She don’t lie, but the pharmaco might: cocaine false advertising case continues

Genus Lifesciences Inc. v. Lannett Company, Inc., 2019 WL
1981186, No. 18-cv-07603-WHO (N.D. Cal. May 3, 2019)
Genus competes with Lannett in the market for cocaine
hydrochloride nasal spray. It sued Lannett for false advertising and
maintaining a monopoly related to Lannett’s production of C-Topical, a cocaine
hydrochloride solution that competes with Genus’ own cocaine hydrochloride
solution, Goprelto. At its core, the complaint alleged that Lannett falsely advertised C-Topical as FDA-approved. Genus also sued First Databank, “a pricing list company
that compares drug products and their prices so that wholesalers and customers
can see all the alternatives available for a particular medication,” for false
advertising and contributory false advertising. Here, Judge Orrick declined to
dismiss all claims against Lannett, but kicked First Databank out because its challenged
statement in the pricing list was not “commercial speech” and First Databank
did not influence Lannett’s alleged false advertising.
In 2017, the FDA granted approval of Goprelto’s New Drug
Application, which required five clinical trials and ten non-clinical trials
involving over 700 human subjects. The FDA approved Goprelto “for the induction
of local anesthesia of the mucous membranes when performing diagnostic
procedures and surgeries on or through the nasal cavities in adults.” “As the
first FDA approved cocaine product, Goprelto was awarded new chemical
exclusivity, which bars any third-party applicant from seeking FDA approval
until December 14, 2022.”  C-Topical and
Goprelto have the same active ingredient, the same strength, and the same
dosage form, and are interchangeable for certain medical uses, including
Goprelto’s approved indicated use.
As the court explained, legal marketing of drugs in the US
requires approval of an NDA or ANDA or exemption from the NDA requirement.  Exemptions include “grandfathered” drugs and
drugs subject to an ongoing drug efficacy study implementation proceeding. A
drug is grandfathered if, among other requirements, its composition and labelling
have not changed since 1962. In 2006, the FDA stated that in cases where one
drug was approved but had unapproved competitors, there would generally be a
grace period of one year before the FDA initiated enforcement action against
the unapproved drug, but the FDA hasn’t yet acted against Lannett.
C-Topical has been on the market at least since 2008, and
Lannett was the sole supplier of cocaine hydrochloride solution products to ear,
nose and throat doctors from 2012 until Genus’s launch of Goprelto. In 2015,
the FDA rejected Lannett’s request that C-Topical be grandfathered. Despite
that, Lannett claimed that C-Topical was grandfathered in a number of SEC filings
and investor calls in 2017 and 2018. Lannett also allegedly advertised C-Topical
as being legally marketed under a “preliminary new drug application” in a
number of SEC filings, “a fictitious regulatory category.”
In addition Lannett’s meta description for its C-Topical
webpage states, “Learn more about the facts and characteristics of the generic
pharmaceutical C-Topical® Solution CII,” although C-Topical is not a generic
pharmaceutical product because it does not have an approved ANDA.
Lannett also allegedly intentionally misled customers by
making the product packaging look like an approved FDA drug, maintaining a
website with the package insert information that looks like an FDA-approved
insert, and registering a trademark for C-Topical. 
Lannett’s website also allegedly “identifies it as a generic
pharmaceutical manufacturer whose leadership is committed to adherence to FDA
standards and compliance with regulatory requirements,” as does its subsidiary
Cody’s, but both sites list C-Topical as one of their products. In addition,
Lannett advertised C-Topical as a “topical solution … indicated for the
introduction of local (topical) anesthesia of accessible mucous membranes of
the oral, laryngeal, and nasal cavities.” This allegedly falsely implied that a
cocaine hydrochloride solution product has been approved by FDA for oral or
laryngeal uses, when no such product has ever been approved in that way. This
allegedly further misled customers into believing that C-Topical had more uses
than Goprelto, making it a more desirable and better product.
Lannett also allegedly provided incomplete or false
information to third party intermediaries in the supply chain of pharmaceutical
products. For example, Lannett sold C-Topical to McKesson Corp., a wholesaler whose
website indicated that C-Topical is generic and does not state that it is
unapproved by the FDA. Intermediaries rely on companies that aggregate
third-party drug pricing information, such as First Databank. “These companies,
including First Databank, assign unique identifying codes for each drug,
allowing for price comparisons of equivalent products.” Because Lannett didn’t
identify C-Topical as unapproved, intermediaries were allegedly unable to
accurately describe it. Genus cited “a study that states that in a nationwide
survey of pharmacists, 91% thought all products pharmacists dispense are FDA
approved.” Customers were allegedly misled to believe that C-Topical is FDA
approved and choose to purchase C-Topical over Goprelto on that basis.
