Even more cocaine

Genus Lifesciences Inc. v. Lannett Company, Inc., 2019 WL
4168958, No. 18-cv-07603-WHO (N.D. Cal. Sept. 3, 2019)
Pleading survey evidence of misleadingness can be pretty helpful, but it can’t help you past theories that target the wrong defendant.
of previous opinion
. Genus alleged that its competitors in the market for
cocaine hydrochloride nasal spray, defendants Lannett and Cody (Lannett’s
wholly owned subsidiary), falsely advertised their unapproved product. Genus
also sued First Databank, a pharmaceutical pricing list company. The court
previously found that some of Genus’s claims against Lannett and Cody were
plausibly stated but that none of its claims against First Databank were; Genus
filed an amended complaint and a motion for reconsideration, neither of which
changed the basic situation.
Additional allegations in the amended complaint: Genus conducted
a survey of Lannett’s customers, which showed that 73.4% of them falsely
believe that C-Topical is FDA approved and that 70.4% falsely believe that
Lannett only sells FDA approved products. It also alleged new survey data
related to whether C-Topical’s unapproved status is material.  Genus added new false advertising allegations
based on Lannett ads describing C-Topical as a “pre-1998” drug and Lannett’s
product catalog identification of C-Topical as generic, as well as other
allegations that don’t turn out to matter.
The previous order held, among many other things, that Genus
could plead false advertising based on the false implication that C-Topical is
FDA-approved using survey data that 91% of pharmacists believe that all
products pharmacists dispense are FDA approved, but statements in SEC filings
and investor calls that C-Topical is “grandfathered” or sold under a
“preliminary new drug application” couldn’t support a Lanham Act claim without
specific allegations that they were made for the purpose of influencing
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.  Finally, the
appearance and content of C-Topical’s labeling and packaging didn’t support a
Lanham Act claim because they weren’t literally false and Genus failed to allege
that they actually conveyed the implied message that C-Topical was FDA approved
to a significant number of consumers.
Genus now argued that its claim wasn’t based on the
statements in SEC filings or investor calls alone, but rather in combination
with the advertisements describing C-Topical as a “pre-1938” product, which would
render the statements contained in the SEC filings and investor calls
actionable. But “Lanham Act claims must be evaluated on a
statement-by-statement basis.”  Factfinders
must analyze the message conveyed in context, but courts “may not assume
context” and shouldn’t necessarily assume that consumers would be exposed to
every ad in a campaign. “There is no indication that consumers would have
observed the SEC filings and statements in the investor calls along with the
pre-1938 ads.” Thus, the SEC filings/investor calls remained outside the scope
of the Lanham Act.
As for the “pre-1938” statement itself, Lannett disclosed that “Cocaine HCL
is a pre-1938 drug that has not been approved by the FDA” and ENT Journal ads
stated that Cocaine HCL “has not been proven safe and effective by the FDA.”  The court agreed that the complaint
sufficiently alleged meaning: Genus alleged “that the only reason Lannett would
advertise C-Topical as ‘pre-1938,’ or that they had submitted an NDA, would be
to convince consumers that C-Topical is an unapproved ‘grandfathered’ drug
product or otherwise authorized by FDA.”
(Separately, Genus argued that “C-Topical is a pre-1938
drug” and “Cocaine HCL has not been proven safe and effective by FDA” were
literally false because the approval of its competing Goprelto product shows
that Cocaine HCL has been proven safe and effective by the FDA. Those
claims survived.)
Genus argued that Lannett’s immateriality argument based on
its disclaimers failed, because a “pre-1938” drug, or one that has a submitted
NDA, is FDA-authorized even though it is not FDA approved, so Lannett’s ads
still falsely suggested FDA authorization. And on materiality, Genus alleged
that the FDA approval status of a prescription drug is material to customers “since
approved drugs provide customers assurance concerning the quality of the
product not afforded to unapproved prescription drugs.” Genus also pointed to
its survey evidence allegedly showing that the majority of Lannett’s customers
would not buy C-Topical if they knew it was unapproved. However, that didn’t
show that consumers care whether the FDA authorizes a manufacturer to
sell an unapproved drug (though presumably they would be less likely to buy it anyway if they understood that it was unapproved). Just because consumers care about FDA
approval doesn’t mean they care about FDA authorization. Anyway, the claim
based on the pre-1938 ads was dismissed with leave to amend for failure to
allege materiality.
On C-Topical’s labeling and packaging: Genus previously
alleged that there were misleading similarities between it and the labeling and
packaging of an FDA approved drug. Genus now pled that it conducted a survey of
Lannett’s customers and alleged that 73.4% of them falsely believed that
C-Topical was FDA approved after reviewing its packaging. Lannett argued that
this allegation was still insufficient because Genus didn’t allege that specific
information on the label or package was false. 
