In re C2R Global Manufacturing, Inc., No. 18-30182-beh,
2021 WL 1347193 (E.D. Wis. Bkrcy. Mar. 30, 2021)
Previous denial
of injunctive relief. There are a number of opinions in
this case—the judge spent time on this rather unusual false advertising
analysis in a bankruptcy case, including taking care with the expert evidence.
I’m only going to discuss a few highlights, but it makes useful reading for
those seeking a review of case law on admissibility for experts in false
advertising cases.
The parties compete in the market for drug disposal
devices. Plaintiff Verde designated its current CEO, Sundby, as a non-retained
expert witness. C2R sought to exclude his testimony with respect to any
opinions about “consumer perceptions,” that is to say, consumers’ mental
impressions when presented with C2R’s advertisements, including how consumers
are likely to interpret those advertisements, whether the advertisements are
likely to confuse or deceive consumers, and whether consumers are likely to
rely on the advertisements in making purchasing decisions. Examples from his
declaration: “[C]ustomers rely and depend on drug deactivation products to
actually deactivate the pills and tablets that the products are advertised as
being able to deactivate.” “[T]he drug-deactivation market as a whole is harmed
by C2R’s continued misrepresentations regarding the Rx Destroyer™ product
capacity” because “when C2R advertises a product using activated carbon that
does not work as represented, that casts doubt on all products using activated
carbon” and “customers lose faith that any products are capable of deactivating
medications as advertised.” “Cost is a central factor in the purchasing
decision and it is directly related to the capacity of the products available
to the customer.” “As a result”—because consumers read C2R’s capacity
advertisements to indicate that Rx Destroyer products deactivate medication at
a lower price-per-pill than the Deterra system—“consumers choose to purchase RX
Destroyer™ rather than Deterra.”
The court granted C2R’s motion in part, and reserved
ruling on the remainder until trial, which would be to the bench, making the Daubert
motion more of a matter of allowing the parties to prepare for trial more
efficiently than of protecting a jury.
Sundby had expertise in the drug disposal industry.
Lanham Act cases (primarily trademark and trade dress infringement cases) have
“excluded expert opinions on customer perception—opinions such as what a word
in an advertisement means, whether customers are (or are not) likely to be
misled or confused by advertising, and whether customers would recognize a
party’s trade dress—when the expert was an industry expert, but not a
perception expert, and therefore did not base his or her opinion on a valid
consumer survey or similar empirical data.”
Verde rejoined that an expert need not conduct consumer
surveys or consumer market research before offering any opinions related to
customer reliance or perceptions. While this is true, it doesn’t mean that “an
expert may offer his own opinions about likely consumer deception or consumer
mental impressions in place of a properly conducted consumer survey.” Verde
argued that surveys/market research were less relevant “where the customers at issue are not
predominantly individual consumers,” but instead are organizations and
institutions who make purchasing decisions through businesspeople, nurses,
doctors, pharmacists, and public health professionals. But the case law is to
the contrary. It is true that an expert can be qualified purely based on
experience in the industry, but that didn’t mean Sundby could testify about
everything. He wasn’t the same as a consumer or dealer testifying about their
own deception.
Thus, Sundby was not qualified to offer opinions on
consumer perceptions— “opinions typically offered by experts with training and
experience in conducting and interpreting consumer surveys.” This covered at
least his statements that C2R’s capacity overstatements led consumers to think
that C2R’s product had a lower price per pill than Verde’s system, and that “as
a result,” consumers chose the former over the latter. “Both of these
assumptions involve predictions about a consumer’s thoughts and impressions
after reviewing C2R’s advertisements—in other words, how consumers perceive the
statements at issue in this litigation.” However, the other statements in the
declaration were about the effect of false advertising on the drug deactivation
market in general (and Verde in particular), and product features relevant to
customer purchasing decisions. “Sundby’s lack of expertise in consumer
perceptions or behavioral linguistics is not, by itself, a reason to exclude
these additional opinions.” (Note that the second—what’s material to consumers—is
a matter of consumer reaction, but one that people in the industry might be
particularly able to know in general.)
