Deliberate Deception In False Advertising

The term “false advertising” is used frequently in casual conversations and legal discussions. However,  demonstrating the competitive injury and lost sales required to recover damages on a false advertising claim often proves difficult in court.

Doing so just got a little bit easier thanks to a recent ruling by the U.S. Court of Appeals for the Second Circuit in Merck Eprova AG v. Gnosis S.p.A. In this case, the court clarified some presumptions that may be made in false advertising claims where deliberate deception is established.

Folate follies

Since 2002, Merck has marketed and sold a folate product called Metafolin®, which is sold to customers in bulk who use it in various finished resale products, such as vitamins and supplements. In 2006, Gnosis began marketing a synthetically produced competing folate product, Extrafolate®. Its product is significantly cheaper than Merck’s but does not provide the same nutritional benefits. Gnosis advertised Extrafolate® as a naturally occurring product. In 2007, Merck sued Gnosis for false advertising. The district court found for Merck and awarded damages, prejudgment interest and attorneys’ fees. Gnosis appealed.

Presumptions prevail

Gnosis contended that the district court’s award of damages based on a presumption of customer confusion, as well as a presumption of injury to Merck, was improper. The Second Circuit disagreed.

Under the Lanham Act, a presumption of customer confusion arises if a plaintiff can prove that:

  • Actual consumer confusion or deception occurred, or
  • The defendant’s actions were intentionally deceptive.

Citing previous rulings, the Second Circuit found that, when literal falsity of advertising is proven (as was the case here), further evidence of actual consumer confusion is not required to establish liability. Moreover, the court found that Gnosis’ use of chemical descriptions for naturally occurring folate in its advertising established implied falsity. Implied falsity combined with proof of an intention to mislead, the Second Circuit said, a presumption of deceit is appropriate and the burden of proof shifts to the defendant to rebut the presumption. According to the court, Gnosis failed to rebut. As to the presumption of injury, Gnosis argued that it was appropriate only for comparative advertising that identifies a specific competing product. The Second Circuit, however, made clear that, in a duopoloy, the presumption of injury is appropriate when deliberate deception has been proven. The court reasoned that, because Merck was the only competitor with a naturally occurring folate product, it followed that Merck had been injured by Gnosis’ deception.

Notably, the Second Circuit also held that, when willful deception is proven, the presumption of injury may be used to award the plaintiff the defendant’s profits. The presumption may further justify enhanced damages.

False advertising’s future

Going forward, the Second Circuit’s recognition of the presumptions of injury and confusion in circumstances involving deliberate deception should ease the burden of plaintiffs making false advertising claims. Moreover, plaintiffs may now be able to recover larger damages awards.