Health Law Daily Parts of Genus’s false advertising suit against Lannett involving a nasal drug survive motion to dismiss
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Tuesday, May 7, 2019

Parts of Genus’s false advertising suit against Lannett involving a nasal drug survive motion to dismiss

By Robert B. Barnett Jr, J.D.

Several of Genus Lifesciences’s false advertising claims involving a nasal anesthesia drug sufficiently stated a cause of action against Lannett Company, however, Genus’s monopolization claims under the Sherman Act was dismissed.

In a suit by Genus Lifesciences alleging that Lannett Company monopolized the market for a nasal anesthesia drug through false advertising and deceptive practices, several of Genus’s false advertising claims adequately stated a claim under the Lanham Act, the federal district court in San Francisco has ruled. The court also, however, dismissed without prejudice Genus’s monopolization claims under the Sherman Act primarily because Genus failed to establish that Lannett used its monopoly power to produce an anticompetitive effect that harmed consumers. In addition, the court dismissed the defendant First Databank, a pricing list company, from the lawsuit because its pricing list did qualify as “commercial speech” under the Lanham Act (Genus Lifesciences Inc. v. Lannett Co., Inc., May 3, 2019, Orrick, W.).

Lannett and its wholly owned subsidiary Cody Laboratories began in 2008 manufacturing and selling C-Topical, a cocaine hydrochloride solution for use in various nasal procedures. It was the only drug in the market from 2012 until 2017, when Genus launched Goprelto, after receiving FDA approval. The FDA awarded Genus new chemical exclusivity barring others from seeking FDA approval until December 14, 2022. C-Topical does not have FDA approval, and therein lied the beginning of the dispute. Genus asserted that Lannett has at various times asserted that C-Topical was FDA approved, was grandfathered in when the FDA changed its rules, is a generic version of Goprelto, and is a “preliminary new drug application” product, none of which are true. Even after Goprelto launched as the only FDA-approved drug on the market, C-Topical still maintains a 99% market share, which Genus asserted is the result of Lannett’s deceptive practices. Genus sued Lannett, Cody, and First Databank, alleging claims under the Lanham Act for false advertising, under the Sherman Act for monopolization, and under California state law for false advertising and unfair competition. Lannett, Cody, and First Databank all filed motions to dismiss.

Lanham Act. Genus’s Lanham Act claims actually encompassed false advertising in multiple forms: (1) statements made in SEC filings, (2) misstatements on labels, (3) misstatements made to third-party buyers of C-Topical, (4) misstatements on its websites, and (5) misleading packaging. Apparently, Lannett never or rarely assertively stated that C-Topical was FDA approved. Instead, the complaint claimed that Lannett falsely created that impression by a variety of means, including omitting that fact from product descriptions, burying the fact in the fine print, or describing the product in ways that implied that it was FDA approved. Lannett argued that a Lanham Act claim requires the affirmative statements. The court, however, categorically rejected that argument, noting that the Lanham Act permits claims that, although not literally false, mislead, confuse, or deceive consumers. A false implication that a drug is FDA approved is enough to state a false advertising claim when combined with allegations that (1) buyers believe that all prescribed drugs on price lists are FDA approved, and (2) 91% of pharmacists are confused about whether such drugs are FDA approved. Thus, the court denied the motion to dismiss to the extent that a claim satisfied those requirements. The court then turned to each of various modes of communication to determine if they misled, confused, or deceived consumers.

SEC filings. Lannett had made statements that C-Topical was grandfathered in or was sold under a “preliminary new drug application” in SEC filings and on investor calls. Courts have held that SEC filings cannot form the basis of a Lanham Act false advertising claim, the court noted. The court determined that statements made on investor calls are indistinguishable from SEC filings for this purpose. It is possible, the court said, that a statement in an SEC filing could be actionable, but only if accompanied by specific allegations that they were made for the purpose of influencing customers to buy C-Topical or were sufficiently disseminated to the purchasing public. In the absence of those specific allegations, the court dismissed without prejudice the Lanham Act claims involving the SEC filings and the investor calls.

Labels. C-Topical’s label stated that the product was for “topical” uses. The word “topical” is defined to mean for use on the outer surface of the body. The label, however, also stated that the product was indicated for oral, laryngeal, and nasal cavities, which was inaccurate given the “topical” description. The false statement gives an impression of superiority to Goprelto, which is FDA approved only for nasal use. The court concluded that the statement was false because the nose, mouth, and larynx are clearly not on the outside of the body. As a result, the court denied the motion to dismiss for claims based on the false labelling.

