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Schering Corp. v. Vitarine Pharmaceuticals Inc.

argued: September 7, 1989.

SCHERING CORPORATION AND KEY PHARMACEUTICALS, INC.
v.
VITARINE PHARMACEUTICALS, INC. AND MAJOR PHARMACEUTICALS CORP. MILGRIM THOMAJAN & LEE P.C., ALFRED T. LEE AND SAMUEL D. ROSEN, APPELLANTS IN NO. 89-5309; SCHERING CORPORATION AND KEY PHARMACEUTICALS, INC., APPELLANTS IN NO. 89-5310 V. VITARINE PHARMACEUTICALS, INC. AND MAJOR PHARMACEUTICALS CORP.



On Appeal from the United States District Court for the District of New Jersey, D.C. Civil No. 88-4046.

Becker, Cowen and Rosenn, Circuit Judges.

Author: Cowen

Opinion OF THE COURT

COWEN, Circuit Judge

Schering Corporation ("Schering"), Key Pharmaceuticals, Inc. ("Key"), and their counsel, Alfred T. Lee, Samuel D. Rosen and the law firm Milgrim Thomajan & Lee P.C., appeal from an order of the United States District Court for the District of New Jersey entered March 13, 1989 imposing $50,000 in sanctions jointly against Schering, Key and their counsel pursuant to Fed.R.Civ.P. 11 and from an amended order dated and entered March 22, 1989, increasing the amount of the sanctions to $100,000.*fn1 Because the record does not support the imposition of Rule 11 sanctions, we will reverse.

I.

Schering and Key commenced this action on September 16, 1988. Numerous claims set forth in the complaint and amended complaint allege violations of 15 U.S.C. §§ 1114 & 1125(a), and related provisions of state law arising from Vitarine and Major's advertising, promoting and labeling of their prescription theophylline drugs offered in competition with those of Schering and Key. Plaintiff Key Pharmaceuticals, Inc. is a wholly-owned subsidiary of Schering Corporation. Key is incorporated in Florida and has its principal place of business in New Jersey.

Defendant Vitarine Pharmaceuticals, Inc. ("Vitarine") is a pharmaceutical manufacturer and distributor. It is a New Jersey corporation with its principal place of business in New York. It owns four drug wholesalers, including non-party Murray Drug Corporation ("Murray"), which jointly own defendant Major Pharmaceuticals Corporation, the owner and licensor of the name and trademark "Major" used by all four of those companies. Under their name and mark, "Major," the defendants sell the sustained-release ("SR") theophylline tablets of Forest/Inwood Laboratories, which the latter sells to others under the mark "Theochron." Schering and Key allege that defendant Vitarine owns, controls and is otherwise responsible for the acts of defendant Major.

Theophylline has been used for many years in treating chronic asthma. Theophylline's effect is directly related to its concentration in a patient's bloodstream. Concentrations of less than 10 micrograms of theophylline per milliliter of blood may result in little or no benefit to the patient, whereas concentrations above 20 micrograms per milliliter result in a markedly higher incidence of side effects.*fn2 An insert included in each package of Theochron explains that the side effects may range from nausea and restlessness to cardiac arrhythmias, convulsions and death.*fn3

The rate and extent to which the therapeutic ingredient of a drug is absorbed is known as its "bioavailability." 21 U.S.C. § 355(j)(7)(A) (Supp. V 1987). The Food and Drug Administration ("FDA") considers two drugs "bioequivalent," i.e. therapeutically equivalent, if their bioavailability under similar experimental conditions does not differ significantly. See Center for Drug Evaluation and Research, U.S. Food and Drug Administration, Approved Drug Products with Therapeutic Equivalence Evaluations at 1-2 (8th ed. 1988); 21 U.S.C. § 355(j)(7)(B) (Supp. V 1987).

In its publication, Approved Drug Products with Therapeutic Equivalence Evaluations, also known as the "Orange Book," the FDA lists all approved drugs currently on the market along with ratings indicating their therapeutic equivalence. An "AB" rating signifies that the manufacturer has provided adequate studies to establish the bioavailability and the bioequivalence of its product. Center for Drug Evaluation and Research, U.S. Food and Drug Administration, Approved Drug Products with Therapeutic Equivalence Evaluations at 1-5 (8th ed. 1988). A "BC" rating signifies a controlled-release drug for which the manufacturer has not submitted appropriate studies specifically demonstrating the bioequivalence of that particular formulation. Id. at 1-6. At the time the complaint was filed, Schering's Theo-Dur was listed with an AB rating in 100 and 200 mg. tablet forms; Theochron was listed with a BC rating in those forms, indicating Forest/Inwood had not submitted studies demonstrating that Theochron was bioequivalent to Theo-Dur in those doses.

