The probiotic worm turns: previous PI loser wins $15 million in Lanham Act case

De Simone v. VSL Pharmaceuticals, Inc., No. TDC-15-1356, 2019
WL 2569574 (D. Md. Jun. 20, 2019)
Previous
discussions.  The parties compete in offering a probiotic
product; De Simone used to license his formulation to VSL, then went out on his
own.  VSL had done well in previous iterations
of this case in preventing the De Simone parties from, among other things, truthfully
referring to scientific studies of the De Simone formulation where the studies
used the then-current VSL trademark to identify the object of study, a
restriction I think violates the First Amentment.  But before a jury, De Simone did well, and the
court declined to disturb that result. The jury awarded $15 million against
Alfasigma for Lanham Act false advertising. 
De Simone’s new partner, ExeGi, sought a permanent injunction against
defendants Leadiant and Alfasigma, and they also asked for attorney’s fees,
costs, and pre- and post-judgment interest.
ExeGi asked the jury to award it nearly $28 million,
representing Alfasigma’s profits from sales of VSL#3 from July 1, 2016 through the
end of trial.  A court has discretion to
enter judgment for a “just” sum of the defendant’s profits, as long as it’s
compensation and not a penalty.  Relevant
factors, derived from trademark cases, are: (1) whether the defendant had the
intent to confuse or deceive, (2) whether sales have been diverted, (3) the
adequacy of other remedies, (4) any unreasonable delay by the plaintiff in
asserting his rights, (5) the public interest in making the misconduct
unprofitable, and (6) whether it is a case of palming off. The court declined
to disturb the jury verdict.
The evidence established that the VSL parties’ senior
management “knew that in producing a new version of VSL#3 in Italy (“Italian
VSL#3”), they had not been able to precisely replicate the original proprietary
mix,” so the false advertising was deployed with the intent to confuse or
deceive. There was testimony supporting a finding of sales diversion, and the
false advertising “had the effect of ‘palming off’ Italian VSL#3 as the same as
the original VSL#3 product now sold by ExeGi as Visbiome.”  [VSL can’t truthfully advertise based on the older
scientific studies; as I noted before, to say that ExeGi can’t use those
studies either because the trademark no longer matches the formulation is
perverse.]  ExeGi was a new company so
its own lost profits weren’t adequate compensation; it didn’t delay in asserting
its claims; there’s a public interest in not being misled “into believing that
a particular product offered to address health needs will have the same
efficacy as a trusted product when that has not been established.” However,
there wasn’t definitive evidence that differences between the formulations
rendered new VSL #3 “unsafe or clinically ineffective for all of its users,”
which strikes me as a pretty high standard (would you be happy with a
formulation switch that was unsafe/ineffective for 25% of users?).  The jury award wasn’t excessive, but was “sufficiently
substantial,” given ExeGi’s status as a startup with limited marketing
resources.
Permanent injunction: In passing off new VSL #3 as the De
Simone formulation, defendants deprived the De Simone parties “of a legitimate
competitive advantage and reduced consumers’ incentive” to purchase their
product Visbiome, which actually contains the De Simone formulation, which
constituted irreparable injury: it led consumers not even to consider
switching. The monetary remedy was inadequate compensation, because past awards
didn’t prevent the offender “from infecting the marketplace with the same or
similar claims in different advertisements in the future.” Plaintiffs argued
that Alfasigma continued to advertise a continuity between new VSL#3 and the De
Simone formulation, and ExeGi’s CEO provided uncontradicted trial testimony that
this false claim was hampering ExeGi’s ability “to leverage the benefits of the
brand,” so money was inadequate.  The balance
of hardships also favored an injunction; ExeGi, “cannot fairly compete” until
Alfasigma and Leadiant “stop[ ] infecting the marketplace with misleading
advertising.” And stopping false advertising is in the public interest,
especially for health-related products.
However, defendants wouldn’t be required to make affirmative
statements about ExeGi’s Visbiome and to issue corrective advertising. Instead,
the injunction would target defendants repeated false assertions in their
advertising that new VSL#3 continued to be composed of the De Simone formulation,
including but not limited to statements claiming that VSL#3 continues to
contain the “original proprietary blend” or the “same mix in the same
proportions.”  This was false vecause new
VSL#3 was an attempt to reverse engineer the original formulation and wasn’t an
exact replication.  The VSL parties were
also enjoined from citing any clinical study performed on the De Simone formulation
or implying that any such study was conducted on new VSL#3.  [Thought experiment: assume the FTC/FDA
argued that VSL couldn’t engage in such advertising.  What First Amendment standard would you expect
a court to employ?  Should a court accept
“they’re not the same” as enough evidence of falsity without proof that the
differences made a clinical difference?]