Using Mead Johnson, Lannett argued that Genus was at best
alleging misunderstanding, and that a survey can’t be used to ascribe a
“misleading” meaning to an otherwise accurate statement. Further, it argued that
it was required by federal law to include the various statements on the
packaging and label.
The court found that it was sufficient to allege that the
overall combination of C-Topical’s packaging misled consumers to believe that
it is an FDA approved product. Mead Johnson was inapposite. “Genus is
not using survey data to parse a particular phrase and establish that it is
misleading.” And the alleged federal requirements weren’t controlling.  Lannett’s “supposed dilemma could be remedied
by including a statement that C-Topical is not FDA-approved without running
afoul of FDA labelling requirements.”
This time, Genus successfully pled that general statements
on Lannett’s website that it complied with FDA regulatory requirements were
misleading because they conveyed the implied message that C-Topical was
grandfathered or sold with FDA approval and deceived a significant portion of
recipients. Genus pled that survey evidence showed that after reviewing
Lannett’s homepage for its http://www.lannett.com website, 70.4% of Lannett’s
customers falsely believed that Lannett sells only drugs that are FDA approved.
 (Verbatims to “What makes you say
Lannett sells only drugs that are FDA approved?” included “Website mentions
generic medications, giving impression that they are selling already FDA
approved pharmaceuticals” and “based on the first page, it is a generic drug
manufacturer. Generic drugs still require FDA approval.”)
Statements in Lannett’s catalog characterizing C-Topical as “generic,”
however, made until 2016, couldn’t have harmed Genus because Genus didn’t enter
the market until after the catalogs were distributed. Thus, without pleading
more of an explanation of harm, the catalogs didn’t plausibly proximately cause
“an injury to a commercial interest in sales or business reputation[.]” Genus
argued that was able to find Lannett’s 2016 catalog as late as April 2019 and
that Lannett hadn’t produced more recent marketing materials.  But that didn’t successfully plead that the
catalogs were currently used in advertising or promotion.
The court also got rid of Sherman Act claims based on
alleged false advertising. For reasons that, whatever their formal
justification, clearly depend on the treble damages available in antitrust
claims, antitrust law generally refuses to consider false advertising to constitute
an antitrust violation. Thus, in antitrust cases, false advertising is presumed
to have a de minimis effect on competitition. To implicate antitrust law, false
advertising must be explicitly false, clearly material, clearly
reliance-inducing, directed at buyers who don’t know the subject matter, long-lasting,
and not subject to neutralization (perhaps by counteradvertising) or other
measures by competitors.  Thus, Genus had
to explain why it couldn’t have engaged in its own advertising promoting its
product as the only FDA approved cocaine hydrochloride product and telling
customers that C-Topical is unapproved or that its route of administration is
misleading.  Genus argued that coutneradvertising
wouldn’t work because the false and misleading statements were being presented
to the market through third-party price lists that appeared to provide
objective and unbiased information. The court disagreed. The main previous case
invoking the third party principle involved a third party, a swimming coach,
who disparaged the quality of the plaintiff’s swim gear.  But here there was no disparagement of Genus’s
product, only allegedly false description of C-Topical.  So it would be easier to rebut.  Nor did it successfully plead that expending
time and money on neutralizing the false advertising would be a
disproportionate burden. And its own pleadings on materiality suggested that an
ad campaign on this theme would be effective, given that roughly 60% of Lannett
customers thought that approval would influence a purchasing decision.
Genus’s amendments to its complaint also didn’t save its
claims against First Databank because there was still no sufficient allegation
that First Databank was engaging in commercial speech when it listed C-Topical.  There was still no facts supporting a finding
that First Databank had any monetary interest in whether customers of cocaine
hydrochloride choose to buy C-Topical rather than Goprelto.
Genus alleged that First Databank falsely advertised that
its database is “reliable” and “accurate.” But that was puffery, and anyway
there was no causal link plausibly alleged between those general statements and
Genus’s alleged injuries sufficient to confer standing on Genus.
Nor did the court reconsider its conclusions on Genus’s contributory
false advertising claim. Genus argued that, under VHT, Inc. v. Zillow Group,
Inc., 918 F.3d 723 (9th Cir. 2019), all that was required for contributory
liability was “material contribution” to the legal violation. Under that
standard, First Databank allegedly controlled the means of dissemination and
was a main channel for Lannett’s false claims. But the court rejected the
copyright treatment. “To do so would open up a vast and currently non-existent
scope of liability for all publishers of non-commercial information.”  [It’s all right for copyright owners, though!] 

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