Merck Eprova AG Headquarters in Schaffhausen, Switzerland
Merck Eprova AG Headquarters in Schaffhausen, Switzerland (4all)

A district court’s award of treble damages and legal fees against a dietary supplement maker that falsely advertised the chemical composition of its product was upheld Tuesday by the U.S. Court of Appeals for the Second Circuit.

Saying that its ruling would enhance the “clarity” of the circuit’s false advertising jurisprudence, a unanimous panel affirmed Southern District Judge Richard Sullivan’s (See Profile) findings in favor of the Swiss supplement maker Merck Eprova AG in its dispute with its only major competitor in the wholesale marketplace for folate supplements, Gnosis S.p.A. of Italy.

Specifically, the panel concluded that where literal falsity and deliberate deception have been proven against one of the players in a two-player market, presumptions of consumer confusion and injury may be made in a case brought under the Lanham Act.

“Egregious, willful” conduct may also warrant enhanced damages against the defendant in addition to injunctive relief, such as that which Sullivan meted out to Gnosis, the judges ruled.

“Gnosis was unjustly enriched as a result of its false advertising, and, in light of Gnosis’s demonstrated deceptive and willful conduct—manifested by its stubborn persistence—the court’s conclusion that enhanced damages were needed to deter Gnosis from any future willful infringement was not an abuse of discretion,” Judge Rosemary Pooler (See Profile) wrote for the court in Merck Eprova AG v. Gnosis S.p.A., 12-4218-cv.

Judges Reena Raggi (See Profile) and Richard Wesley (See Profile) joined in the ruling.

Gnosis challenged Sullivan’s awarding to Merck of $526,994—three times what he determined Gnosis’ profits were on its supplement Extrafolate from 2006 to 2012—and just over $2 million in attorney’s fees, costs and prejudgment interest. The Second Circuit affirmed all aspects of Sullivan’s determination.

According to the circuit, Merck spent decades and tens of millions of dollars in research to develop the folate supplement Metafolin, which was resold by other companies for vitamins and dietary and nutritional supplements. Metafolin was considered a “pure isomer product” in the nutritional supplement industry while Extrafolate was a “mixed” product, though Sullivan found that Gnosis sought to mislead customers by calling Extrafolate “pure.”

The similar, though not chemically identical, supplement that Gnosis sold as Extrafolate is cheaper to produce than Metafolin and “has not been found to have the same nutritional benefits to humans,” according to the Second Circuit ruling.

Purchase orders for the two products showed that Merck charged $14,310 wholesale for a kilogram of Metafolin while Gnosis charged $4,500 for a kilogram of Extrafolate, according to the ruling.

The court noted Tuesday that testimony at a bench trial before Sullivan indicated confusion among some Gnosis customers about what exactly they were buying when they purchased Extrafolate. The panel said the fact that Gnosis improperly labeled Extrafolate clearly added to the uncertainty.

“The record readily supports the conclusion that ‘a significant number of consumers’ were misled by Gnosis’s false labeling,” Pooler wrote.

The court rejected Gnosis’ argument, which the company made while citing Time Warner Cable v. DirecTV, 497 F.3d 144 (2d Cir. 2007), that courts may only make a presumption of injury in false advertising cases when comparable advertising is involved which mentions the plaintiff’s product by name.

The court noted that Time Warner, in fact, involved a circumstance where the plaintiff was not mentioned in the offending advertisements. Time Warner sued over DirecTV’s disparaging statements about “cable” television, which did not mention Time Warner by name, though as the only cable provider in the region, the target of its criticisms was clear, Pooler wrote.

Similarly, in a product area where two companies essentially have the field to themselves, as Merck and Gnosis did for the folate supplement market, Pooler said one company may be harmed by the other’s false advertising even if it does not mention the competitor by name.

“Gnosis capitalized on consumers’ desire to purchase a pure isomer product by using the pure isomer’s common name in its brochures and marketing materials,” she wrote. “Because its only competitor for such a pure product at the time was Merck, it follows that Merck was damaged by Gnosis’s false advertising of a mixed product as a pure one.”

In addition to setting damage payments at over $500,000, Sullivan also ordered Gnosis to engage in a corrective advertising campaign for Extrafolate. The circuit said a court may award both monetary damages and injunctive relief in a false advertising case “where the parties are direct competitors in a two-player market, and where literal falsity and willful, deliberate deception have been proved.”

“Gnosis’s assertion that it is improper to award damages, and a corrective advertising campaign is unsupported by the case law,” Pooler wrote. “There was no abuse of discretion here; we affirm the injunction as laid out by the district court.”

Natalie Clayton, a partner with Alston & Bird, argued for Merck.

Laurie Haynie, senior counsel for Husch Blackwell in Omaha, Neb., represented Gnosis.

Metafolin is a synthesized form of L-methylfolate, which is naturally present in leafy green vegetables, whole grains, citrus fruits and organ meats. Folates promote fetal development and to combat vascular, neurological and skeletal disorders in humans.

Merck sued Gnosis in 2007. Its suit challenged Gnosis’ description of the chemical properties of Extrafolate in promotional materials from 2006 to 2009.

Sullivan’s ruling noted that Merck and its licensees have spent $100 million marketing Metafolin, especially in touting it as a “pure” folate isomer.

Merck Eprova, a subsidiary of the German-based pharmaceutical giant Merck KGaA, is now known as Merck & Cie.