On September 16, 1988, counsel for plaintiffs, Schering and Key, and counsel for defendants, Vitarine and Major, appeared in the chambers of the district judge on plaintiffs' application for an order to show cause for a preliminary injunction. Schering and Key sought injunctive relief as to two claims. First, they claimed that defendants falsely advertised that Murray Drug Corporation's 100 and 200 mg. Theochron theophylline was bioequivalent to Schering's Theo-Dur theophylline. Second, they claimed that Murray's advertisement of its competing generic product was misleading. In this regard, Schering and Key alleged that the defendants' advertising featured the Theo-Dur trademark as the most prominent visual element, thereby implying that defendants' product was the same as, or related to, Theo-Dur. Complaint at para. 16(a). As to both claims, plaintiffs sought a prompt hearing and expedited discovery.

The complaint carried a sense of urgency. Paragraph 21 states, "Defendants' aforesaid acts have caused and, unless enjoined by this court, will continue to cause great and irreparable injury to plaintiffs and present hazards to the public, for which there is no adequate remedy at law." Plaintiffs' Memorandum in Support of an Order to Show Cause for a Preliminary Injunction dated September 16, 1988 states that "[because] of the grave consequences that may follow from mistaken medication involving prescription drugs which are sold in a deceptive manner, relief in such cases is granted upon lesser proof than required where other product categories are involved in infringement litigation." Memorandum at 7-8. The memorandum further states that "[aside] from the hazard defendants' acts create for patients suffering from serious illnesses, defendants' representations of bioequivalence expose plaintiffs to adverse reactions of physicians, pharmacists and patients who mistakenly attribute to Theo-Dur the inadequacies of defendants' 100 and 200 mg tablets which the latters' advertising presents as the equivalent of Theo-Dur 100 and 200 mg tablets." Memorandum at 9.

In addition to the representations made in the complaint and memorandum in support of an order to show cause, counsel for Schering and Key allegedly made certain representations in the course of presenting the complaint to the district judge in chambers on September 16, 1988. This in-chambers proceeding was not transcribed and the parties now differ as to what was actually said during the proceedings.*fn4

The district court wrote:

Whatever the precise assertions, . . . it was made absolutely clear to me that if I did not act, and act immediately, trouble -- real trouble -- loomed ahead for any patient subjected to a substitution of defendants' product for Theodur in the 100 mg. and 200 mg. dosages. [Counsel for Schering and Key] thus invested his application with an importance and an urgency which would prove to be wholly unwarranted by the facts.

Schering Corp. v. Vitarine Pharmaceuticals, Inc., 124 F.R.D. 580, 582 (D.N.J. 1989). October 24, 1988 was set as the hearing date on the preliminary injunction application. The parties were to petition the assigned magistrate in the event expedited discovery could not be agreed upon.

On September 19, 1988, John Sullivan, counsel for Vitarine and Major, telephoned Samuel D. Rosen, counsel for Schering and Key, and told him that defendants agreed that the FDA had not yet determined Theochron to be bioequivalent to Schering's Theo-Dur in the 100 and 200 mg. tablet strengths. Mr. Sullivan stated that Murray Drug Corporation had made an honest mistake in issuing the advertisement and that Murray was no longer running it. Affidavit of John Sullivan at para. 4, Schering v. Vitarine (Civ. No. 88-4046).

On September 23, the parties appeared before the magistrate on plaintiffs' application for expedited discovery, which was granted. The magistrate suggested that Murray Drug Corporation send a notice to its customers, informing them of the mistaken advertising. On September 24, Murray sent out a corrective notice to its customers.

On October 24, 1988, at the outset of the preliminary injunction hearing, the district court suggested that plaintiffs, defendants and the related non-party Murray Drug Corporation consent to an order by which Murray and defendants would not advertise their products as bioequivalent to Theo-Dur. The parties agreed in principle. The preliminary injunction hearing of October 24 continued respecting other alleged misuses of Schering's Theo-Dur mark and was adjourned until ...


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