Similar analysis applied to the reliability of his
opinions:
Sundby can testify about his own experiences with
customers over the years—provided such testimony is not inadmissible for other
reasons—but Verde has not persuaded the Court that any opinions Sundby intends
to offer about the likely thoughts or perceptions of Verde’s target consumers
are sufficiently reliable to be admitted. To the extent Sundby intends to rely
on his “industry experience” rather than a consumer survey to opine on likely
consumer perceptions—and, more particularly, that consumers in general would
interpret “capacity” in C2R’s advertisements to mean “capacity to deactivate”
and, as a result, would be more inclined to purchase C2R’s products over the
competition—Sundby has not adequately explained why his chosen methodology
(apparently based on experience including conversations with others in the
industry) is appropriate or reliable.
Sundby could offer testimony “on subsidiary factual
issues relevant to the question of deception, such as typical advertising and
marketing channels in the industry, the types of consumers in the target
market, the sales process, and other circumstances helpful to providing a full
context for the advertising at issue—provided that Sundby is able to lay a
proper foundation for such testimony at trial.” For the same reasons, he could
testify on the effect of false advertising on the drug deactivation market, or
product features relevant to customer purchasing decisions, at least for now
and subject to cross-examination.
Nor could Sundby offer the excluded testimony as lay
testimony, because that would exceed the scope of his personal perceptions. He
could, however, offer “specific examples of consumer deception that he has
witnessed” along with the admissible testimony described above, if given a
proper foundation.
In re C2R Global Manufacturing, Inc., No.
18-30182-beh, 2021 WL 1347160 (E.D. Wis. Bkrcy. Mar. 30, 2021)
Here, Verde won partial summary judgment on the
literal falsity of certain capacity statements about its competitor’s drug
disposal product.
C2R’s advertisements claimed that the Rx Destroyer
“destroys” and “[d]issolves, adsorbs, and neutralizes” medications. C2R also
advertised that its products meet DEA disposal standards by making drugs
“scientifically irretrievable.” And it advertised specific pill capacities by
size, though sometimes with asterisks saying this was approximate. Its capacity
claims were based on calculations and other tests of activated carbon in the
medical literature, not on actual testing with pharmaceuticals, which it deemed
impractical given the variety out there. Unfortunately, its expert’s
calculations assumed that the products contained more activated carbon than
they actually do, and plaintiff Verde had a number of other criticisms. Verde’s
Director of R&D also conducted multiple tests of C2R’s products using
different drugs and concluded that they were “incapable of deactivating
medications up to their capacity claims.” After litigation began, C2R also
retained another expert, whose tests showed varying levels of adsorption, but
who also concluded that there were other deactivating ingredients in the
products besides activated carbon.
C2R also posted a document on its website appearing
to summarize the results of a test conducted on C2R’s NarcGone product, by an
unidentified lab described only as DEA-certified. According to this one-page
summary, “Based upon 5 grams methamphetamine, 65% adsorbed in 2 hours, 86%
adsorbed in 24 hours, 94% adsorbed in 4 days and 100% in 7 days.” C2R omitted
additional test results: “When 12.5 grams of methamphetamine was added 70% was
absorbed in 7 days.” When relevant witnesses were questioned, C2R was not able
to provide additional detail about the testing.
Verde argued that the challenged advertisements
conveyed the message that C2R’s products had the capacity to deactivate or
neutralize approximate amounts of medication and that this deactivation or
neutralization was accomplished by adsorption to activated carbon, regardless
of the medication placed inside—that is, regardless of whether a given sized
pill contained 5 mg of drug or 200 mg. C2R instead argued that its ads conveyed
that its products render approximately the stated number of pills “safe for
disposal” (not fully deactivated) using a variety of mechanisms, activated
carbon adsorption being one. Some of its advertisements—not all of which
contained “capacity” representations—stated that the products contain, and
operate using, more than just activated carbon. So, C2R said, its ads were
ambiguous about what they did. C2R argued that its ads were also ambiguous
about pill size, and that it was more plausible to read the capacity representations
as referencing 5 mg or 30 mg tablets, rather than 200 mg tablets. Its pre-suit
expert made assumptions based on 5 mg and 30 mg pill sizes, and his
calculations were linked on its website and sent to customers with C2R’s
advertising.
