Guest Trademark Post: Judith L. Grubner, Partner, Arnstein & Lehr, LLP

Alaven Consumer Healthcare, Inc. manufactures and sells Colonix non-prescription herbal supplements and intestinal cleansers under its house brand DrNatura.  Alaven sued DrFloras LLC for trademark infringement, unfair competition, false advertising and other claims for using the trademark DrFloras for similar products.  The federal district court dismissed the infringement and unfair competition claims without trial because the judge decided that DrNatura and DrFloras were not confusingly similar trademarks. 

On appeal, the federal appeals court for the 11th Circuit concluded that the district court judge was right that there was insufficient evidence of likelihood of consumer confusion to require a trial.  Alaven Consumer Healthcare, Inc. v. DrFloras, LLC, No. 10-1131 (11th Cir., 10/12/2010).

Both companies have federal registrations and/or pending applications for their trademarks.  The marks look like this:

The side-by-side visual similarities are the “Dr” and “ra” elements of the marks and leaves in the design.  As a whole, however, they don’t have the same appearance, pronunciation or meaning and the district court judge thought they were reasonably distinct from each other. 

It is not unusual for trademarks for supplements to include “Dr” or a variation of “Natural” or “Nature.”  There are over 200 active registrations and pending applications for trademarks for supplements containing “Dr” and over 400 for marks containing variations of “Natural” or “Nature.” 

It looks like this case may have resulted from some tough marketplace competition between the products, which are similar and are marketed and distributed on the Internet to the same types of customers.  Without an obvious showing of bad faith or any evidence of consumers who were confused to tip the balance, Alaven did not have a strong enough case to go to trial.

Guest Deal News Post: Erik L. Kantz, Partner, Arnstein & Lehr, LLP

Schiff Nutrition International (NYSE: WNI) is reportedly “on the prowl” for new acquisitions after a sale of approximately 25 percent of its shares to TPG Growth, a private equity firm affiliated with TPG Capital of Forth Worth and led by William McGlashan Jr.  

McGlashan is familiar to the nutritional supplements industry as a co-founder of Pharmanex Inc. McGlashan will become a member of Schiff’s board along with TPG managing partner Matthew T. Hobart.

Based in Salt Lake City, Utah, Schiff develops, manufactures, markets and distributes branded and private label vitamins, nutritional supplements and nutrition bars in the United States and throughout the world, including recognized brands marketed through mass markets (including club stores) and, to a lesser extent, health food stores. 

TPG acquired its shares from Weider Health & Fitness, which before the deal controlled approximately 93% of the company’s voting shares and approximately 53% of all Schiff shares outstanding.  Weider Health’s Eric Weider will continue to serve as chairman of the board.

The deal signals a renewed strategy of growth through acquisitions of other companies in the supplements industry.  According to recent reports, Schiff has already looked at a number of deals in the market.  And their timing seems right, as activity in the industry remains strong, including reported acquisitions by The Carlyle Group of its rival NBTY and ramped-up efforts by strategic buyers such as Nestle, which in September launched Nestle Health Science, committing significant resources to its efforts in this segment.

For more information about the deal and Schiff, click here.

Greg Doherty of Poms & Associates

Guest Post: Greg Doherty of Poms & Associates Insurance 

Deals in the supplement space are heating up.  That’s why it’s important to remember to pay attention to details like Extended Reporting Provision (“ERP”) or “tail” coverage options available in insurance policies that can protect the business going forward in the event of claims.

Liability insurance for supplement raw materials suppliers, contract manufacturers and retailers is offered on a “claims made” basis almost exclusively. When a dietary supplement company is acquired, the Seller–and the Buyer– need to be aware of the uniqueness of how the claims made coverage must be structured around the transaction, so as to protect both of them after the deal closes.

Central to understanding this subject is the coverage trigger for claims made insurance. A policy has to be in effect when the claim is made against the supplement company, not necessarily when the claim actually occurred. Often there is a long delay between when a claim happens and when a lawsuit is filed. With claims made coverage if no claims made policy is in force when the claim comes in, there is no coverage, regardless of when it occurred.

 Many M&A deals are “assets only” acquisitions these days, reinforcing the importance of covering the Seller, who is left with past liabilities as part of the transaction.. That means the Seller retains the liabilities—including future claims that come in from something that happened when he DID own the company, This is usually backed up by an indemnity agreement from Seller to Buyer in the agreement of sale.

The first inclination of the Seller is to cancel his liability policy on the closing date because ostensibly he doesn’t need it anymore. Not so with a claims made policy. If Seller does that and does not exercise the Extended Reporting Provision (“ERP”) or “tail” coverage option in his policy, he will have no policy if a claim comes in, and thus no coverage.

Let’s use an example an injury that happened pre-close but is not made until six months after close. Remembering that it is the making of the claim that triggers the coverage, NOT when the injury occurred, at if the ERP coverage is NOT purchased by Seller:

 -At the time the claim is made, the Seller will have no insurance coverage , and

-Neither will Buyer as their policy is going to effectively bar any claims that happened before the acquisition.

So in the absence of ERP coverage, neither party will have any insurance coverage for the claim. This is also why savvy Buyers will often require the Seller to purchase ERP coverage as part of the overall transaction, the fear being that if Seller is long gone and without coverage, the courts will assign him liability anyhow, in spite of the contractual agreement in the sale document that the claim should be paid by Seller.