Attorneys’ fees: ExeGi prevailed on its false advertising
claims, and the VSL parties voluntarily dismissed their Lanham Act
trademark/false advertising claims with prejudice, making the De Simone parties
prevailing parties for all the Lanham Act claims in the case.  Still, under Octane Fitness, a fee
shift was unwarranted; “there was no unusual discrepancy in the merits of the
parties’ positions,” especially given that the VSL parties got two preliminary
injunctions. And even though the jury didn’t credit the VSL parties’ evidence on
the equivalence of the parties’ products, that didn’t mean their arguments were
frivolous or objectively unreasonable, and the jury didn’t necessarily find bad
faith.
As for the manner of litigation, neither party covered itself
in glory.  Nor was a fee award necessary
for compensation and deterrence given the damages and injunctive relief
achieved.
De Simone v. VSL Pharmaceuticals, Inc., No. TDC-15-1356, 2019
WL 2570068 (D. Md. Jun. 20, 2019)
Here’s the related Rule 50/Rule 59 decision, rejecting defendants’
motions.  Along with the $15 million to
ExeGi from Alfasigma, the jury awarded almost $1 million to De Simone from VSL
for breach of contract and almost $1.9 million for unjust enrichment from VSL
and defendant Leadiant, and rejected VSL’s counterclaim against De Simone
alleging breach of fiduciary duty.
Rule 50: A district court may overturn a jury verdict by
rendering judgment as a matter of law only if there is no “legally sufficient
evidentiary basis to find for the [prevailing] party on that issue.”  Alfasigma argued that none of its challenged
ads met all the elements of a Lanham Act claim. The claim turned largely on
three challenged items: a page of the VSL#3 website entitled “VSL#3: new
formula dairy-free,” a similar press release, and statements made on the VSL#3
Facebook page.  Viewed in the light most
favorable to ExeGi, the evidence was enough to show that, at a minimum, the webpage
satisfied all the elements of false advertising, since it claimed that the
manufacturer had “revert[ed] back to an established process that removes all
dairy while maintaining the original proprietary mix of eight strains of live
bacteria.” Likewise, Leadiant’s letter to healthcare providers, which was sent
to hundreds of doctors around the United States, also constituted false advertising
when it stated that “VSL#3 is the same quality product, containing the same
genus and species of bacteria, in the same proportions that you have come to
expect.” Both the webpage and the letter “were disseminated in a manner
sufficient to constitute commercial advertising placed in interstate commerce.”  There was sufficient evidence of literal
falsity. ExeGi submitted expert testimony that the new version of VSL#3 had
only seven strains of live bacteria, not eight, and that based on a
fermentation analysis, the two products would degrade compounds differently and
thus function differently. VSL’s president/CEO also acknowledged that in
reverse engineering the formulation, “you can determine a certain range of the
presence of the strains but you cannot precisely assess the exact quantity of
the strains,” so its scientists were “not able to give a precise indication of
the percentage of each strain[ ] contained” in VSL#3, or a “formal” range for
such proportions, but instead could only measure the amount of each strain with
a margin of error of 30 percent.
Alfasigma argued that, under the terrible In re GNC Corp.,
789 F.3d 505 (4th Cir. 2015) decision, “when the statement underlying a Lanham
Act false advertising claim is based on scientific representations, the
statement cannot be found to be literally false unless ‘all reasonable experts
in the field agree that the representations are false.’” VSL’s expert testified
that VSL#3 had eight strains of bacteria, and that the relative ratios of
strains was “indistinguishable within one percent,” but he didn’t testify that
the ratio of the strains in Italian VSL#3 were the same as the “original
proprietary mix” of the De Simone formulation.  The court misdescribed GNC as involving
a Lanham Act false advertising claim—it was a California state law claim and
thus GNC’s mangling of Lanham Act distinctions was dicta as to Lanham
Act claims—but also emphasized the language that “[w]hen litigants concede that
some reasonable and duly qualified scientific experts agree with a scientific
proposition, they cannot also argue that the proposition is ‘literally false.’
” The court here concluded: “GNC thus does not broadly hold that a false
advertising claim based on a statement grounded in science must fail if the
defendant presents an expert witness supporting its position. In the absence of
a concession that the statement is the subject of reasonable scientific debate,
that question is properly decided by the jury.” 
Indeed, the court [unnecessarily] gave a defendant-friendly
jury instruction that: “If an alleged false statement states a scientific
proposition, and you find that there is a reasonable difference of scientific
opinion about that proposition, that is, duly qualified experts in the field
have a reasonable disagreement about the accuracy or validity of the
proposition, the challenged statement is not ‘literally false.’” The jury could
reasonably conclude that to the extent there was a disagreement about the
number of strains in Italian VSL#3, or whether Italian VSL#3 contained the same
original proprietary mix as the De Simone formulation, it wasn’t a reasonable
disagreement. The plaintiffs presented other evidence and experts beyond those
already described: an expert in the field of proteomics, the study of how genes
produce proteins and what proteins they produce, stated that based on his
comparative proteomic testing of VSL#3 and Visbiome, “the two products were
very different,” with a 25 percent difference in the protein expression of new
VSL#3 and Visbiome, meaning that of the approximately 4,000 proteins identified
in the two products, about 1,000 of them were different. The expert concluded
that this difference in protein expression would “result in different
performance.” A Professor of Gut Physiology and Pediatric Gastroenterology at
Harvard Medical School who testified as an expert in the use of probiotics for
the management of gastroenterological and immunological disorders stated that
based on his review of various scientific studies comparing the De Simone formulation
with new VSL#3 that “the new formulation from Italy is not … comparable to
the formulation that is from the United States.”