First Databank allegedly assigned a unique clinical
formulation ID (CFI) to drugs based on ingredients, strength, dosage form, and
route of administration. Drugs with the same attributes were assigned the same
CFI and “linked” so that a search for one would produce the other as a
substantive alternative. But, since C-Topical’s route of administration is
listed as “topical” and Goprelto’s is listed as “intranasal,” the two drugs are
given different CFI numbers. Consumers would allegedly be misled into thinking
that C-Topical is the only cocaine hydrochloride drug available on the market. Genus
allegedly notified First Databank about the misleading advertisement, providing
First Databank with knowledge.
Genus also alleged anticompetitive conduct in the market for
cocaine hydrochloride solution, which is allegedly unique because it is the only
nasal product that is both a vasoconstrictor and local anesthetic, unlike any
other drugs on the market. Lannett allegedly schemed to use a different CFI
number to prevent the parties from competing on price. “But because the CFI
numbers are different, and C-Topical had a monopoly on the market for a number
of years, customers are generally not aware that Goprelto exists and will not
find it when searching for or reordering C-Topical.” Between June 2018 and
September 2018, Genus sold only 544 bottles of Goprelto while Lannett sold over
45,000 bottles of C-Topical, despite Goprelto’s lower price.
“Lannett’s core argument is that absent an affirmative
representation of approval, marketing an unapproved drug is not actionable
under the Lanham Act.” It’s not enough to put an unapproved drug on the market
with a FDA-ish package insert, according to Mylan Labs., Inc. v. Matkari, 7
F.3d 1130 (4th Cir. 1993). Genus pointed out that the Lanham Act covers more than
affirmative, literally false statements. Par Sterile Prod., LLC v. Fresenius
Kabi USA LLC, No. 14-cv-3349, 2015 WL 1263041, at *4 (N.D. Ill. Mar. 17, 2015),
agreed that mere alleged implication that a drug was approved by the FDA was
insufficient to state a Lanham Act claim, but also found that the implication was
enough when combined with allegations that (i) buyers believe all prescribed
drugs identified on the Price Lists are FDA approved and (ii) that in some
surveys 91% of pharmacists are actually confused about whether all drugs that
appear on industry price lists are approved. This was enough to survive a
motion to dismiss, though not necessarily to survive summary judgment.
What about the false statements in SEC filings and investor
calls?  [As Matt Levine of Money Stuff
says, sounds like securities fraud because everything is securities
fraud.]  That didn’t seem like
“commercial advertising or promotion.” Genus failed to allege “that the SEC
statements and investor calls were made for the purpose of influencing
consumers to buy its goods or services, or that they were disseminated
sufficiently to pharmacists, doctors, and hospital groups.”
And the cases were on Lannett’s side. For example, Sigma
Dynamics, Inc. v. E. Piphany, Inc., No. 04-cv-0569-MJJ, 2004 WL 2648370 (N.D.
Cal. June 25, 2004), held that in order for statements on the investor calls to
be actionable, “plaintiffs would need to allege that consumers attended the
investor conference calls and that the purpose of the investor calls was to
influence customers to buy defendant’s goods or services.” Sigma did hold that statements on websites and in press releases
available to the public were commercial speech for purposes of a motion to
dismiss, but Judge Orrick disagreed [he didn’t really disagree, he just thought
that commercial speech was a broader category than “commercial advertising or
promotion”]: “in order to be actionable, the statements must be accompanied by
specific allegations that they were made for the purpose of influencing the
customers of cocaine hydrochloride solutions to buy C-Topical, or were
disseminated sufficiently to the relevant purchasing public (pharmacists,
hospitals, and doctors) to constitute ‘advertising’ or ‘promotion’ within the
pharmaceutical industry.”
Alleged falsity of labeling for oral, laryngeal, or nasal
administration: Lannett argued that the mere fact of broader labeling than
Genus wasn’t actionable, and that there were no false comparative
statements.  But the FDA says that a
“topical” route is “[a]dministration to a particular spot on the outer surface
of the body[.]” Lannett’s label states that C-Topical is “indicated for the
introduction of local (topical) anesthesia of accessible mucous membranes of
the oral, laryngeal and nasal cavities.” Mucous membranes are not the outer
surface of the skin; this affirmative misrepresentation allegedly harmed Genus
by inducing customers to believe that C-Topical is different and superior to
Goprelto because of its additional routes of administration. The court agreed
that this was sufficiently pled.