The court agreed with Verde that some of the ads
relied on claims about the activated carbon alone, not the accompanying liquid,
but not all the ads. As for pill size, the evidence didn’t show that the
expert’s assumptions about pill size were conveyed with each ad, and even if a
link to those assumptions were provided, “it would be insufficient to change
the plain language of the advertisements at issue—particularly the former
‘Q&A’ webpage, which expressly states that ‘[c]apacity [is] based upon
200mg Advil™ tablet[s].’” C2R used to advertise that “[c]ombinations of
medications added to the Rx Destroyer are limitless.” “C2R now wants to walk
back the unqualified language of its advertisements, urging the Court to find
its message equivocal…. That the statement at issue is broad—and not limited to
pill sizes of 30 mg or less, as C2R now may wish it were—does not make it
ambiguous.”
However, ads about pill “capacity” or how much a
product “holds” were more ambiguous, since the ads didn’t explicitly define
capacity or hold to mean ability to adsorb/deactivate. But did they necessarily
imply adsorption/deactivation? The Seventh Circuit has neither adopted or
repudiated the doctrine. [I’d say that by emphasizing what an ad means to any
“linguistically competent” person, it has adopted the doctrine, but sure.] The
doctrine has never been rejected by any other court of appeals, and is readily
used in district courts around the country. The court here would use it, but
carefully: there must be no more than one plausible reading for necessary
implication to apply.
Relevant considerations include the surrounding
context, which includes the nature of the business at issue and the product
being sold. (Citing Avis Rent A Car System, Inc. v. Hertz Corp., 782 F.2d 381
(2d Cir. 1986), for the nature-of-the-business/product factors; that case
wasn’t explicitly a necessary implication case, but falsity of the claim “Hertz
has more new cars than Avis has new cars” did turn on whether you counted only
cars for rent or also counted cars that were available for sale after their
rental lives ended.)
“Here, the text of the advertisements that surrounds
the ‘capacity claims,’ as well as the nature and purpose of the Rx Destroyer
products, provide relevant context for the Court’s analysis.” The court
concluded that, with respect to one webpages, “[t]he clarity of the statement
of purpose, combined with the statement of capacity (using the word ‘hold’),
conveys the single message that the product will perform its advertised
function—neutralization and adsorption of active medication ingredients by
activated carbon—up to the stated capacity.” Nothing in the ad suggested that
“hold” meant, for example, mere storage—in context, it meant neutralization.
Other pages/flyers weren’t quite as clear.
Verde didn’t show that consumers would see the flyers
together with other C2R ads. Nor has Verde offered any evidence of the nature
and sophistication (or lack thereof) of the “audience to which the statement[s]
[are] addressed.” Thus, the court wouldn’t assume or infer that consumers
reading the flyers would go to the website and learn more that would put the
pieces together for them—not for literal falsity by necessary implication.
Were those literal messages false? The initial predictive model “cannot prove or
disprove the falsity of C2R’s capacity claims; they merely predict, rather than
measure, the actual performance of the Rx Destroyer products.” So his
predictions wouldn’t allow a reasonable factfinder to find that the products
do, in fact, have the represented capacities. In a footnote, the court
commented that it would be different if the ads had included an express
disclaimer within the body of the advertisement, e.g., “product capacity
numbers are based on theoretical modeling performed by Dr. Henry Nowicki, in
which he predicts adsorptive capacity of the Rx Destroyer carbon based on pills
of up to 30 mg.”
However, it wasn’t enough for summary judgment that Sudafed
and Claritin tests showed deactivation levels of only 59% and 68%,
respectively. These two tests standing alone weren’t enough when other (hotly
contested) test results of ibuprofen, Advil, and aspirin showed 90%
deactivation.
It was concerning that the math showed that there
wasn’t enough carbon to adsorb the advertised pill capacity when using 200mg
pills, which was one of the pill sizes C2R chose to advertise. Still, there
wasn’t literal falsity. (I really don’t see why the 200mg claim wasn’t
literally false.)
Lesson: Even strong claims can fail to win summary
judgment.
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Rebecca Tushnet 