ERP coverage for Sellers in a M&A deal should not be overlooked by either Seller or Buyer.

The three little guys on Rice Krispies boxes are in trouble for claiming that their cereal supports the immune systems of children. The Federal Trade Commission announced on June 3 that Kellogg Co. had  agreed to pull back on health claims for the puffy cereal.

In a statement, commission chairman Jon Leibowitz said, “We expect more from a great American company than making dubious claims – not once, but twice – that its cereals improve children’s health. Next time, Kellogg needs to stop and think twice about the claims it’s making before rolling out a new ad campaign, so parents can make the best choices for their children.”

In a joint statement, Leibowitz and commissioner Julie  Brill used stronger language: “As a trusted, long-established company with a presence in millions of American homes, Kellogg must not shirk its responsibility to do the right thing when it advertises the food we feed our children.”

Kellog had a run-in with the FTC over its Frosted Mini-Wheats that resulted in the company’s admission that health claims made for the cereal were false and a settlement order in February 2009. Kellogg agreed not to claim “benefits to cognitive health, process, or function provided by any cereal or any morning food or snack food unless the claims were true and substantiated,” according to the statement on the Rice Krispies order.

Leibowitz and Brill said in their joint statement that even as Kellogg was pulling back on the Mini-Wheats claims, it must have been moving forward with health claims on the Krispies cereals.

“The company clearly has the means and ability to carefully test its children’s food products to determine if the products in fact provide health benefits for kids,” the commissioners said. “We are also confident that Kellogg has the wherewithal to carefully develop truthful and nonmisleading advertising about such health benefits.”

Kellogg responded with a statement saying that it stands behind the validity of product claims and research. “So we agreed to an order that covers those claims,” their statement said.

The expanded order now prohibits Kellogg from “making claims about any health benefit of any food unless the claims are backed by scientific evidence and not misleading.”

This is familiar ground for makers of nutritional supplements, but not so much for a manufacturer whose advertising icons include three guys in hats and a cuckoo bird. (Cocoa Puffs had the claim, too.) Kellogg, and General Mills whose Cheerios heart-health claims drew a warning letter from the Federal Drug Administration, are now learning what it’s like when you emblazon words like “immunity” and “antioxidants” on product packaging.

Nearly all of the herbal dietary supplements tested in a Congressional investigation contained trace amounts of lead and other contaminants, and some supplement sellers made illegal claims that their products can cure cancer and other diseases, investigators found.

So begins an article in the New York Times on a Government Accounting Office report released May 26 that questions the safety of supplements. Could plaintiff attorneys be thumbing through the pages looking for defendants?

Very little in the report is news to the industry. A number of supplements  have trace amounts of ingredients that could be harmful in large doses. And questionable health claims are commonplace.

A government study carries weight in the mind of jurors considering product defect claims: Did a supplement make plaintiff sick? Did it contribute to health problems? Did the manufacturer take adequate steps to ensure the safety and quality of its product? This  is the stuff of litigation.

The report has led to the usual suggestions: better disclosure of ingredients on labels; better inspections of manufacturing plants; better enforcement of rules on product claims; and FDA power for recalls. None could prevent tainted products from being marketed and sold, so what legislation cannot do, litigation might.

Peter Quinter of Becker & Poliakoff

Guest Post from The Customs and International Trade Law Blog

The U.S. Food and Drug Administration recently issued several warning letters to prominent food and drink companies regarding false claims displayed on their food and drink products, including those marketed to children.  Some food products brazenly claim to increase a person’s immune system, reduce the chance of getting a cold, or even cure cancer.  Are they really believable?

The Obama Administration has taken a more aggressive posture to attempt to reduce the obesity of Americans, especially children.  There is a direct connection between what we eat and our health.  Remember the saying ”You are what you eat”?   Dr. Margaret Hamburg, the new FDA Commissioner, announced in a March 3, 2010 letter to food companies:

I have made improving the scientific accuracy and usefulness of food labeling one of my priorities…It is clear to me as a working mother that the use of front of pack nutrition symbols and other claims can be helpful to busyy shoppers who are often pressed for time in making their food selections.

In a typical Warning Letter to one of the worlds’ largest food companies, Nestle, in a December 4, 2009, the FDA complained about Juicy Juice All Natural 100% Juice Grape products.  The FDA alleged that the product was misbranded because the lables were misleading in that the label was designed to imply that the producct is 100% grape juice when it truly was not.

The FDA regulations regarding food, including drinks, are complex.  True and accurate health claims are allowed on certain food products under specific circumstances, according to the FDA guidance.  Hopefully, the food industry will be more responsible, and if not, I encourage Commissioner Hamburg to pursue civil penalties against companies and the corporate officers of those companies who deceive the public. 

A discussion about health claims on food products and how to respond to FDA Warning Letters will take place on June 3, 2010 in Miami, at a seminar entitled “Importing Food Products in Compliance with FDA and U.S. Customs Rules“. 

In solidarity with FDA Commissioner Hamburg, I am a working Dad, and I don’t like to be lied to either!

Thanks Peter!  -Ed.