Failure to affirmatively disclose unapproved status to third
parties and intermediaries: Lannett argued that it had no duty of disclosure
under the Lanham Act. It also argued that the materials it sent to the third
party intermediaries explicitly state that C-Topical lacks FDA approval and the
product information on First Databank and other price lists made this clear as
Genus didn’t state a claim for false advertising to price
lists and other third party intermediaries because there are weren’t supporting
allegations, such as the surveys Genus cited for pharmacists. The court
commented that an allegedly “buried” disclosure would “support a finding that
Lannett has correctly informed the price lists,” which I don’t quite get—is it
not plausible that price list operators would miss fine print?  Seems like an odd thing to say on a motion to
dismiss, but perhaps the court just wanted that spelled out in the allegations.
Website statements: Lannett argued that the meta description
on its C-Topical website describing the drug as generic wasn’t misleading, read
in context with Lannett’s landing page that states that the FDA has not
approved C-Topical. But Genus alleged that the landing page didn’t say that.
Instead, one had to click on a “package insert” link.  While initial interest confusion cases say
that a landing page can dispel potential trademark confusion, Lannett’s landing
page “would not disabuse a consumer of the notion that C-Topical is generic
based on the meta description.” Thus, the allegedly false statement in its
website’s meta description could be the basis for a false advertising claim
under the Lanham Act. [The court doesn’t discuss whether the description was
visible in search results—for what it’s worth, when I searched Lannett’s
current page didn’t use the term “generic.”]
General statements on Lannett’s websites about FDA
compliance: Lannett argued that its statements weren’t specific to C-Topical
and that compliance with FDA requirements was within the FDA’s primary
jurisdiction. Genus responded that Lannett’s website makes no carveout for
C-Topical and that because the FDA denied Lannett’s application to grandfather
C-Topical, Lannett’s statement of legal compliance was false.  The court found that Genus’s argument
stretched the FDA’s denial too far. The FDA rejection didn’t explicitly say
that C-Topical couldn’t be marketed, only that it couldn’t be described as
The court turned to statements about making compliant,
generic products, e.g., “[i]t’s important to remember that generic medicines
are made to meet the same standards, as provided by FDA, as brand name
medicines. Customers may rest assured that generic pharmaceuticals are produced
with the same active ingredients and attention to quality as branded versions.”
Those weren’t false, and Genus didn’t plausibly allege that the statements
actually conveyed the implied message that C-Topical was grandfathered or sold
with FDA approval, and deceived a significant portion of recipients.
However, on subsidiary Cody’s website, the statements that “Cody
Laboratories is committed to compliance with all Local, State, and Federal
requirements and regulations governing our business, especially FDA, DEA …”
and that Cody’s “active pharmaceutical ingredients are used in FDA approved
commercial drug products,” combined with its identification of “Cocaine
Hydrochloride USP” as one of those ingredients plausibly added up to an
affirmatively false or misleading statement. Genus sufficiently alleged
materiality: “FDA approval status of a prescription drug is material to
customers because approved drugs provide customers assurance as to the quality
of the product not afforded to unapproved prescription drugs.”
Appearance and content of C-Topical’s labeling and
packaging: Resembling FDA-approved drug packaging wasn’t enough to plausibly
allege deception. There weren’t sufficient allegations of intentional deception.  “[W]hen the alleged representation is not an
overt false statement but is merely misleading in context as it is here, the
pleading standard is higher and allegations that the advertising actually
conveyed the implied message and deceived a significant portion of recipients
is required.” Genus made only conclusory statements such as, “On information
and belief, Lannett’s and Cody’s packaging and packaging insert deceives, or
has the capacity to deceive, a substantial segment of customers, including
pharmacists, into believing that Lannett’s and Cody’s C-Topical has FDA approval.”
More specific allegations were mandatory without an affirmative misstatement.
The antitrust claims failed because they were antitrust
claims. Specifically for the false advertising part, even though Genus
adequately alleged that the statements were (1) clearly false, (2) clearly
material, (3) clearly likely to induce reasonable reliance, and (4) made to
buyers without knowledge of the subject matter, that’s not enough to avoid a
presumption that the effect on competition was de minimis.  The false advertising must also have (5)
continued for prolonged periods, and (6) not have been readily susceptible to
neutralization or other offset by rivals, and Genus didn’t allege those. It
wasn’t enough to allege that “Lannett makes it prohibitively difficult for customers
to find a competing product,” and that “customers” tend to repeat their last
order or search directly for [C-Topical],” making it difficult to rebut the
false promotions. It also alleged that “[w]holesalers, GPOs, and IDNs use, or
rely upon, First Databank’s CFI codes to compare products” making other
marketing methods less useful.  “But
these allegations do not show why other efforts to promote its product, other
than its attempt to get First Databank to change C-Topical’s CFI number, have
failed or would not be successful,” e.g., an ad campaign touting Goprelto as
the only FDA approved cocaine hydrochloride product, or efforts to educate
customers that C-Topical is unapproved or that its route of administration is
California FAL and UCL claims survived because the Lanham
Act claim did.