Third parties. Genus argued that Lannett failed to tell third party intermediaries, such as wholesalers, group purchasing organizations, integrated delivery networks, and third-party managed price lists, that C-Topical was not FDA approved. Lannett argued that it had no affirmative duty to do so. The court concluded that Genus stated a cause of action to the extent that C-Topical was featured on price lists, given the allegations that customers believe the drugs on the list are FDA approved. This rationale, however, did not extend to third parties in the absence of any allegation that they believed that all the drugs on the list were FDA approved.

Websites. Lannett’s website does not reveal that C-Topical is not FDA approved. Instead, a user has to click twice to be taken to a government site that states that C-Topical is not FDA approved. The court concluded that the metadata on the website that sent a user to two locations to reveal the FDA status this way was confusing to consumers and constituted a valid claim for false advertising under the Lanham Act. The court also, however, refused to allow Genus to pursue false advertising claims related to Lannett’s website statement that its product complies with the law. Genus made the argument that the statement was false because the FDA declined Lannett’s grandfather petition. This was stretching the falsity argument too far, the court said. Similarly, the website’s statement that Lannett was committed to adherence to FDA standard and regulatory requirements was not deemed false under the Lanham Act, for the same reason. The court also determined, however, that Cody’s website contained an affirmatively false statement: that its product contained FDA-approved ingredients. This statement, the court said, suggested that C-Topical was FDA approved and supported a Lanham Act false advertising claim.

Packaging. Genus alleged that the C-Topical packaging was designed to match the packaging of FDA approved drugs. The court rejected that argument, noting that the pleading standards are higher where the misleading act involves context. Genus did not meet that heightened standard.

Sherman Act. Genus asserted a monopolization claim under the Sherman Act. The court concluded that Genus met two of the pleading requirements—the possession of monopoly power and antitrust injury—but it failed to meet the other one—willful acquisition or maintenance of the power. Genus failed to establish that Lannett used its power to foreclose competition, to gain a competitive advantage, or to destroy a competitor. A substantial share of the line of commerce must be affected.

As for the monopolization claim involving false advertising, Genus failed to establish that the advertising had any more than a de minimis effect on competition. Moreover, Genus never proved that Lannett’s actions were continued for long periods and were not readily susceptible to neutralization or other offsets. For example, Genus never stated how long the website statements had existed. Even more importantly, Genus never explained why other efforts to promote its product would not have worked (it only tried to get First Databank to change a number assigned to C-Topical). Thus, the court concluded that the impact on competition, given the pleadings, was de minimis. Turning to monopolization for listing practices, the court agreed that the “topical” statement was false. Once again, however, the complaint failed to establish monopolization because it never established that Genus was foreclosed from the market. It possibly had other channels of distribution. Unless those were closed too, monopolization did not occur.

State law claims. The court refused to dismiss the state law claims, for the same reasons it refused to dismiss some of the Lanham Act claims.

Databank claims. The court dismissed Databank from the lawsuit because the listing that Databank published did not qualify as “commercial advertising or promotion” under the Lanham Act. It is just a reference database. It is not seeking to influence customers. In addition, the claim against Databank for contributory false advertising cannot be made as a matter of law under any permitted theory.

As a result, the following claims were dismissed without prejudice: (1) statements on SEC forms or made during investor calls, (2) statements on Lannett’s own website, (3) the C-Topical packaging, and (4) the Sherman Act claims. The motion to dismiss as it applied to all other claims was denied. First Databank’s motion to dismiss was granted. The false advertising-related claim was dismissed without prejudice. The contributory false advertising claim was dismissed with prejudice.

This case is No. 3:18-cv-07603-WHO.

Attorneys: Jason Nathaniel Haycock (K&L Gates LLP) for Genus Lifesciences Inc. George G. Gordon (Dechert LLP) for Lannett Co. Inc. and Cody Laboratories, Inc. Thomas R. Burke (Davis Wright Tremaine LLP) for First Databank, Inc.

Companies: Genus Lifesciences Inc.; Lannett Co. Inc.; Cody Laboratories, Inc.; First Databank, Inc.

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