lack of irreparable harm dooms injunction against false advertising of drug disposal product

In re C2R Global
Manufacturing, Inc., No. 18-30182-beh, 2020 WL 5941330 (E.D. Wisc. Bkcy Oct. 6,

Verde sought a preliminary
injunction against C2R, its direct competitor in the drug disposal market, from
engaging in false and misleading advertising in violation of the Lanham Act,
and an order requiring corrective advertising. Despite likely success on the
merits, lack of irreparable injury precluded an injunction. The court applied eBay,
as it predicted the Seventh Circuit would, and also relied on Verde’s delay.

Verde sued C2R in
March 2018 for false advertising and patent infringement; a few months later,
C2R filed for Chapter 11 protection, and Verde timely filed a nearly $7 million
proof of claim. After a Markman hearing and decision, the parties settled their
patent claims. In February 2020, Verde sought both preliminary and permanent
injunctive relief; the court considers only the former.

The technical
details are complex, but the core of the claim is that C2R falsely advertised
how much drug content its products could render inert. Although it removed
specific pill number claims from its website, at the time of the motion it
still included the statement that its containers could be filled until contents
are two inches from the cap, which was allegedly false. C2R based its claims on
various analogies/evidence about the product components/similar competitors; Verde’s tests of C2R’s product yielded at most a 30% adsorption rate, and its experts persuasively critiqued the assumptions on which C2R’s claims relied.

After Verde sued,
C2R commissioned independent testing that found that the Rx Destroyer
deactivated 90-99% of the pills in his experiments. Among other criticisms, however, Verde’s expert critiqued the testing
methodology, which included filtering out material that included drug residue
(paste), which (Verde’s expert argued) improperly altered the drug deactivation
conclusion, and critiqued C2R’s expert’s technique of constant agitation, which
was both not realistic and not consistent with the product use instructions.

Verde argued that,
based on the testimony of its Chairman and CEO, “if unused
drugs are tossed in the trash, they risk being inadvertently diverted by
neighbors, children or pets,” and that the “toilet flushing of drugs is now
also discouraged, owing to environmental contamination risk to the nation’s
watershed.” He asserted that customers purchase C2R’s product over Verde’s
because the Rx Destroyer cost-per-pill appears lower due to C2R’s capacity
representations compared to its price point. In addition, he opined that “when
C2R advertises a product using activated carbon that does not work as
represented, that casts doubt on all products using activated carbon.”

C2R, by contrast,
argued that Verde wasn’t its primary competitor, though it acknowledged that
the fact that Rx Destroyer has a larger capacity is a competitive advantage
over Verde, or over anything else on the market. C2R has advertised Rx
Destroyer as being more affordable on a cost-per-pill basis. The parties also
submitted dueling declarations about whether the damages were merely financial
and not irreparable. C2R’s expert, for example, found
meaningful customer overlap, “noting that Verde does not offer product data
sheets that are required by many hospitals, and thus cannot sell to those
entities, while C2R does provide such data sheets and has such hospitals as
customers.” Plus, he indicated that “Verde has enjoyed faster growth and higher
annual revenues than C2R during the relevant time period,” suggesting lack of

Verde’s expert
disagreed that financial evidence enabling partial quantification of the
damages was the same as an adequate remedy at law. [Can a company in bankruptcy
be assumed to be able to provide an adequate remedy at law?] Verde identified
twenty-five customers to which both Verde and C2R sell. And Verde’s growth
could have been greater: the entire market for drug disposal products offered
by these parties “dramatically increased during the 2015-2019 period.”

On the merits, when
advertising explicitly or implicitly represents that tests prove the claim, a
plaintiff can prevail by showing that the tests did not establish the
proposition for which they were cited. Even if there is no industry standard
test for deactivation capacity, “when advertisements purport to rely on
testing, the presence or absence of a government certified test is not
relevant.” Predicting capacity for drug disposal products may be challenging, “that
does not absolve the manufacturer—here, C2R—from fashioning truthful
advertising statements, even if on relatively short notice.” Verde showed
likely success on the merits.

Irreparable harm:
First, no presumption applies; the Seventh Circuit has yet to say so in the
Lanham Act context but likely would apply eBay, given that it has
already done so in copyright cases. “But certainly, all of the cases cited
above recognize the particular difficulty in assessing harm when a competitor
engages in false advertising.”

Verde argued: (1)
the parties compete directly; (2) effectiveness and cost are two of the most
important factors in a purchase decision; and (3) the false representations
were “critical” to effectiveness and cost. However, the Chair/CEO’s testimony
didn’t identify specific facts such as survey data or sales reports to show
lost sales, and if his opinions were based on statements made to him by
customers, those statements would be inadmissible hearsay. “Courts in this
circuit consistently have rejected vague summaries of hearsay statements by
unidentified consumers.”  His testimony
didn’t meet the requirements of Rule 701 for non-expert testimony.

The fact that the
parties compete didn’t prove harm. This wasn’t express comparative advertising,
and the record didn’t show a two-party market. Trademark cases are different
because confusion about source can show irreparable harm because of lost
control over reputation; harm to reputation is inherently intangible/impossible
to quantify. [Sigh.]

Verde’s expert
couldn’t help because he didn’t provide alternative evidence of harm, just
criticized C2R’s expert. It wasn’t enough to infer that any customers who knew
of both companies would purchase more from Verde absent C2R’s advertising.

Separately, delay
proved lack of irreparable harm. The pertinent measurement is from the time the
plaintiff discovers the trademark infringement (or false advertising) until the
injunctive relief motion is filed, or from the time plaintiff first sent its
cease-and-desist letter until filing its motion. “Here, that time frame would
be June 2014 to January 2020, or 67 months.” Verde argued that, while it had
experimental evidence undermining C2R’s capacity claims prior to filing suit,
it had not yet conducted any discovery, and it moved promptly but prudently
only after completing that discovery. Verde also argued that “it was not in a
position at the time of its earlier testing to expend significant funds on
legal fees in pursuit of litigation.”

But this delay was “longer
than prudence can bear.” Verde had test results for years. “[T]he span of time
during which Verde at least possessed test results discrediting C2R’s website
statements is far beyond any duration accepted by courts as reasonable and
could well have allowed C2R to relax its defenses and continue its advertising
expenditures.” Its reference to the costs of litigation was “an internal
cost-benefit assessment Verde made, and when weighed against the amount of time
between the first testing in 2014 and the motion in 2020, does not justify the
substantial delay in seeking a preliminary injunction.”

Belt and suspenders:
It hadn’t been shown that Verde lacked an adequate remedy at law [which I still
wonder about—C2R is in bankruptcy!]. Also, harm to the environment or public
safety “is not of a degree warranting a preliminary injunction.” Indeed,
official websites say that putting unused medications in the trash is not ideal
but don’t definitely nix it, mitigating the public interest at this stage.

from Blogger

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