A new decision of the United States Court of Appeals for the Second Circuit has clarified “certain aspects of [the circuit’s] false advertising jurisprudence.”  Merck Eprova AG v. Gnosis S.p.A., No. 12- 4218-cv(L) (2d Cir. July 29, 2014). In affirming a district court decision awarding damages and corrective advertising, a unanimous panel held (i) “where, as here, the parties operate in the context of a two-player market and literal falsity and deliberate deception has been proven, it is appropriate to utilize legal presumptions of consumer confusion and injury for the purpose of finding liability in a false advertising case brought under the Lanham Act”; and (ii) “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.”  Slip Op. at 1.

Merck involved two producers of raw ingredients used in vitamins and dietary and nutritional supplements.  Section 43(a) of the Lanham Act, 15 U.S.C. § 1125(a), provides a remedy for  commercial injuries caused by false and misleading advertising, and the plaintiff relied on it to challenge product specification sheets, brochures, and marketing materials (the “advertising”) used by the defendant to sell a folate product — a B vitamin used by the body to make new cells — marketed as Extrafolate. The plaintiff sells a folate product marketed as Metafolin, which is one of its “most  important products” and the first such product to reach the market.  Slip Op. at 2.

The district court concluded that the defendant’s advertising violated Section 43(a) by describing a chemically “pure” product, even though Extrafolate (which costs over a third less than Metafolin) is, in fact, a chemically mixed product. The court also found the defendants’ claims intentionally deceptive, citing evidence that they recognized the difference between the chemical names but nevertheless continued distributing the advertising for nearly two years after the plaintiff commenced its suit.

The Second Circuit agreed that the defendant’s claims were both literally and impliedly false, insofar as their advertising “accurately describ[ed] a product it was not selling.”  Slip Op. at 10. The decision proceeded to address two legal presumptions that the district court applied with respect to Section 43(a) liability.

First, Merck confirmed that the district court properly applied a legal presumption of both consumer confusion and injury.  Under Second Circuit law, proof of intentional deception alone gives rise to a rebuttable presumption of consumer confusion. Most prior cases addressing Section 43(a) concerned challenges to expressly comparative advertising. While the defendant’s advertising made no mention  of the plaintiff or Metafolin, Merck drew on that jurisprudence to hold that in a two-player market, the comparison need not be explicit.  Here, Metafolin was Extrafolate’s only alternative, and the chemical naming convention and description of it were used (falsely) to market Extrafolate.  Merck held that while presuming injury is improper where products are not obviously in direct competition, where the defendant’s “only competitor for such a pure product at the time was [the plaintiff], it follows that [the plaintiff] was damaged by [the defendant’s] false advertising of a mixed product as a pure one.”  Slip Op. at 29.

The Second Circuit also clarified a second presumption that applies with respect to damages. The Merck Court described the pure folate market as one “created by [the plaintiff] and entered into and exploited by [the defendant] through its false advertising of a mixed product as pure.” Slip Op. at 30. Merck noted that the rationales for awarding profits in false advertising cases (including this one) include avoiding unjust enrichment, affording compensation, and deterrence.  Given the district court’s finding of “egregious, willful” deception by the defendant, id. at 37, together with the parties’ “direct competitor[] in a two-player market,” the Merck Court held that “the presumptions of injury and consumer confusion [also could] be used for the purposes of awarding both injunctive relief and monetary damages.” Id. at 33.  Noting the district court’s description of defendant’s “stubborn persistence” in continuing its advertising long after the plaintiff filed suit (id. at 36), the Second Circuit affirmed a damages award in the amount of triple the defendant’s profits, along with prejudgment interest, attorney’s fees and costs, and the imposition of corrective advertising.