What a Tangled Web We Weave, When First We Practice to Deceive: Second Circuit Holds that “Deliberate Deception” Creates Legal Presumption of Consumer Confusion and Injury in a Two-Player Market

by Proskauer - Advertising Law
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On July 29, the Second Circuit clarified its view that, in a two-player market, willfully deceptive advertising – even non-comparative advertising – creates a legal presumption of consumer confusion and injury, applicable to determination of both liability and damages. This emphatic opinion makes plain the peril that follows a finding that defendant willfully engaged in false or deceptive advertising.

The parties to this case – Merck and Gnosis – are the only two commercial manufacturers of folate, a nutritional compound used in dietary supplements. Folate exists in two forms: a naturally occurring pure form and a synthetic mixed form. Pure folate retails for vastly more per kilo than its mixed cousin because pure folate is far more beneficial to human health and is extracted, with relative difficulty, from organic material.

Two features of Gnosis’ promotional materials prompted Merck to sue for false advertising under the Lanham Act. First, Gnosis misused a scientific term denoting pure folate to describe its mixed product. The district court deemed this a literally false misrepresentation. Second, Gnosis accurately, but misleadingly, described the chemical properties of pure folate, a product it was not selling, in promotional materials for its mixed compound. The district court found this claim to be impliedly false.

Crucially, the district court found that these allusions to the natural product were manifestations of a “concerted and organized campaign to deceive consumers” and, from this finding, established a presumption of actual injury and consumer confusion. Ultimately, this finding of intentional deception tipped the scale firmly against Gnosis, which, following a bench trial, ended up liable for over $500,000 in damages, more than $2 million in attorney’s fees and costs (with prejudgment interest) and responsible for a corrective advertising campaign.

On appeal, the Second Circuit confirmed that it was appropriate to presume injury to Merck (injury being a necessary element of liability under 43(a)). In the Second Circuit’s words, “[b]ecause its only competitor for such a pure product at the time was Merck, it follows that Merck was damaged by Gnosis’ false advertising of a mixed product as a pure one.” Drawing an analogy with comparative advertising cases, the Court of Appeals reasoned that a company attempting to deceive consumers in a two-player market necessarily harms its only competitor. The Court also clarified that injury may be presumed from deceptive intent even when the advertisements do not mention the competitor.

The Second Circuit also carried over its presumptions of consumer confusion and actual harm into its reckoning of damages. The Court held that “In a false advertising case such as this one, where the parties are direct competitors in a two player market, and where literal falsity and willful, deliberate deception have been proved, the presumptions of injury and consumer confusion may be used for the purposes of awarding both injunctive relief and monetary damages to a successful plaintiff.” Quoting a law review article, the Second Circuit further held that, upon a showing of willful falsity, a plaintiff is eligible for damages and injunctive relief “regardless of the extent of impact on consumer purchasing decisions.” Ultimately, the deception at issue was so egregious that the Second Circuit affirmed the award of trebled profits.

This case is important because the Second Circuit stated, in no uncertain terms, that false advertising in a two-player market will be treated like comparative advertising. As such, willful deception in such a market brings with it presumptions of injury and damages.

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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