Friday, October 5, 2012

What’s In a Name? NY Court Comes Down Hard on Gnosis for its “Calculated Decision” to Use Improper Chemical Name to Describe a Product


By Saul Perloff


On September 30, 2012, United States District Judge Richard J. Sullivan ruled in favor of Merck Eprova AG (n/k/a Merck & Cie) in its 2007 false advertising lawsuit against Gnosis S.P.A. and Gnosis Bioresearch SA (“Gnosis”). See Opinion After Bench Trial.

Metafolin® vs. Extrafolate®

Merck Eprova, a Swiss subsidiary of Germany’s Merck KGaA, manufactures and sells Metafolin®, a synthesized form of L-methylfolate, a naturally occurring folate. Folate helps the body produce healthy cells. It is particularly important in fetal development. L-methylfolate, is believed to be superior to folic acid—commonly found in supplements and fortified food—because it is easily absorbed by the body. Metafolin can be found a variety of pharmaceutical products including dietary supplements and medical foods.

Metafolin is one of Merck Eprova’s most important products. According to the opinion, the company and its licensees have spent $100 million marketing Metafolin. Merck’s customers often tout as a selling point the fact that the Metafolin in their products is the substantially pure “L” isomer of methylfolate.1

Gnosis began marketing a competing folate product, Extrafolate™, in 2006. However, according to the Merck Opinion, unlike Metafolin, which is the “L” isomer of methylfolate, Extrafolate is a racemic mixture of both the “L” and “D” isomers. According to the opinion the “D” isomer is not active in the body and is arguably unhealthy. In its suit, Merck Eprova claimed that Gnosis falsely promoted its racemic folate product as the pure L isomer folate product.

Merck Eprova Has Article III Standing


In his ruling, Judge Sullivan quickly dispensed with Gnosis’s contention that Merck Eprova lacked Article III standing. The judge concluded, “Plainly, a manufacturer such as Merck is injured when a competitor falsely advertises that its chemically distinct product is identical to the manufacturer’s product.”

Gnosis’s “Calculated Decision” to Falsely Advertise Extrafolate


On the substance of the false advertising claims, the Judge found that specification sheets and product brochures Gnosis used to promote Extrafolate constituted commercial advertising and were literally false. In some of these materials, Gnosis described Extrafolate using the formal chemical name and number of the L isomer product. In other materials, Gnosis used the common name and abbreviation of the L isomer product.

Gnosis had attempted to show, through expert testimony, that the common name and abbreviation it used were ambiguous and could reasonably refer to its racemic product. While the court found the expert’s “esoteric” testimony “fascinating” at times, it concluded Gnosis failed to demonstrate any ambiguity.

According to Judge Sullivan, Gnosis’s witnesses could not “point to a single organization or a single article that uses the common name or abbreviation in the manner Gnosis does.” The judge concluded that it was “obvious” that Gnosis’s use of these terms in its marketing efforts was a “calculated decision to copy Merck’s advertising and capture a portion of Merck’s market share, knowing full well that its [racemic] Mixture Product was materially distinguishable from Merck’s pure [L] Isomer Product.”

Gnosis Liable for Contributory False Advertising


In addition to finding Gnosis directly liable for false advertising, the Court also ruled that Gnosis was liable for “contributory false advertising.” Relying on the Supreme Court’s 1982 decision in Inwood Labs., Inv. V. Ives Labs, Inc., Judge Sullivan held that Gnosis’s false use of the common name caused its distributors to also falsely advertise Extrafolate.

Gnosis’s Bad Conduct Merits Award of Treble Damages and Attorneys’ Fees


Turning to damages, Judge Sullivan concluded there was “little doubt” Merck was entitled to Gnosis’s profits on the sale of Extrafolate. Under the law of the Second Circuit, profits may be awarded where a defendant acted willfully. In this case, the Court found the “record is clear that Gnosis deliberately and willfully engaged in false advertising as part of a strategy designed to gain its market share in the lucrative vitamin and nutritional supplement industry through deception.” Furthermore, in calculating Gnosis’s profits the court used Gnosis’s gross sales and refused to accept Gnosis’s evidence of costs.

On top of this, the Court found “that the award of Gnosis’s profits must be increased in order to fully compensate Merck for the improved market position Gnosis enjoyed solely as a result of its false advertising.” Thus, Judge Sullivan trebled the award to $526,994.13.

The Judge also enjoined Gnosis from advertising Extrafolate using the name of the L-isomer product and ordered Gnosis to engage in corrective advertising. Finally, the Judge concluded this was an “exceptional case.” Pointing to Gnosis’s conduct during the litigation, including “withholding documents in discovery and obstructing depositions” as well as “Gnosis’s utter lack of respect for the judicial process,” the Court found that “this case is one justifying the award of attorney’s fees.”

Case: Merck Eprova AG vs. Gnosis S.P.A. and Gnosis Bioresearch S.A., Case No. 1:07-cv-05898-RJS-JCF (S.D. N.Y.)

This article was prepared by Saul Perloff (sperloff@fulbright.com / 210 270 7166) of Fulbright’s False Advertising Practice.

1The opinion contains a thorough discussion of stereochemistry and stereoisomers.