Plus, the jury could have concluded that the number of
strains or the proportion of those strains were different based on “non-scientific
evidence,” to wit, regulatory filings made by VSL to Health Canada in 2013 and
2018 describing the composition of VSL#3 differently (with eight strains and
seven strains respectively).  What makes
this “non-scientific”?  GNC is
nonsense, and nonsense decisions create nonsense distinctions.
Anyway, there was also evidence that the challenged
materials were literally false when they said that the manufacturing of VSL#3
would be “moving back to “the original manufacturing facility in Italy,” and produced
“in the same facility that [VSL#3] was originally produced,” since VSL#3 had
“always” been produced for commercial sale in manufacturing facilities in the
United States.
Materiality: The false statements on the number and
proportions of strains were “plainly” material because they related to an
“inherent quality or characteristic” of VSL#3. Plaintiff’s expert testified
that new VSL#3 was not comparable to the De Simone formulation; that, based on
those differences it was “not appropriate” to conclude that Italian VSL#3 is
the same product studied in prior clinical trials; and that no doctor would prescribe
a product that was not itself the subject of clinical tests. And the jury could
reasonably infer that the false claim that new VSL#3 was being made in the
“original manufacturing facility” could influence purchasing decisions by
causing purchasers to mistakenly believe that new VSL#3 and the De Simone formulation
were actually the same and that new VSL#3 was supported by the history of
clinical trials relating to the De Simone formulation.  Because of the literal falsity, deception was
presumed.
Injury/proximate causation: The jury could reasonably find
this too. ExeGi’s CEO testified that Alfasigma’s advertising made it hard for
ExeGi to leverage the fact that it had the “real” De Simone formulation.  Plaintiff’s expert testified that the change
in manufacturing locations for VSL#3 and the move to a dairy-free formulation
meant it was neither appropriate nor accurate to claim that VSL#3 continued to
be the “same quality product containing the same genus and species of bacteria
in the same proportions that you have come to expect,” and that to make such a
claim would require VSL#3 to be subjected to efficacy testing to ensure
continuity of outcomes. In total, it was reasonable to conclude that false advertising
about the continuity between original VSL#3 and new VSL#3 was leading
physicians to continue to prescribe VSL#3, and thereby fail to prescribe
ExeGi’s product.
Alfasigma argued that ExeGi showed only correlation, not
causation.  But the evidence about
doctors’ demand for clinical trials, and evidence that it was important to dieticians
to know what strains of bacteria were in VSL#3 and whether those strains
matched up with the product that was the subject of clinical tests so that they
could make informed recommendations to her clients, was enough for the jury to
reasonably find injury/likely injury. 
Unlike in cases cited by Alfasigma, there was no evidence from
purchasers about other reasons they chose new VSL#3 over Visbiome, or
other competitors over Visbiome.  More
fundamentally, unlike in those cases, the false statements at issue weren’t
just one reason among many to buy the product; they were “passing off” of one
product for another. The jury could conclude that there was demand for the De
Simone formulation specifically and that Alfasigma falsely promised to satisfy
that demand.
The profits award was also ok.  A plaintiff who seeks defendant’s profits
must show that the defendant benefited from the false advertising, and the
evidence supported such a finding.
The court likewise upheld the unjust enrichment verdict
based on continued sales of original VSL#3 past the exclusive license date.
Under Kimble v. Marvel Entertainment, LLC, 135 S. Ct. 2401 (2015), licensing
provisions providing for “post-expiration royalties are allowable so long as
tied to a non-patent right—even when closely related to a patent.” Here, the
situation was exactly like Kimble’s example of a post-patent royalty
tied to trade secrets. De Simone’s exclusive licenses covered first his patent
and later his know-how even after the expiration of the patent; although the royalty
amount didn’t decrease post-patent, at most that would render the royalty
provision unenforceable. But the jury found defendants liable not for breach of
contract, but for unjust enrichment, because they were able to continue to sell
VSL#3 without paying royalties to De Simone for his know-how.
For similar reasons, the court declined to grant defendants’
motion for a new trial. Alfasigma argued that it was error for ExeGi’s false
advertising claim to be submitted to the jury because, as ExeGi sought
disgorgement, the claim was equitable in nature. But Dairy Queen, Inc. v. Wood,
369 U.S. 469 (1962), held that the plaintiff in a trademark infringement claim
who sought the remedy of an “equitable accounting” of the defendant’s profits
was entitled to a jury trial. “Although disgorgement may have some history in
equity, ExeGi’s claim required nothing more than the adding up of unjustly
earned profits, a task well within the ken of the jury.”

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