Third Circuit Requires Proof of Customer Deception and Reliance on False Ads to Award Damages

Biotechnology companies Natera and CareDx have been engaged in a prolonged legal battle regarding the validity of patents covering methods of cell-free DNA analysis for noninvasive monitoring of organ transplant rejection. The case has been lauded by the legal community as the “last chance for diagnostic patents” to be reviewed by the Supreme Court.[1]  In comparison, the Lanham Act case CareDx brought against Natera in 2019,[2] alleging that Natera used the results of a flawed clinical trial to make false and misleading claims that its test Prospera was more effective than CareDx’s AlloSure test, initially received only modest attention.

On March 14, 2022, a jury decided Natera owed $21.2 million in compensation for its false advertising and $23.7 million in punitive damages for competing unfairly with CareDx.[3] In its appeal, Natera argued that it is entitled to a judgment as a matter of law "because CareDx did not present evidence of actual deception and customer reliance, which precludes an award of damages, nor did it present evidence sufficient for a reasonable jury to find any of the advertisements literally false."[4] On July 17, 2023, Judge Connolly decided that while Natera engaged in false advertising, CareDx hasn’t proven that market participants relied on Natera’s advertising.[5] Judge Connolly granted “Natera's request for judgment as a matter of law of no damages under the Lanham Act.”[6]

Economic experts often rely on parties’ data and event study methodology to establish the effect of alleged false advertising. In this context, the purpose of an event study would be to measure a change in a certain outcome (Natera’s and CareDx’s sales, for example) in response to Natera’s false advertising. However, because CareDx failed to demonstrate that customers were deceived by or relied upon Natera’s ads, Judge Connolly rejected CareDx’s argument that Natera’s increased sales were a result of customers deception,[7] and that CareDx’s lost sales were sufficient proof that CareDx had a reasonable expectation of “entering into a valid business relationship.”[8]^,[9]

While CareDx pledged to appeal Judge Connolly’s decision, the moral of the story appears to be that under Third Circuit law, it is not enough for plaintiffs to prove that defendants engaged in false and misleading advertising; they must also prove that defendant’s campaign reached and influenced the customers, a task that is best achieved through a customer survey. Through a well-executed survey, one can establish whether customers (physicians ordering the test) were deceived by the allegedly false advertising. However, a survey alone may not be able to establish that customers relied on false advertising when making their purchasing decisions. To show reliance, an economist could conduct an event study focusing on physicians’ prescribing behavior before and after they were exposed to the alleged false advertising, controlling for other factors that may influence their prescribing decisions.   

[1] Kass, Dani. “5 Patent Cases To Watch in the Second Half of 2023.” Law360, Jul. 19, 2023, available at https://www.law360.com/articles/1697857/5-patent-cases-to-watch-in-the-second-half-of-2023

[2] Wolfe, Jan. “CareDx adds false advertising claims to patent dispute with Natera.” Reuters, Apr. 10, 2019, available at https://www.reuters.com/article/ip-patent-natera/caredx-adds-false-advertising-claims-to-patent-dispute-with-natera-idUSL1N21T007

[3] Brittain, Blake. “CareDx wins $45 mln verdict against Natera for false advertising.” Reuters, Mar. 15, 2022, available at https://www.reuters.com/legal/litigation/caredx-wins-45-mln-verdict-against-natera-false-advertising-2022-03-15/

[4] United States District Court for the District of Delaware, CareDx, Inc v. Natera, Inc., Memorandum Opinion, 19-662-CFC, July 17, 2023, (“Memorandum Opinion”), p. 5.

[5] Under Third Circuit law, actual deception must be proven to establish damages for a Lanham Act violation, even if based on an unambiguous and literally false advertisement. ("[T]here must be a showing of some customer reliance on the false advertisement" to establish damages under the Lanham Act. See Memorandum Opinion, p. 4.

[6] Memorandum Opinion, p. 9.

[7] Memorandum Opinion, p. 7. Judge Connolly stated that CareDx failed “to identify any evidence adduced at trial that linked those increased sales to customers' actual deception or reliance on Natera's advertisements.”

[8] Memorandum Opinion, p. 13-14. Judge Connolly stated that “CareDx neither cited in its briefing nor adduced at trial evidence to show that Natera interfered with (i.e., caused harm to) a valid business relationship.”

[9] CareDx also attempted to recover the costs of advertising designed to combat Natera’s false advertising of the defendant. However, Judge Connolly excluded the opinion of the plaintiff's expert regarding “corrective advertising damages,” in part because it was based on "vague, undocumented, and back-of-the-envelope . . . estimates" by the plaintiff's CEO. See https://ipde.com/blog/2021/05/11/judge-connolly-tosses-damages-opinion-based-on-ceos-testimony/.