Nutritional Ingredient Manufacturer Held Liable for False Advertising

This posting was written by William Zale, Editor of CCH Advertising Law Guide.

Gnosis, a manufacturer of raw ingredients for nutritional companies, falsely advertised its Extrafolate product in violation of the Lanham Act by using the chemical name, abbreviation, chemical formula, and Chemical Abstracts Services registry number reserved for Merck Eprova’s purer folate ingredients, the federal district court in New York City has ruled.

Merck was entitled to an enhanced award of Gnosis’s profits, a permanent injunction including provisions for corrective advertising, and an award of attorney’s fees. The court held that Merck lacked standing under the New York deceptive practices and false advertising laws.

Folate is the B vitamin that helps the body make new healthy cells. All living beings require folates, and they are particularly useful to promote prenatal health for expectant mothers and their fetuses and to lessen the risks of some cancers and cardiovascular diseases.

Gnosis’s folate product was a mixture of the “active” S-isomer and the “inactive “R-isomer. Although Gnosis’s product was admittedly a mixture of these two isomers, Gnosis used terms and the chemical formula for the pure S-isomer product in describing its product.

Merck had standing to sue under the Lanham Act because it was injured when its competitor falsely advertised its chemically distinct product as identical to Merck’s product. In an organized advertising campaign Gnosis widely distributed materials that were literally false and that materially misrepresented the nature of what Gnosis was selling, the court determined. Gnosis also distributed brochures with literally true descriptions of a pure 6S Isomer Product that were impliedly false and intended to mislead customers in connection with Extrafolate, which was not a pure 6S isomer, the court found.

Gnosis was liable, not only for direct false advertising, but also for contributory false advertising because its false use of the common chemical name caused its distributors to advertise falsely, the court decided.

Enhanced Profits Award

The award of Gnosis’s profits was held necessary to prevent it from falsely advertising in the future. Gnosis’s conduct during its advertising campaign and litigation revealed its disdain for the law and the court. It deliberately and willfully engaged in false advertising as part of a strategy designed to gain its market share in the lucrative vitamin and nutritional supplement industry through deception, according to the court.

Though the plain language of the Lanham Act permits trebling of only of damages, an award of profits may be enhanced without identified limit to “such sum as the court shall find to be just if “the amount of the recovery based on profits is . . . inadequate, under 15 U.S.C. § 1117(a). Gnosis’s profits during the applicable period were $175,664.71. This amount was increased to $526,994.13 in order to compensate Merck for the improved market position Gnosis enjoyed solely as a result of its false advertising, the court found.

Injunctive Relief

Injunctive relief was appropriate because Merck suffered irreparable harm and the damages award, based only on sales up to March 2009, did not fully compensate Merck. Gnosis was to be (1) permanently enjoined from advertising its 6R,S Mixture Product with the names 6S-5-methyltetrahydrofolate, L-5 methyltetrahydrofolate, L-S-MTHF, or any synonyms thereof and (2) ordered to engage in a campaign of corrective advertising to be approved by the court with input from Merck.

Attorney’s Fees

An award of attorney’s fees was appropriate. Gnosis’s false advertising was willful and done in bad faith and because its litigation strategy was conducted in bad faith with senior officers, including its CEO, frustrating the litigation process at every turn, the court found.

New York Law

Merck lacked standing under the New York deceptive practices and false advertising laws. Corporate competitors have standing under the New York law if the gravamen of the complaint is consumer injury or harm to the public interest. Although Merck’s experts posited that there may be some negative health consequences associated with the R-isomer, Merck had not definitively established that these negative health consequences were also associated with the Gnosis’s 6R,S mixture product, the court determined. Instead, Merck’s allegations focused almost entirely on losses suffered by Merck itself, not the eventual—and theoretical— harm suffered by the public at large.

The opinion in Merck Eprova AG v. Gnosis S.p.A. will be reported at CCH Advertising Law Guide ¶64,835.

Grads Could Not Pursue Action Based on Law School’s Post-Graduate Job Claims

This posting was written by William Zale, Editor of CCH Advertising Law Guide.

Nine graduates of New York Law School (NYLS), who allegedly chose to attend the school based on its promotional statements as to hiring of graduates, could not pursue claims for damages under the New York deceptive practices statute and common law, a New York state trial court has held. The graduates sought to recover damages equal to the difference between the allegedly inflated tuition (currently $47,800 per year) and the “true value” of an NYLS degree.

The allegedly misleading information was disseminated for the classes entering 2005-2010. According to the complaint, the NYLS data allegedly omitted facts that would have given prospective students a more accurate picture of NYLS's post-graduation employment prospects.

For example, the graduates alleged that NYLS consistently reported that approximately 90-92 percent of its graduates secured employment within nine months of graduation, but did not report the percentage of graduates employed in part-time or temporary positions.

NYLS's statements in its marketing materials were not misleading in a material way to consumers acting reasonably, the court determined. Documentary evidence in the complaint identified sources of information regarding law school graduates' realistic employment prospects—sources readily available for reasonable consumers of legal education to research and compare various law schools for the purpose of seriously considering whether to enroll.

The students could not have reasonably relied on NYLS's alleged misrepresentations, in the court’s view. They had ample information from additional sources and had the opportunity to discover the then-existing employment prospects at each stage of their legal education.

The graduates’ theory of damages was too speculative, according to the court. This was especially true since a supervening event, the 2008 Great Recession and its aftermath, had wreaked havoc throughout the legal job market and upset the plans of most recent law graduates wherever they attended law school.

The decision is Gomez-Jimenez v. New York Law School, CCH Advertising Law ¶64,652