First Databank: Genus sued for false advertising of
C-Topical as having a “topical” route of administration and for contributory
false advertising based on Lannett’s primary conduct.
Direct false advertising: this wasn’t commercial advertising
or promotion as to First Databank because the price list wasn’t meant to
influence purchasers to buy First Databank’s goods or services; it was what First Databank sold. Although
the Gordon & Breach test for
“commercial advertising or promotion” likely needed modification after Lexmark to remove the requirement of
speech by a competitor, that didn’t
affect the outcome here.
Genus argued that First Databank wasn’t a “mere reference
database” because it derives millions of dollars from licensees to access the
pricing list and that it failed to identify any statements of public importance
that would make the pricing list non-commercial speech. Customers allegedly relied
on pricing lists for the purely commercial purpose of comparing products and
prices. Still, under Bolger, First
Databank’s pricing list didn’t propose a commercial transaction between First Databank and customers of cocaine
hydrochloride. Genus didn’t allege that First Databank had a monetary interest
in whether customers chose C-Topical over Goprelto. Though Genus argued that
“First Databank’s business involves a quid pro quo in which information is
provided to First Databank in exchange for First Databank utilizing the data,
including assigning its own CFI codes, and targeting and distributing it to the
relevant consumers,” that “would be true for every drug listed on the pricing
database, including Goprelto, and cannot reasonably be characterized as a quid
pro quo relationship for the purposes of this case.” Although First Databank allegedly
had an economic motivation to make representations about specific drugs in
order to maintain its market position in the pharmaceutical supply chain, that
didn’t show a profit motive in any particular representation.
Contributory false advertising: Genus argued that First
Databank contributed to Lannett’s alleged false advertising by knowingly and
materially participating in it. The court thought that contributory false
advertising couldn’t apply to non-commercial speech in any context because “the
Lanham Act, as a whole, applies only to commercial speech.”  [Side note: hotly contested or just wrong on
the TM side of the Lanham Act!  But to
the extent that we’re talking about contributory liability, we may be talking
about acts that are not even commercial speech, like ordinary contractual
language or other economic activity carried out through speech.]
Out of an abundance of caution (and perhaps an eye for
interesting arguments), the court analyzed contributory false advertising
without reference to commercial speech. In Duty Free Ams., Inc. v. Estée Lauder
Cos., 797 F.3d 1248 (11th Cir. 2015), the Eleventh Circuit held that
contributory false advertising requires a showing of (1) direct false advertising
by a third party and (2) defendant’s contribution to that conduct “either by
knowingly inducing or causing the conduct, or by materially participating in
it.” Genus satisfied (1) but not (2). 
Material participation, analogizing from trademark, can occur
where a defendant directly controlled or monitored the third party’s false
advertising, or maybe even when the defendant provides a necessary product or
service without which the false advertising would not be possible. The Eleventh
Circuit suggested looking at “the nature and extent of the communication”
between the third party and the defendant regarding the false advertising;
“whether or not the [defendant] explicitly or implicitly encouraged” the false
advertising; whether the false advertising “is serious and widespread,” making
it more likely that the defendant “kn[ew] about and condone[d] the acts”; and
whether the defendant engaged in “bad faith refusal to exercise a clear
contractual power to halt” the false advertising. Genus’s allegations didn’t
meet this standard. “The allegations in the complaint do not suggest that First
Databank’s conduct was persuasive in inducing Lannett to do what it did.”
First Databank pointed to the test used in ADT Sec. Servs.,
Inc. v. Sec. One Int’l, Inc., No. 11-cv-05149-YGR, 2012 WL 4068632 (N.D. Cal.
Sept. 14, 2012), which held that a claim for contributory false advertising
requires that the defendant: “(1) intentionally induced the primary Lanham Act
violation; or (2) continued to supply an infringing product to an infringer
with knowledge that the infringer is mislabeling the particular product
supplied.” Under that test, Genus’s claims also failed.  The tests were different, but they had the
same theory: “the party accused of contributorily infringing essentially drives
the infringing party’s conduct.” Genus’s theory was the opposite. Its
contributory false advertising claim against First Databank was dismissed with

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