Willful False Advertiser Not Subject to Disgorgement of Profits or Injunctive Relief

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The US Court of Appeals for the Fifth Circuit affirmed a district court ruling that the defendant need not disgorge its profits or be subject to any further injunction, despite a jury finding that it had willfully falsely advertised its products for many years and profited from its deception. Retractable Technologies, Inc. v. Becton Dickinson & Company, Case No. 17-40960 (5th Cir. Mar. 26, 2019) (Higginbotham, J) (Graves, J, dissenting). The Court explained that the partial injunctive relief ordered by the district court at an earlier phase of the case and already carried out was sufficient to prevent future harm, and thus a further injunction was unwarranted. The Court also found that although some of defendant’s profits were the result of the false advertising, the plaintiff had not proved that those profits had come at the expense of the plaintiff’s profits, and thus disgorgement was not required under equity.

Initial District Court Proceeding

Retractable Technologies, Inc., (RTI) sued Becton Dickinson & Company for false advertising and antitrust violations resulting from Becton’s marketing of its “safety syringe” products, a type of syringe that automatically retracts the needle into the body after the syringe is used, to prevent injury to health care workers from accidental needlesticks. Both RTI and Becton, as well as two other competitors, sell safety syringes. Becton had falsely advertised its safety syringes as having the “world’s sharpest needle” (a proxy for patient comfort) and for having less “waste space” in its syringes than RTI’s syringes (which meant that less medicine was wasted in each use).

The jury found Becton liable on both the antitrust and false advertising claims, and awarded $113.5 million in damages for the antitrust violations. The district court trebled that figure to $352 million pursuant to the antitrust statute. The district court also found that equity favored disgorgement of Becton’s profits under the Lanham Act, but found that these profits were subsumed in the $352 million figure.

Finally, the district court issued an injunction to remedy the false advertising and antitrust claims. The injunction required Becton to immediately cease making false claims; notify various entities, including both sellers and purchasers of syringes, of the falsity of its claims; and re-train its employees and distributors. Becton asked the district court to stay the injunction pending appeal, but the district court stayed only the part of the injunction that required Becton to notify its “end users,” such as hospitals and health care providers, of the falsity of its claims. Becton complied with the remainder of the injunction.

First Fifth Circuit Appeal

Becton appealed the district court’s finding of antitrust liability, and the Fifth Circuit reversed, finding the antitrust claim legally insufficient. The Court vacated the $352 million dollar damages award, as well as the injunction, finding that it was at least partly based on the now-vacated antitrust claim.

In addressing the disgorgement issue, the Fifth Circuit agreed that “at least some part of [Becton’s] profits were attributable to the false advertising”; that Becton had willfully deceived customers; and that laches did not bar RTI’s claims. The Court remanded the disgorgement issue to the district court to determine whether and how much Becton should be required to disgorge for the Lanham Act violations.

On remand, the district court held a one-day bench trial and found that equity did not favor any disgorgement. The court also did not reinstate any part of the injunction. RTI appealed.

New Fifth Circuit Decision

In a split decision, the Fifth Circuit affirmed the district court’s holding. Regarding the injunction, the court agreed that the remedial steps that Becton had taken over the two years between the district court’s initial decision and when the Fifth Circuit vacated the injunction—including removing the false advertising from its marketing materials; notifying and re-training its employees, distributors and major purchasing groups to cease making the false claims; and posting a notice on its website—were sufficient to remedy any injury or threat of injury to RTI. RTI had not proved that the sole portion of the injunction that had been stayed (notification of end users) was necessary to prevent future harm.

Regarding the district court’s denial of disgorgement, the Fifth Circuit held that the district court was correct in finding that even though some of Becton’s profits were attributable to its false advertising claims, RTI had not shown that its own sales were diverted as a result of these false claims—despite the fact that Becton’s advertising disparaged RTI’s syringes. Specifically, RTI had not shown that a single customer saw Becton’s advertising and as a result chose to purchase Becton’s, rather than RTI’s, syringes. The Court noted that RTI and Becton were not the only competitors in the safety syringe market—there were two others as well, and RTI’s market share was only 6%. Furthermore, RTI’s market share had actually risen during the period when the false advertising was being distributed.

In dissent, Judge Graves explained that he thought the district court had erred in reweighing the diversion factor and in finding insufficient evidence of disgorgement. Graves would have remanded the case back to the district court.

Practice Note: Even though RTI demonstrated that Becton had profited from its false advertising (thus establishing liability), RTI did not prove that its own sales had been diverted (thus failing to prove its tangible harm and entitlement to an equitable remedy). The Fifth Circuit refused to presume diversion based on the jury finding that Becton’s deceit was willful, noting that such a presumption would conflate liability with entitlement to damages and constitute “an unjustified windfall” for RTI. The injunctive relief RTI had already received before the injunction was vacated was sufficient remedy for the harms caused to RTI by Becton’s willful false advertising.

RTI appears to be seeking rehearing of the Fifth Circuit’s opinion; it has obtained an extension of time to file its petition.

A plaintiff seeking disgorgement under the Lanham Act should plan to put on evidence of its lost sales attributable to the defendant’s Lanham Act violations, including thorough testimony of consumers who, as a result of defendant’s violations, purchased defendant’s products rather than plaintiff’s products. This is especially important if the plaintiff and defendant are not the sole competitors in the marketplace. The principles in this case will likely be applied by district courts in the Fifth Circuit to all Lanham Act cases, not just those involving false advertising.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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