors alleging that a label is deceptive despite FDA compliance.

Editor: Let’s move on to Lexmark.

DeFilippis: Lexmark manufactures and sells laser printers and toner. Lexmark designed the toner to work only with Lexmark printers. Other businesses, however, acquired used Lexmark cartridges and refurbished them. In response to this, Lexmark offered a “Prebate” program, which allowed customers to purchase new toner at a 20 percent discount if they returned the empty cartridge. Lexmark included a microchip that would disable the cartridge after it ran out of ink. Lexmark sued Static Control, a manufacturer and distributor of components used to remanufacture cartridges, and Static Control asserted counterclaims for false advertising, alleging that Lexmark’s Prebate program was deceptive. The critical issue became whether Static Control had standing to sue for the alleged Lanham Act violations.

Recognizing a circuit split over how to address standing for Lanham Act claims, the Supreme Court articulated a new test to determine whether a claimant has standing to bring a Lanham Act claim. Consistent with the analysis in POM, discussed earlier, the Court employed statutory construction. The Court rejected tests previously employed by the circuit courts and instead held that standing is a two-step inquiry: a zone of interests test and a proximate cause analysis. The Court looked to the Lanham Act's statement of purpose, which includes broadly those who “allege an injury to a commercial interest in reputation or sales” in creating the “zone of interest.” Second, a party only has standing under the Lanham Act if its “injuries are proximately caused by violations of the statute.” A party must show economic or reputational injury flowing directly from the deception wrought by the defendant's advertising. Deception that causes consumers to refrain from purchasing the plaintiff’s products satisfies this requirement. The Court ultimately found that Static Control had adequately alleged injury proximately caused by Lexmark.

Editor: Do you expect that this ruling will also lead to increased litigation?

DeFilippis: The standard articulated in Lexmark is a threshold requirement. It can have the effect of limiting or increasing suits depending on the jurisdiction and the test previously employed. There has been significant case law interpreting and applying the test since the decision was made, however, whether litigation will increase or decrease across the nation remains to be seen. Lexmark makes clear that a court may properly consider the overall purpose of a congressional act when applying the zone of interests test, especially if that purpose is expressly articulated in a separate provision of the act. It will be interesting to see how courts analyze the level of proof needed to “allege” proximate cause at this stage.

Editor: Tell me about the Merck case.

Bhatt: Merck is a decision from the Second Circuit that involved advertising for the nutritional supplement folate. After expending much time and money, Merck developed a pure form of the folate supplement. Gnosis also produced a folate product but its product was synthetically made, making it cheaper than Merck’s product and apparently not as beneficial to consumers.

In its marketing materials for the synthetic product, Gnosis incorporated the name and abbreviation for the pure folate product and included product descriptions that implied to consumers that its product was a pure folate product and not the synthetic one. Merck filed suit alleging misleading and false advertisement. After a bench trial, the District Court found the materials literally and impliedly false and applied the presumptions of consumer confusion and injury to plaintiff when awarding damages.

In addressing the application of the consumer confusion presumption, the Second Circuit held that where a defendant’s actions were intentionally deceptive, as was the case with Gnosis, there is a rebuttable presumption of consumer confusion. The findings of literal falsity and Gnosis’s intent sufficiently supported the imposition of this presumption.

The court also clarified that the presumption of injury is not limited to comparative advertising (cases where a defendant specifically refers to the plaintiff’s product by name). The court stated that where, as in this case, the parties operate in a two-player market, and a plaintiff has been able to prove literal falsity and deliberate deception by the defendant, it is appropriate for a court to presume injury for the purposes of determining liability under a false advertising claim. Where willful deception is established, the presumption of injury may be used to award the plaintiff damages in the form of defendant’s profits.

Editor: Are there any early indications of Merck’s impact on false advertising cases?

Bhatt: Merck may mean that plaintiffs in the Second Circuit who operate in a two-player market and who are able to establish the threshold matters of literal falsity and deliberate deception may no longer have to demonstrate actual competitive injury and quantify the resulting damages. Conceivably, this could lead to an increase in false advertising claims in two-player markets and could increase an award of damages where threshold criteria are satisfied.

Editor: What other areas of liability should businesses consider when advertising their products?

Bhatt: Prescription drug and medical device makers also must be mindful of recently promulgated guidelines from the FDA. These guidelines provide a reminder that it is not just traditional labels or packaging that are subject to regulations and scrutiny.

The new guidelines join two previously released social media guidelines that underscore how seriously the FDA is taking social media usage by drug and device manufacturers. Of the latest guidelines, one provides an outline for how the FDA thinks manufacturers should correct what they believe to be inaccurate information about their product posted by third parties, such as bloggers. The other provides the FDA’s position on communicating information about drugs and devices accurately on social media.

Recognizing the difficulties in balancing the FDA’s requirements with the character and space limitations on social media sites such as Twitter, or with online ads such as sponsored links on Google, this guideline provides the FDA’s policy on presenting risk and benefit information on these platforms. The key elements include: (1) that benefit information should be accurate and non-misleading and reveal material facts; (2) that benefit information should be accompanied by risk information within the character or space limitations of each individual communication; (3) that if all risk information cannot be presented, then at minimum, the most serious associated risks should be disclosed; (4) that the risk information should be comparably as prominent as the benefit information; and (5) if it does not appear that adequate benefit and risk information, among other required information, can be adequately communicated, then the company should reconsider using a given platform for the intended message.

Editor: What does this mean for businesses?

Bhatt: It is clear based on the recent jurisprudence from courts and guidance from government agencies that false or misleading advertising will continue to face scrutiny from competitors or from regulatory bodies. As a consequence, businesses should take care in crafting promotional materials, whether in print, on packaging, or online, to ensure that the information presented is accurate and within the bounds of the law.

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